ProQuest Export

Document 9 of 100

PAUL W. BARRET, JR. SCHOOL OF BANKING (BSB): A CASE STUDY

Author: Kelley, Chris; Marion, Frank M

Abstract:

This case concerns the future of a regional banking school which may not be properly positioned to afford future growth, given the current banking environment. The case is written for senior business marketing students (level 5) and would be suitable for the first year marketing course (level 6) of a MBA program. These levels are five and six, respectively. The case can be taught during an hour and 15 minute session. The students will have written the solution prior to arriving in class. The total preparation should not exceed two and one half hours. Chet Kennedy, recently hired as the Executive Director of the Paul W. Barrett, Jr. School of Banking (BSB), formerly know as the Mid-South School of Banking, is faced with a requirement to immediately prepare an initial outline of a strategic marketing plan for the school. The assignment is further complicated by the fact that the chairman of the selection committee, openly disagreed about the committee selection of Kennedy

Kennedy would replace the highly respected former school director who recently retired. Chet realized he had less than a two week honeymoon.

Chet had practical banking experience with a leading national bank and he had graduated from the Barrett School. He remained involved with the school as President of the Alumni Association. Since 1998 the banking industry had become more competitive. The years of 2000 through 2003 were really tough with bank restructurings, layoffs, early retirement packages and hiring freezes. Given the current savings and CD inter est r ates, consumers were restless, and many were switching accounts from bank to bank.

During 2003 the business environment of fierce competition, corporate fraud, identity theft, and rock bottom interest rates, training for bank managers seemed more important than ever. Chet believed there was an opportunity to reverse stagnant enrollments, a regional focus, the new brand name confusion of the school. But he wondered just how he would do it.

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

Chet Kennedy, recently hired as the Executive Director of the Paul W. Barrett, Jr. School of Banking (BSB), formerly know as the Mid-South School of Banking, is faced with a requirement to immediately prepare an initial outline of a strategic marketing plan for the school. The assignment is further complicated by the fact that the chairman of the selection committee, openly disagreed about the committee selection of Kennedy

Kennedy would replace the highly respected former school director who recently retired. Chet realized he had less than a two week honeymoon.

INTRODUCTION

The Board of Regents just wrapped up its first board meeting with the newly installed Executive Director, Chet Kennedy. The main point of discussion surrounding the annual meeting is the declining enrollment trend throughout banking schools. The economic difficulties of the financial industry the past few years, along with many banks training in-house, have led to the erosion of the prospective student base. The board was unsettled on Mr. Kennedy's charges: to take the school to the next level. The Chairman of the committee, who openly disagreed with the hiring of Kennedy, has given him a week to get an initial report together.

Chet had previously been a regional sales and service manager for National Bank of Commerce, a $22-billion bank holding company based in Memphis, Tennessee with locations throughout the southeast. He was a year 2000 graduate of the Barret School of Banking, and had remained involved with the school as the President of the Alumni Association.

BANKING ENVIRONMENT

Most banks have had difficulties over the past few years. The recession left banks, like most businesses, with compressed margins. Cost saving measures were the norm - layoffs, hiring freezes, salary savings by offering early retirement packages, audits of expenditures, etc. Consumers had difficulty living the lifestyle they had enjoyed in previous years, which led to increased debt and late or defaulted loan payments. That translated into the highest levels of loan losses in generations. Adding to these financial troubles were identity theft and fraudulent activity performed against consumers and banks. This epidemic has caused financial hardships all around. It costs an exorbitant amount of resources - financially and technologically - to combat. Weigh all of this against the backdrop of corporate greed and moral and legal issues with some members of upper management prevalent in Corporate America the past few years and the idea of extensive training makes more sense than ever.

BACKGROUND OF THE SCHOOL

The Barret School of Banking is an independent non-profit banking school located on the campus of Christian Brothers University (CBU) in Memphis, Tennessee. The school is governed by a Board of Regents, which includes senior level bankers from several surrounding states. They serve voluntarily without compensation, and are responsible for evaluating and providing direction in faculty, curriculum, and marketing to enhance the educational experience of industry professionals. BSB offers a three-year program with a one-week per year residency session format at CBU which provides 125 hours of classroom instruction. The students are also accountable for eight home-study assignments following the first two years. The curriculum is selected and designed to deliver a high degree of understanding, knowledge, and information essential for advancement within the banking industry. The faculty is comprised of twenty-four industry experts carefully chosen to provide the classroom leadership necessary to absorb the information. At last count, the faculty breakdown by profession was ten current bankers, ten financial services consultants, three academics/professional educators, and one regulator. To enhance learning, these faculty members are charged with passing on their industry experience through practical applications. The classes are limited in size (<40) to allow for informal interaction with instructors and peers, and small group case studies are performed during the week in a number of the classes to encourage sharing. State of the art computer simulation and audio-visual technology is available throughout the sessions. These pragmatic teaching practices make it easy for students to return to their banks with immediately usable knowledge. See Table 1 on following page for a list of curriculum.

STUDENT ENROLLMENTS

BSB attracts the majority of its students from the states of Arkansas and Tennessee, with regulars from Missouri, Kentucky, Alabama and Mississippi. To continue to grow, there is a definite need to attract a higher number of students from Kentucky, Mississippi, Missouri, and Tennessee, with new entrants from Illinois and Indiana. The average incoming (freshman) class size is sixty-five students for a total of approximately two-hundred enrolled at one time if counting all three classes. The typical student has over five years of banking experience, is in their early thirties, hails from an institution of assets between $100-500 million, and is a college graduate. The ratio of men and women attendees is even.

HISTORY OF THE SCHOOL

BSB was established in 1972 as the Memphis School of Banking by a group of local bankers. In 1979, it became the Mid South School of Banking to reflect its regional expansion in the Midwest and Southeast. Since its inception, the School has educated over 1,700 industry associates from seventeen states. In 2001, Mid South School of Banking changed its name to the Paul W. Barret, Jr. School of Banking in honor of an $8 million grant from the Paul W. Barret, Jr. Charitable Trust. Mr. Barret was a local banker, entrepreneur, and philanthropist who contributed a great deal to the area community. The endowment made Barret the most highly endowed banking school in the country, and will provide the opportunity to keep BSB in the forefront of the financial education industry. The mission has evolved through regional expansion since its foundation, but the core beliefs are still prevalent: offer an advanced, comprehensive banking education at the best possible value. The endowment insures this vision will continue by garnering the best faculty and passing the benefits to the bankers through tuition subsidies.

COMPETITION

Kennedy's first item of business is to figure out who the main competitors are, and compare the offerings. By searching the internet, he found a number of viable competitors for students throughout the Midwest and Southeast. There are seven main competitors, but they differ in difficulty and by the type of educational experience the student will gain. Four of the schools are sponsored by state banking associations. The other three are considered graduate level banking schools. "Where do we fit in the mix," Kennedy thought while compiling the information.

Kennedy studied the curriculum feverishly. The state banking schools were not as advanced as the BSB offering, accepting newer, less experienced employees. They only have 80 total hours of instruction over two years versus 125 hours over three years at Barret. The prices are comparable, but he felt this might offer an opportunity to advance in those markets. The state schools accept funding from the state banking associations in which they reside. Kennedy spoke with a number of his Board of Regent members who reside in those states, and are members of the state associations. The consensus was that the state banking schools are not quite the advanced quality of BSB, and they tend to rely on the banks to help fund the schools financial shortcomings; most schools do not turn a profit. They are subsidized by state associations or endowments if they are lucky. In fact, many state banking schools have folded (Arkansas) or consolidated into other institutions. Kennedy wondered if any of the state schools would consider a merger due to the endowment Barret has at its disposal. "It would be great to gain market share in surrounding states by a merger, and take the burden off of the state bank associations"

The graduate schools of banking at LSU, SMU, and Wisconsin were a different challenge. They offered an extra week each year for the three years compared to BSB. They attracted middle and senior department managers, along with experienced lending officers. The price alone, made sure the banks enrolled only the cream of the crop. Does BSB want to add to its existing curriculum to elevate to their level? It is a tough question because of the cost of additional faculty and leasing of facilities.

Kennedy wondered if the graduate schools would allow graduates of Barret to skip the first year of their programs, and enroll into the second year. They would have a great deal of educational experience through BSB, and would be able to jump right in to the curriculum at the graduate level. The cost of one year at a graduate banking school is similar to three years at Barret, so the banks will not have much additional costs if they feel an employee is worthy of additional schooling. This may help provide a niche for Kelley to expand on for the Strategic Marketing Committee.

MARKETING RESEARCH: FOCUS GROUP RESULTS

In 2002, the Board of Regents commissioned a series of independent Focus Groups charged with the responsibilities of examining the Barret School of Banking's position in the banking school realm, identifying new opportunities, and exploring new horizons for the School. The information compiled by these groups was then included in a survey completed by alumni, faculty, regents, current students, student sponsors, focus group participants, and additional industry professionals.

It was found that the scope of the marketing effort (utilization of brochures, the web site, internet, mass mailings, alumni, Regents, and face to face recruiting) needed to be increased in order to gain name recognition throughout the Midwest and Southeast. The school lost its brand name when the name changed from Mid South School of Banking to Barret School of Banking. The feasibility of BSB being a "feeder" school for the graduate schools of banking was intriguing, creating a niche for Barret. Changing the School from a general education outlet, where the student can attain a broad knowledge base, into a graduate school format by offering electives and the opportunity to specialize is an option, but could add additional expenses to the School. Extending the school to a fourth year (one-week/year) to compete with the graduate schools of banking was an option because it would allow BSB to provide a broader education. This again could add more expenses to the bottom line, but could allow the school to readily compete with the graduate schools. Provide the students with the best faculty and curriculum in the banking school industry. The regents are committed to this goal through the use of the endowment.

COMPETITIVE ADVANTAGES

Kennedy was able to uncover some of the competitive advantages he believed would help in future marketing by studying the competition and focus group results. The logistical location of Memphis, Tennessee, makes it attractive to many banks throughout the Southeast and Midwest as major interstates and an international airport provide low cost travel for bankers. The lecture series during the school session provides a distinguished speaker for all students and their sponsors to enjoy. The tuition is affordable due to BSB subsidizing about half of the cost per student. The endowment enables the school to deliver the savings back to the sponsor banks. The one-week versus a two-week format allows banks to educate their employees at a lower price than the graduate schools. The sponsoring bank may prefer the one-week format due to the inherent cost of the employee being absent from the bank for two consecutive weeks while attending school. As a result of a partnership between Barret and Christian Brothers University (CBU), alumni of BSB are eligible for six hours of graduate credit upon admission to the MBA program at CBU. BSB may not be considered a graduate school of banking, but this partnership provides a level of credibility to the educational offering. An active Board of Regents consisting of industry professionals from six surrounding states (TN, AR, KY, MO, AL, & MS) presents an opportunity for outreach, as well as an active barometer of the banking environment. The endowment makes almost any marketing idea feasible. The school is one of the most highly funded banking schools in the country.

MARKETING PLAN

"I can't believe I have to report on this tomorrow." Kelley has an idea for the strategic plan, but he is torn between competing head to head with the graduate schools of banking or creating a niche for the banking industry. The board wants to increase enrollment, along with providing the best educational value and he has to offer something to the committee tomorrow.

"There are just so many possible objectives to choose from." Go head to head with the graduate schools of banking. Increase the length of the school to a fourth year or mirror the existing graduate school schedules. Become a "feeder" program to the graduate schools of banking. Work on a merger with some of the state association schools. Increase faculty pay to equal or exceed the graduate schools of banking, therefore attracting the cream of the crop. Mass market to the entire banking industry versus a regional focus. Add electives to the existing generalist curriculum to allow for specialization. Offer refresher or elective courses to alumni to keep them involved with the school and provide an advanced degree.

Frequent banking school trade shows to market the program. Continue the lecture series, but take it a step further, and add a distinguished speaker for graduation. Offer an internet option for off-site training. Encourage Christian Brothers University (MBA partner) to offer on-line MBA courses to benefit all out-of-region students.

AuthorAffiliation

Chris Kelley, Christian Brothers University

ckelly@cbu.edu

Frank M. Marion, Christian Brothers University

fmarion@cbu. edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 1

Pages: 27-31

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192411901

Document URL: http://search.proquest.com/docview/192411901?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 13 of 100

DYERSBURG FABRICS

Author: McCullough, Mike; Lane, Wilburn

ProQuest document link

Abstract:

If the life expectancy of a human being is based on how long the average person is tending to live when that individual is born, Dyersburg Fabrics no doubt outlived its life expectancy defined in individual terms. The life expectancy of a cotton mill born in 1929, in West Tennessee, although not officially established, must surely have been considerably lower than 70 years. The company that began in August, 1929, as Dyersburg Cotton Products, and later became known as Dyersburg Fabrics, lived to be almost exactly 70 years of age. Using the New International Version of the Bible, Psalm Chapter 90 and verse 10 says, "The length of our days is seventy years- or eighty, if we have the strength; yet their span is but trouble and sorrow, for they quickly pass, and we fly away." Dyersburg Fabrics (the name we will tend to use here) achieved the Biblical promise of 70 years and also experienced the promised "trouble and sorrow", and in the end, it did "fly away". However, as is often the case with individuals, many of the nearly 26,000 days the company was alive, could be considered happy and hopeful.

Dyersburg Fabrics very nearly died as a child, which is not surprising since it was born in the economic equivalent of disease epidemic. This economic disease was "The Great Depression". To better understand economic conditions that prevailed at the time of the birth of Dyersburg Cotton Products, let's recall the events of the Great Depression.

Full text:

THE SHORT BUT HAPPY LIFE OF DYERSBURG FABRICS: PART ONE

THE GREAT DEPRESSION

In the 1920s, with the war to end all wars, World War I, behind them, Americans looked with high hopes toward happy and economically improving lives. Until the closing months of the decade, the U.S. experienced growth in industry, technology, wages, consumer spending, and availability of cash. These factors supported economic growth and confidence in the economy. Many US citizens, from all classes, invested in stocks to make quick money. As more invested, stock prices rose and the rising values spurred even more people to buy, resulting in billions of dollars of investment in the US stock market. Many invested all their savings. Some mortgaged homes, cashed in savings or took out loans speculating that the market would continue to rise. The stock market peaked at the end of August and beginning of September, 1929, when the Dow Jones reached a high of 381 after having been at 191 at the beginning of 1928.

Tuesday, October 29, 1929 ("Black Tuesday") was even worse, 16,000,000 shares were traded, billions of more dollars were lost and the stock market collapsed as the gains of 1928 and 1929 were stripped away. Stock prices dropped until November 13, 1929 when they reached an all-time low. By the time 1929 ended, stock values had dropped by at least fifteen billion dollars.

By 1933, 11,000 banks (almost half of all U.S. banks) that had invested their deposits in the stock market were forced to close (bank fraud exposed by the market crash was a major reason for many of these closures). Many industries and business that had dumped profits into stock, also shut down. These closures, resulting from the market crash led to a dramatic decline in the U.S. economy. There was no confidence in the economy, the average American spent far less, and production and employment levels fell. This fueled a worldwide economic slump known as the Great Depression.

Prior to turning to the story of Dyersburg Cotton Products, let's take one more look at relevant history by tracing the highlights of the American Textile Industry.

A BRIEF HISTORY OF THE AMERICAN TEXTILE INDUSTRY

The story of the U.S. textile industry can be reduced to immigration, migration and emigration. (Note: a primary source for the history given here was written by Barbara M. Tucker and found at: http://college.hmco.com/history/readerscomp/rcah/html/ah_085400_textileindus.htm; in February, 2004).

Immigration

The American Textile Industry was imported from England by Samuel Slater, a British Mechanic, in 1790, to Pawtucket, Rhode Island, the same year Rhode Island became a state, three years after the founding of the first three states, Delaware, New Jersey and Pennsylvania and six years before Tennessee was founded.

The American textile industry was thus a descendent of the British factory system. Samuel Slater's importation of cotton-spinning technology from England transformed New England from an agricultural to an industrial region and led to the modern corporation, owner-management separation and the development of big business. The system's emphasis on the individual rather than family or community was a major shift in American society and came to characterize the nation's industrial and social development. It also meant that the federal government would only encourage industry, not operate it. Operation would be left to private individuals.

Francis Cabot Lowell, a wealthy Boston merchant, introduced another form of textile manufacturing to New England around this time. The Lowell system, was based in larger-scale operations, used power looms and combined the spinning of yarn and the weaving of cloth. Lowell, who built a large factory in Waltham, Massachusetts in 1813, employed women and girls. These were the first "big businesses" in America. He used professional management staffs and, supported by U.S. tariffs on imported cotton and woolen goods, his factories would turn annual profits of from 20 to 25%.

By the Civil War, the Lowell and Slater systems looked a lot alike, both using immigrant and family labor, company owned tenement housing for the workers, and tight control over both the work and non-work lives of the labor force. These manufacturers used the corporate form of ownership, with professional managers and cost accounting.

The Paterson, New Jersey, venture was revived, and in Philadelphia, the textile industry flourished with factories specializing in weaving, spinning, dyeing, or finishing.

Unions won few victories during the years prior to the Civil War, as the managers successfully played women against men, adults against children and immigrants against those born in the U.S. The economic depression of 1836-1844, further hurt the cause of organized labor and thus was born a tradition of paternalism and harsh working conditions in the textile industry. Throughout the nineteenth century, New England remained the center of cotton, woolen, linen and thread production.

Migration

In the 1880s, a shift in location began to occur. Small textile mills moved south, many of them mirroring the earlier Slater system: town design based on rural villages, small-scale production, and paternalistic practices by owners. One of these small southern towns would be Trenton, Tennessee, only a few miles from Dyersburg, Tennessee, that would later become the home of the company featured in this story. The majority of this southern migration would take place down the east coast, but the fact that cotton was grown in the delta region, helped bring some of the manufacturing to that area.

Early southern mill towns were controlled by mill agents and superintendents, with the company providing jobs, houses, food, clothing, and goods. The work force was drawn from the countryside, and conditions were harsh. In the 1880s and 1890s the Knights of Labor and the National Union of Textile Workers organized southern mill workers, but strikes were largely ineffective with the national economy in trouble.

In the early twentieth century, conditions in the textile industry continued to deteriorate in the North. Major strikes organized by the Industrial Workers of the World (IWW) occurred in 1912 and 1913, with the IWW developing new tactics. One of the most successful, called the "Children's Crusade", saw workers in Lawrence, Massachusetts send their children dressed in rags to New York and other cities to parade through the streets for strike sympathy. The northern unions had some success, but mostly they helped shape management's long-term strategy, which involved seeking southern, non-union labor. As has often been the case over the years, union success led to industrial migration, in this case to the southern United States.

Emigration

Eventually, the U.S. textile industry would succumb to foreign competition, with factories leaving for ridiculously lower wages to points around the world (thus the emigration, and last, phase of the U.S. textile industry). Dyersburg Fabrics would fight the trend longer than most others. Let's return to their story.

HOW DYERSBURG COTTON PRODUCTS CAME TO BE

Ground was broken for the building in the Summer of 1928 and the first machines started spinning at Dyersburg Cotton Products on Monday, March 25, 1929, which means the company was seven-months old when the great disease (depression) struck the nation on Friday, October 25, 1929. The young company would struggle to survive the first few years of its life. However, before looking at these difficult years, we should answer the question of why the company came to be in Dyersburg in the first place.

In 1929, Oswego set up Dyersburg Cotton Products with Ladd Lewis as president. The plant was large from the early days, with around 1500 employees. This was a time when cotton production processes were labor intensive. A large number of these employees were women who cut and sewed. The mill made long-handle underwear, knit material for gloves, meat bags and knit material for sweaters and other types of clothing.

Vestiges of New England-textile practices came south with the Adrian Mills/Oswego Mills combination. Not only was the Dyersburg operation paternalistic, but it brought south ethnic groups that were in charge of various operations. These ethnic divisions had come to be because management had hired large numbers of European immigrants, when the young women in New England demanded better conditions and higher wages.

The carding operation brought down from New York was English because it was run by Bill Coward an Englishman. Spinning was done by Italians hired and supervised by an Italian named Frank Garro. The knitting operation was run by a first-generation German immigrant, Ray Weidner, who had hired other German immigrants. These workers came south with the operation, infusing the town of Dyersburg, Tennessee and the surrounding rural communities, with diversity.

In 1932, Dyersburg Cotton Products was reorganized when Mr. Wheeler convinced the accountant who had recommended liquidation that he could run the firm. The accountant, E. L. Amis, decided to join Wheeler as the financial expert and so Wheeler became manager and Ladd Lewis left the company.

After this reorganization and the assumption of leadership by Mr. Wheeler, the company began to prosper and would realize some of its finest years during World War II. The decades from the 1930s to the 1990s, are filled with stories of events that occurred in the U.S. textile industry and Dyersburg's reactions to them. Our focus here though, will be on the approach the company took toward employee relations. Along with technical and financial adjustments, this reaction to the human part of the business played a strong role in the ability of the company to endure the century.

HOW TO BUILD A COMPANY COMMUNITY

After Dyersburg Cotton Products, which later became Dyersburg Fabrics, began operations under Wheeler, the accountant E. L. Amis, was not only given the title of Secretary-Treasurer, but he was also given the assignment of employee relations. What follows is an account of the aggressive way he carried out this latter function and how it helped build a community-spirit within the company and better attach the company to the Dyersburg area.

The company weekly newspaper: The SPINNIT

According to a story that appeared in the newspaper on April 3, 1979, around the time that the company was celebrating its 50th anniversary, E. L. Amis, may well have fancied himself as something of a journalist (perhaps missing his true calling, the story's writer speculated). By 1979, Mr. Amis was already deceased, but his legacy, the SPINNIT, remained.

The SPINNIT was the company newspaper, printed every two weeks, first published on September 1, 1940. Amis edited it, drew cartoons and took photographs. The first editions were four pages long, but at the time of the company's 50th-anniversary issue in 1979 (the 39th year of the publication), the paper was 12 to 14 pages long.

Amis had the reputation of being as devoted to the newspaper as he was to the company. He was often "caught" sketching out ideas and drawings for the paper during company business meetings. The fact that the paper thrived long after his death was testimonial to the fact that Amis was not the only one with a deep affection for the newspaper.

The first edition of the paper in September of 1940, indicated that the company had 630 names on its payroll the week before. This means that the company had settled into far fewer employees than they had at the beginning, when the number is reported to have been as high as 1500. During those days of large numbers, the ranks were inflated by the number of women in the large sewing operation. By 1940, the sewing operations had dwindled until the number of men was 370 and the number of women employees was 260. The Sept. 1, 1940 paper also said that the average age of the men was 34 and that of the women was 32.

The Hankering and Hunkering Club

After Mr. Amis became ill, sometime in the 1940s, and left the company, Fred Childress, the personnel director, took over editorship of the paper. It was Fred Childress who invented the fictional Hankering and Hunkering Club and wrote stories of supposed events that occurred during the periodic meetings of the club. He used names of actual employees in his humorous accounts, which served as an additional source of mirth.

The paper featured a free want-ads section where people would list cars and other items for sale. Looking at back issues of the paper suggests the great variety of company-sponsored events and services. These included, free help for employees filling out their tax returns.

The staff of the SPINNIT were pictured in the April 3, 1979 edition. All the men had on suits, light-colored shirts and ties. The women were all decked out in hats. There were 17 women who sat for the picture and 10 men. These people were the ones who wrote the stories describing recent goings on in their respective departments.

Company-sponsored activities, benefits, events, services

The company had its own bowling league that played on Tuesday nights. In 1979, the company gave employees who had been there 25 years or more, four weeks of paid vacation. Each December, on a designated Saturday morning, they had a pancake breakfast that was apparently well attended. The mill had winter and summer unpaid closings, of about ten days each. They also held an annual employee-recognition dinner in November of each year, at which time those who had been with the company twenty-five years were honored.

The War

The SPINNIT also reported on the company's contribution to WW II. Apparently two people who had worked for Dyersburg lost their lives in the war: Arthur O'Malley, a former employee of the Cotton Spinning Department and Edward B. Jones, a former Knitting employee, the former dying in a plane crash and the latter when the ship he was on was attacked. The SPINNIT was able to find where at least 70 Dyersburg employees fought in the war.

Play Ball

The company sponsored a semi-pro baseball team made up of mill employees, called the Cotton Products Panthers, which was organized and managed by Ray Weidner, head of the Knitting Department, himself a former semi-pro baseball catcher. He started the team in 1940 and according to the SPINNIT, they played in "just about every cow pasture in this part of the country".

Later on, the mill built the team a park of their own in Dyersburg, with part of the money coming from W. H. Burnham of Adrian, Michigan, one of the early members of the board of directors of the company. The park was named for Mr. Burnham and called, Burnham Field. The park was dedicated on May 23, 1941.

Mr. Weidner managed the team through the 1948 season (during which three players actually left the company for professional baseball, two of whom played in the major leagues). They had a record during those seven seasons of 102 and 42, which means they played an average of a little over 20 games a year. Mr. Weidner retired as manager in 1948 and the team folded in 1949, donating Burnham Field to the City of Dyersburg for the city's youth baseball program.

Setting the tone

It was during the war years that the community and company became galvanized around one another and this relationship would last until the plant's inordinately sad closing in 1999. At the time of the closing, the plant employed around 800 people. In some cases, as many as four generations of family members worked for the company, and in a lot of these instances, three generations were working there at the same time. The years between the war and the closing are filled with interesting events, but the focus of this account has been the early formative years, when the company culture was set and during which the mill and the community bonded in a way that is most likely thing of the past in the United States.

AuthorAffiliation

Mike McCullough, University of Tennessee at Martin

mccullou@utm. edu

Wilburn Lane, Lambuth University

lane@lambuth. edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 1

Pages: 61-66

Number of pages: 6

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412024

Document URL: http://search.proquest.com/docview/192412024?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 17 of 100

AT&T WIRELESS & CINGULAR: WILL TWO GOOD COMPANIES BECOME ONE GREAT COMPANY?

Author: Yu, Linda; Berardino, Lisa; Krishnamurti, Vaidheeswaran

ProQuest document link

Abstract:

The primary subject matter of this case centers on the recent acquisition by Cingular Wireless of AT&T Wireless. This case highlights issues such as operating synergies, strategic management, and stock price movement around the merger event. Secondary issues highlight the human resource management concerns such as potential downsizing, leadership challenges, management incentives, and retaining employees during the transition. The case also sets up an analysis of the current competitive forces in the wireless industry. This case has a difficulty level appropriate for first year graduate level. The case is designed to be taught in two class hours and is expected to require four hours of outside preparation by students. Cingular Wireless announced the acquisition of AT&T Wireless in February 2004. This is the biggest U.S. wireless merger in history and the deal has drawn public attention. The wireless industry is competitive, rapidly changing, and has an influence on people's lives. The AT&T Wireless shareholders experienced dramatic gain in their investments shortly after the acquisition announcement. Customers of both Cingular and AT&T Wireless are promised better coverage and services. Top management from both companies are confident that synergies will be created when two of the nation's leading wireless service providers join together. Lawyers and bankers specialized in mergers and acquisitions are benefiting by rendering their services. But the synergies will not come without costs. Many people, including top management, may lose their jobs; customers may receive lower quality services due to the confusion when two companies integrate; wireless users are concerned with reduced competition in the market and the possibility of higher prices; and many wireless suppliers are concerned about losing profits when the newly created firm tries to lower its costs. We use this recent acquisition deal to illustrate the basic concepts of mergers and acquisitions. Consistent with the traditional textbook structure, this case allows instructors to cover topics such as: different types of mergers and acquisitions, motivations behind mergers and acquisition, and the pros and cons of such activities. We also explore the implications of mergers and acquisitions on human resource management. It provides a multi-discipline exercise for students that will help them to integrate the knowledge they have cumulated from previous course work.

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

Cingular Wireless announced the acquisition of AT&T Wireless in February 2004. This is the biggest U.S. wireless merger in history and the deal has drawn public attention. The wireless industry is competitive, rapidly changing, and has an influence on people's lives. The AT&T Wireless shareholders experienced dramatic gain in their investments shortly after the acquisition announcement. Customers of both Cingular and AT&T Wireless are promised better coverage and services. Top management from both companies are confident that synergies will be created when two of the nation's leading wireless service providers join together. Lawyers and bankers specialized in mergers and acquisitions are benefiting by rendering their services. But the synergies will not come without costs. Many people, including top management, may lose their jobs; customers may receive lower quality services due to the confusion when two companies integrate; wireless users are concerned with reduced competition in the market and the possibility of higher prices; and many wireless suppliers are concerned about losing profits when the newly created firm tries to lower its costs. We use this recent acquisition deal to illustrate the basic concepts of mergers and acquisitions. Consistent with the traditional textbook structure, this case allows instructors to cover topics such as: different types of mergers and acquisitions, motivations behind mergers and acquisition, and the pros and cons of such activities. We also explore the implications of mergers and acquisitions on human resource management. It provides a multi-discipline exercise for students that will help them to integrate the knowledge they have cumulated from previous course work.

INTRODUCTION

On February 17, 2004, Cingular Wireless defeated the Britain based Vodafone and successfully acquired AT&T Wireless with a $41 billion cash offer. It is the biggest U.S. wireless acquisition in history. The market was caught by surprise by the large takeover premium: $15 per share compares to $6-$9 per share during the past year. The combined company would become the biggest wireless company with 46 million customers and the most advanced digital network in the U.S. Consolidation can help to achieve significant operating synergies. The company expects to generate over $ 1 billion in operating expense and capital expenditures in 2006, and the saving might be doubled starting 2007.

Company History - Cingular Wireless

Cingular Wireless is a Delaware limited liability company jointly owned by SBC Communications Inc. and BellSouth Corp. It was formed in April 2000 and began doing business under the "Cingular" brand name in January 2001. Cingular has access to cellular/PCS licenses in 45 of the 50 largest U.S. metropolitan areas, covering an aggregate of approximately 81% of the of U.S. population, and operate in 43 of the top 50 markets across the country. In addition, it established numerous roaming agreements to ensure that their customers can receive wireless service in virtually all areas in the United States where cellular/PCS wireless service is available. Some of the Major milestones achieved by Cingular over the years are:

1. In 2000, Cingular and Crowley Digital Wireless, LLC (Crowley Digital) formed a joint venture, Salmon PCS LLC, (Salmon) to acquire PCS licenses being auctioned by the FCC.

2. In May 2001, Cingular and T-Mobile exchanged FCC licenses covering approximately 36 million POPs (Point of Presence) each.

3. In January 2002,Cingular entered into an agreement with AT&T Wireless to form a jointlycontrolled and equally-owned venture to construct a GSM voice network with GPRS/EDGE data technologies. As of December 31, 2003, they had an investment in the venture of $21 million.

4. In December 2003, Cingular acquired three PCS licenses in Florida from Sunshine PCS, for approximately $14 million.

5. In February 2004, Cingular completed an exchange transaction with Dobson Cellular Systems, Inc. Cingular transferred $22 million cash and wireless property in Michigan to Dobson in exchange for wireless property in Maryland.

6. In February 2004, Cingular acquired an operational cellular system in Louisiana and other FCC licenses in Louisiana, Arkansas and Texas from Unwired Telecom Corporation. They expect the aggregate consideration for this transaction to be approximately $28 million cash.

Company History - AT&T Wireless

Created in 1994 as the result of AT&T Corporation's purchase of McCaw Cellular Communications, AT&T Wireless began trading as a tracking stock on the New York Stock Exchange in April 2000. On July 9, 2001, AT&T Wireless (NYSE: AWE) split off from AT&T, to become the largest independently owned and operated wireless company in North America and one of the most widely held stocks in the United States.

In July 2001, AT&T Wireless became the first company to introduce the next generation of wireless services in the U.S. with the launch of GSM(TM)/GPRS in Seattle, Washington. Through roaming agreements and affiliates, GSM/GPRS service is now available to more than 250 million people in the United States and available in more than 130 countries for voice calling and some 45 countries for data services. Additionally, in November 2003, AT&T Wireless took the lead in wireless data by introducing its national EDGE service, the fastest national wireless data service in the United States. Major milestones achieved by the company over the years are,

1. 1947 - AT&T Bell Laboratories invents wireless (cellular) phone service.

2. 1990 - AT&T Wireless, then McCaw Cellular Communications, introduces wireless SS7 signaling, allowing the creation of the North American Cellular Network and making national automatic roaming possible for wireless customers.

3. 1994 - AT&T Corporation acquires McCaw Cellular Communications for $11.5 billion.

4. 2000 - AT&T Wireless begins trading as a tracking stock under the ticker symbol "AWE," raising $10.6 billion in its Initial Public Offering.

5. 2000 - AT&T Corp. announces it will split the company into four independent businesses. AT&T Wireless will be split off as an asset-backed corporation in 2001.

6. July 9, 2001 - AT&T Wireless becomes an independent company publicly traded on the New York Stock Exchange (NYSE: AWE) and listed on the Standard & Poor's 500 Index.

7. 2002 - AT&T Wireless acquires TeleCorp PCS in an all-stock transaction.

Cingular's Next Challenge

The merger affects the entire wireless industry and many others. Days after the merger announcement, competitors started to grab market shares during this unstable time period. Sprint PCS offered two months unlimited free calling for qualified new customers. Bankers and lawyers will land over $80 million from this acquisition. Suppliers to major U.S. wireless companies, such as Ericsson and Nokia, are concerned about decreasing revenues fearing that the combined wireless giant will cut capital expenditures to realize operating synergies.

The CEO of Cingular Wireless, Stan Sigman, joined the company in November 2002 and is known as the person who brings in "a sense of urgency" to the organization. The 56-year old CEO is facing the biggest challenge in his career to bring the two companies together and to achieve the synergies expected by all parties. This task may be complicated by an anticipated slowdown in sales growth and uncertain future profitability prospects facing the entire wireless industry. In addition, Sigman needs to come up with a retention plan for the management team at AT&T Wireless.

Stan Sigman, a telecom veteran, has successfully made dozens of acquisitions. Facing the biggest U.S. wireless acquisition in history, he needs an executive committee to help him to analyze the current issues and solve problems that encountered Cingular. This executive committee includes top-level management from different areas and some of them do not have sufficient finance background. Suppose you are a newly graduated MBA and is working as the assistant to one of the committee members. Your assignment is to prepare a presentation for your boss to be submitted to the committee. Your boss has come up with a list of questions that he wants to address in this presentation and he wants you to prepare answers prior to the meeting. You also need to think about relevant issues that might be raised in the meeting and prepare for those to make sure your boss doesn't look bad.

CASE QUESTIONS

To address the following questions, you will need to conduct searches on the internet for articles published around the time of the acquisition and some basic reference books in finance and human resource management.

1. There are three types of mergers and acquisitions: strategic acquisitions, financial acquisitions, and conglomerate acquisitions. Compare and contrast these three types of acquisitions. What type of acquisition is conducted when Cingular Wireless acquires AT&T Wireless?

2. What are the motives behind mergers and acquisitions? How can Cingular benefits from the acquisition? For what consideration did Vodafone participated in the bidding war?

3. What are the disadvantages of mergers and acquisitions? Please list major tasks need to be resolved by Stan Sigman after the acquisition is complete.

4. AT&T was trading at $6 - $9 in 2003. What happened to its stock price after the acquisition announcement? Why? Cingular Wireless is not publicly traded. If it does, what will happen to the stock of Cingular?

5. How Cingular Wireless is going to finance the acquisition? What effect does it have on the firm's financial postion?

6. Who are the stake holders in a merger or acquisition?

7. What are the human resource management implications of this acquisition ?

References

REFERENCES

Cook J. (2004). T-Mobil chief expects AT&T Wireless-Cingular to cut 12,000 Jobs. Seattle Post Intelligencer. March 3, 2004.

Drucker J., Lubin J., Latour ?., Cingular Sigman faces huge task, Wall Street Journal,

How the Cingular Deal helps Verizon, Businessweek Online, March 1,2004

The Securities and Exchange Commission website www.sec.gov

AT&T Wireless company website. www.attws.com

Cingular Wireless company website. www.cingular.com

AuthorAffiliation

Linda Yu, SUNY Institute of Technology

yul@sunyit.edu

Lisa Berardino, SUNY Institute of Technology

calongl@sunyit.edu

Vaidheeswaran Krishnamurti, SUNY Institute of Technology

krishnv1@sunyit.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 1

Pages: 131-134

Number of pages: 4

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192411956

Document URL: http://search.proquest.com/docview/192411956?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 18 of 100

SUPER SISTERS, INC.

Author: Gunther, Richard; Rafi Efrat

ProQuest document link

Abstract:

After observing a customer engage in suspicious conduct, the Loss Prevention Manager of a store detains the shopper after grasping her by the arm and shoving her back to the store. Apparently, the shopper lost her balance and fell on her back sustaining significant physical damage. The shopper was then escorted to the loss prevention room where she was asked to wait for the store manager, who showed up more than an hour later. Following some questioning in the loss prevention room, the shopper was allowed to leave after it was determined that she did not engage in shoplifting. Due to the significant injuries the shopper sustained she was permanently unable to resume her work as a successful sales person for a pharmaceutical company. She is now suing the store for lost future income under the legal claim of false imprisonment. The statistics portion of the case requires students to use Excel to compute descriptive statistics, perform regression analysis, and project future income. Students are also required to carefully define the statistical terms they are using and explain the meaning of their results In the legal portion of the case, students are referenced to legal opinions and asked to evaluate whether the shopper is likely to be able to recover under the claim of false imprisonment. The students are then expected to utilize their previous statistical analysis to conclude whether, and if so how much, the court is likely to award the shopper for lost future income. Students also need to determine if the shopper is likely to recover compensatory damages for injury and a punitive award. Finally, the student is asked to recommend strategic management policies that would serve to avoid reoccurrences of the problem. This case requires students to apply materials learned in most Business School's lower division core (LDC). It is used in a course at the beginning of the junior year that has goals to integrate LDC material while developing teamwork and communication skills. Specifically, the case requires knowledge of elementary statistics and a beginning business law course. Student teams prepare the case with tutoring from faculty who provide "just-in-time" specific knowledge as requested by student teams. A team of students formally presents their case solution, another team acts as a "challenge team" and the whole class participates in an active question and answer session. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case sequence is the integration of statistics and business law. Secondary issues examined include the use and meaning of descriptive statistics, regression analysis, statistical index numbers, the legal responsibilities for detaining a customer in a store, the liability of a merchant for compensatory damages arising out of the commission of a tort, and related strategic management issues. The case has a difficulty level of three, appropriate for junior level. The case is designed to be taught in three class hours. That time estimate includes a formal class presentation by a team and a challenge by another student team. It is expected to require ten to fifteen hours of outside preparation by students for the case.

CASE SYNOPSIS

The statistics portion of the case requires students to use Excel to compute descriptive statistics, perform regression analysis, and project future income. Students are also required to carefully define the statistical terms they are using and explain the meaning of their results In the legal portion of the case, students are referenced to legal opinions and asked to evaluate whether the shopper is likely to be able to recover under the claim of false imprisonment. The students are then expected to utilize their previous statistical analysis to conclude whether, and if so how much, the court is likely to award the shopper for lost future income. Students also need to determine if the shopper is likely to recover compensatory damages for injury and a punitive award. Finally, the student is asked to recommend strategic management policies that would serve to avoid reoccurrences of the problem.

This case requires students to apply materials learned in most Business School's lower division core (LDC). It is used in a course at the beginning of the junior year that has goals to integrate LDC material while developing teamwork and communication skills. Specifically, the case requires knowledge of elementary statistics and a beginning business law course. Student teams prepare the case with tutoring from faculty who provide "just-in-time" specific knowledge as requested by student teams. A team of students formally presents their case solution, another team acts as a "challenge team" and the whole class participates in an active question and answer session.

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case is designed for a junior level business course that integrates core material. The primary subject matter includes concepts from business law and statistics. Secondary issues include the meaning and use of descriptive statistics, regression analysis, price indices, inflation, present value, merchants' law for false imprisonment, and personal injury claims. It is assumed the student will have had a previous lower division course in statistics and business law. The completion of a previous introductory course in accounting and economics is recommended.

It is recommended that approximately 3 class hours be devoted to this case. This time includes a class of about 1.5 hours where students, after reading the case, discuss the facts and decide what coaching assistance they need in the case. The instructor then covers the background material she or he feels is appropriate for the case. Additional background reading could also be assigned. It is suggested that the second class period of 1.5 hours include either (1) a formal class presentation by a team of students, with possibly a challenge by another student team, or (2) a more traditional discussion of the case led by the instructor. In either situation, an overview of the issues in the case is given and the answers to the questions at the end of the case are discussed. It is suggested that the student teams or instructor use slides or PowerPoint presentations as appropriate.

This case is fictitious but was loosely based on several real world situations. It includes issues and analysis that have practical implications in statistics, law, accounting, and economics. It has been the experience of the authors that the many interesting issues in this case will challenge and motivate students.

ANSWERS TO SPECIFIC CASE QUESTIONS

1. Put the data from Exhibit 3 in an Excel file. Use Excel, along with this file, to determine Mrs. Kim's real income for the last fifteen years. Do this by first converting each price index from percent by dividing by 100. Then, divide gross income by your converted (adjusted) price index. Using Excel, find the mean, median, and standard deviation of her past real income. Explain the meaning of these statistics. Can you use mean income to forecast future earnings? Take into account both statistical and non-statistical considerations.

One purpose for the first part of the question is to get students to think about the difference between actual income and real income. Students are also asked to prepare their spreadsheet for further analysis. After doing the required computations on the Excel worksheet provided with the case, they should get the results shown in Exhibit 1 .

View Image - Exhibit 1: Calculation of Real Income

Students can then use the Excel procedures for descriptive statistics to answer the rest of this question. The results are shown in Exhibit 2 below. Students must then pick out the mean, median, and standard deviation from the Excel output. They also must define them.

View Image - Exhibit 2: Descriptive Statistics for Real Income

The mean real income (35,500.32) is the sample average, a measure of central tendency of the sample. The median (35,449.46) measures the real income in the middle position of the sample; equal numbers of observations have income both below and above the median. If the size of the sample is an odd number, the median is the middle value. If the size is even, the median is the average of the two values in the middle. The standard deviation (878.3 1) measures the variability or dispersion of real income and is the positive square root of the variance.

Exhibit 1 shows that mean gross income appears to increase with time. Using the mean of a time series to forecast the future would ignore the effects of time and not be appropriate. However, real income does not appear to be related to time (see Exhibit 1). A better case can be made for projecting mean real income into the future. The confidence level in Exhibit 2 indicates that one can be 95% confident the population or real mean will be between (35,500.32 + 486.39) and (35,500.32 - 486.39). Therefore, real income does not appear to vary too much and is not related to time. It is reasonable to assume then that Mrs. Kim's real income will continue to be about 35,500.32 for some time in the future, provided Mrs. Kim's work situation and the economy remain the same as they have for the last 15 years.

2. How do you interpret the price indices in Exhibit 3? How are they constructed? Use Excel regression to analyze the relationship between the adjusted price index (dependent variable, i.e. 1.136) and year (independent variable, i.e. 1987). Interpret your regression findings by discussing the coefficient of determination (R-square), the regression coefficient, the p-values, and the regression equation. Can you use the regression equation to predict the price indices? Take into account statistical, macroeconomic, and other considerations.

What is a price index? A price index shows the relationship between the price level in a given year and the price level in a base year. The base year of the index is 1982-1984. The index value for the base year is always 100. The price index value for 1987 is 1 13.6. This means that the general level of prices has risen by 13.6% since 1982-1984 for the bundle of goods in the index purchased in 1982-1984.

How does one use price indices? Any time series of economic data will be reported for each year at the price level that exists in that year. This is called nominal data. Nominal means at the existing level of prices. One uses the price index to adjust a nominal time series of data to eliminate the effects of inflation so as to see what is happening to the real variable over time. (Real means adjusted for inflation. Real data is sometimes reported as in constant dollars). The calculation for each year is

Real xx = Nominalxx / (Price Indexxx/100)

Real 87 = Nominal87 / (Price Index87 / 100)

By dividing the nominal gross income data by the adjusted price index for each year, one gets a real time series. In this case the real time series shows that the gross salary has remained relatively flat over the 15 -year period.

How are price indices constructed? A price index is constructed by taking a basket of goods and services, purchased in the base year, and calculating what it would cost to buy the same basket with the same goods in the same quantities in some other year. By comparing the total expenditure necessary to purchase the same basket, one can isolate the price change effect.

The most commonly quoted price index is the Consumer Price Index or C.P.I. The C.P.I, is calculated by taking a historic basket of consumer goods, purchased in some past base year, and estimating the current cost of buying the same basket.

Example: Suppose there are two goods, X and Y. In the base year of 2000 the average consumer purchased the following quantities at the indicated prices.

Basket 2000: P^sub x^ = $ 200, Q^sub x^ = 100; P^sub y^ = $ 10, Q^sub y^ = 300.

Suppose the prices of these two goods in 2001 are P^sub x^ = $ 210; P^sub y^ = $1 1 How much have prices risen?

CPI 2001 = [(P^sub 01^ x Q^sub 00^) / (P^sub 00^ x Q^sub 00^)] x 100.

The numerator is what it costs to buy the same basket today; the denominator is what it cost to buy the basket in 2000 (the base year). The ratio will then reflect the amount of change in prices.

CPI 2001 = {[($210 x 100^sub x^) + ($1 1 x 300^sub y^)] / [($200 x 100^sub x^) + ($10 x 300^sub y^)]} x 100

= {[($ 21,000) + ($3,300)] / [($20,000) + ($3,000)]} x 100

= ($24,300) / $23,000) x 100 = 1.057 x 100 = 105.7

The price index has risen from 100 to 105.7, thus the price level has risen by 5.7%

Excel regression is used to analyze the relationship between the adjusted price index and year. The regression results for the Super Sisters case are shown in Exhibit 3 below. The coefficient of determination measures the percent of the variation of the price indices accounted for by the variation in year. It is rather high for a regression, over 99%.

P-value is known as the observed level of significance. It is a measure of the probability of error. Exhibit 3 shows that the p-value for year is 3.98706E-15 or about 3.987 ? IO"15. This number is expressed in scientific notation. The number - 1 5 in the exponent implies that one can move the decimal in 3.987 to the left fifteen places giving .000000000000003987. The probability of error is therefore extremely small. The relationship between year and adjusted price index is significant at any level, including .05 or .01, above .000000000000003987, the p-value. Thus, the relationship between year and price index is significant, strong, and apparently linear. (Students may want to draw a scatter diagram to reinforce these ideas).

The regression coefficient for year of 0.043725 would represent the slope of the straight trend line. On average each new year will bring an increase in the price index of 0.043725. Thus, the inflation is about 4%. The regression equation is

Y (Price Index) = Intercept + Year Coefficient (X or Year)

Y (Price Index) = - 85.7181 17 + 0.043725 (X or Year)

The formula above could be used to predict the price index for future years. For example, you can plug the year 2002 in the equation about and get 1.819, a prediction for the price index.

As long as the economy of Green behaves in the future as it has in the past, the equation above could provide a reasonable forecast for the price index. However, if there were an increase in inflationary pressures in the future, which have not occurred for the last 1 5 years, then the regression equation would lose its utility. Conversely, less inflation in the future would also lessen the usefulness of the equation.

View Image - Exhibit 3: Regression Results

Analysis of the causes of any sustained inflation has shown that the major determinant of inflation is growth of the money supply in excess of real economic growth. If the monetary authority (in the US it is the Federal Reserve) is expected to follow the same basic policies in the coming years as it followed during the time series of data, the regression can be used to predict the future changes in the index.

3. Assume that Mrs. Kim's real income will not change over the next ten years. Use the mean real income from question 1 to determine projected real income for the future ten years of Mrs. Kim's work expectancy. Use the regression equation from question 2 to project adjusted price indices for the next ten years. Assume that Mrs. Kim pays 20% of her actual income in taxes and that Green will not provide significant state assistance. Use the projected real income and adjusted price indices to estimate Mrs. Kim's net actual income for the next ten years. What would be the likely amount of an award to Mrs. Kim based on a present value rate of 10%? Discuss the factors that could cause Mrs. Kim's future income to differ from your estimate.

Exhibit 4 below shows a ten-year projection for Mrs. Kim's income. The mean real income from question 1 becomes the projected real income shown in column 6. The regression equation from question 2 is used to calculate the adjusted price indices shown in column 5. The adjusted index (column 5) is multiplied by real income (column 6) to determine the actual gross income in column 3. A tax of 20% is subtracted from gross income in column 3 to get net income in column 7. Net income is multiplied by a present value factor with a rate of 10% to get the values in column 8, which are then totaled. (A spreadsheet that will accept alternate values could be used for grading purposes.)

Factors that could cause Mrs. Kim's future income to differ from the estimate in Exhibit 4 are numerous. They include the wage market for Mrs. Kim's position, inflation, changes in income tax rates, changes in interest rates, state assistance, etc.

View Image - Exhibit 4: Projections of Mrs. Kim's Income

4. Would the merchant's defense relieve Super Sisters, Inc. from liability under the cause of action of false imprisonment? In answering this question, please read and identify the relevant law from the following case precedent: Thomson v. LeBlanc, 336 So. 2d 344 (1976).

No, the merchant's defense is not likely to relieve Super Sisters, Inc. from liability under the cause of action of false imprisonment. A merchant has the privilege to detain a customer on the merchant's premises provided that: (a) the party making the detention had a reasonable cause to believe that the detained person had committed a theft. Reasonable cause requires that the detaining officer have articulable knowledge of particular facts sufficiently reasonable to suspect the detained person of shoplifting. To have articulable knowledge, the merchant must conduct preliminary investigation of his suspicion, if time permits; (2) the detention must not have lasted longer than for a reasonable period of time; and (3) the detention must have been conducted in a reasonable manner. In determining whether the detention was conducted in a reasonable manner, courts examine the following factors: (a) whether the merchant threatened the customer with an arrest; (b) whether the merchant coerced the customer; (c) whether the merchant attempted to intimidate the customer; (d) whether the merchant used abusive language towards the customer; (e) whether the merchant used force against the customer; (f) whether the merchant promptly informed the customer of the reasons for the detention; (g) whether the detention took place in public next others. See Thomson v. LeBlance.

Super Sisters, Inc. (the "Sisters") would argue that the merchant privilege protects it from liability for false imprisonment to Mrs. Kim. First, Mr. Lee, its Theft Prevention Manager, had a reasonable basis to believe that Mrs. Kim had committed a theft. Mr. Lee had a reasonable basis to believe that Mrs. Kim had committed a theft because, based on concrete personal observations, he had articulable knowledge of particular facts suggesting that Mrs. Kim had just engaged in shoplifting. The articulable knowledge of particular facts is based on Mr. Lee's personal observations of Mrs. Kim, who was standing next to calligraphy sets in the store, making a sudden move to her pocket. Mr. Lee then observed her proceeding at an accelerated pace toward the store's exit. He noticed that Mrs. Kim's side pocket was stuffed. Mr. Lee then conducted a preliminary investigation of what he believed to be a shoplifting incident as he proceeded directly to where Mrs. Kim had been standing and noticed that a calligraphy pen set was missing from a rack that was fully stocked up earlier that day.

While Mrs. Kim will concede that Sisters may have had a reasonable basis to believe that a theft may have taken place, she would argue that Sisters have not conducted the detention in a reasonable manner and for a reasonable time. First, the detention was not conducted in a reasonable manner. While Mr. Lee did not threaten Mrs. Kim with an arrest or use abusive language when dealing with her, he intimidated, used force and effectively coerced Mrs. Kim to follow him to the Loss Prevention Room. The intimidation, the force and the coercion was accomplished when Mr. Lee shouted at Mrs. Kim in public, grasped her by the arm and shoved her back to the store, causing her to lose her balance and severely hitting her back. Also, Mr. Lee failed to conduct the detention in a reasonable manner because he did not promptly inform Mrs. Kim of the reasons for her detention but waited for more than eighty minutes to do so.

Second, the detention lasted for an unreasonably long period of time. While a reasonable length of detention under these circumstances would have been anywhere from five to fifteen minutes, here the detention lasted for at least eighty minutes.

Therefore, since Sisters would not be able to demonstrate two of the three required elements for the merchant's privilege, Mrs. Kim would be able to prevail in her cause of action against Sisters for false imprisonment.

5. Assuming that Super Sisters, Inc. is liable for false imprisonment and assuming that Mrs. Kim is deemed unable to locate another job for life due to her present medical condition, is a court likely to award her compensation for loss of future income? What standard will a court consider in determining whether Mrs. Kim is entitled to compensation? In your opinion, is Mrs. Kim's settlement offer reasonable? Support your opinions with a discussion of the legal and practical possibilities. In answering this question, please read and identify the relevant law from the following case precedent: Caldwell v. Kehler, 643 A.2d 564 (1994).

Yes, a court is likely to award Mrs. Kim compensation for loss of future income. The principal goal of damages in personal injury actions is to compensate fairly the injured party. Fair compensatory damages resulting from tortuous infliction of injury encompass no more than the amount that will make the plaintiff whole. The injured party has the right to be compensated for diminished earning capacity. The measure of damages for tort recovery encompas sing diminished earning capacity can be based on the wages lost as a result of the defendant's wrongdoing. That measure includes the value of the decrease in the plaintiffs future earning capacity. Although generally objectionable for the reason that their estimation is conjectural and speculative, loss of future income dependent upon future events are allowed where their nature and occurrence can be shown by evidence of reasonable reliability. The award of damages for loss of future income depends upon whether there is satisfactory basis for estimating what the probable earnings would have been had there been no tort. A satisfactory basis for an existing basis may include reliance on specific statistical models based on past earning records. The proper measure of damages for lost future income in personal injury cases is the present value of net income after taxes. See Caldwell v. Khler, at 2-3.

Here, statistical analysis of past earnings could be used to estimate with reasonable degree of reliability the present value of Mrs. Kim's net loss of future income. Based on the statistical analysis discussed above, the projected present value of Mrs. Kim's net loss of future income is $345,913.37.

To facilitate an amicable resolution of this dispute, Sisters should seriously consider making a counter offer to Mrs. Kim's settlement proposal. This would avoid costly and risky litigation, especially since Mrs. Kim has overestimated her loss of future income by more than $400,000 ($750,000 - $345,913.37). Since Sisters would likely be held liable under false imprisonment for the injuries sustained by Mrs. Kim, the settlement counter offer should include all of Mrs. Kim's documented medical bills of $765,000. Further, based on the analysis above, the net present value of Mrs. Kim's lost income is $345,913.37. Hence, Sisters' counter settlement offer should be at least $1,110,913.37.

In determining the total amount of the counter settlement offer, Sisters may also consider increasing the amount to take into account the costs of litigation to the extent this dispute goes to trial. Further, they may consider the possibility ofajury awarding Mrs. Kim punitive damages. Lastly, Sisters may wish to consider the costs of bad publicity that may be triggered by a prolonged litigation.

6. What actions would you recommend should be taken to prevent a reoccurrence of a situation similar to that involving Mrs. Kim? What company policies need to changed or added? Discuss the relevant management issues.

This is an open-ended question. Many good answers are possible here as long as they are well thought out. Certainly the way operations are currently carried out needs to be changed. Jimmie Lee and, perhaps, other personnel need to be given training on customer relations and the customer's legal rights. Mr. Lee may also need to be disciplined. Preventative actions also need to be taken to prevent shop lifting. Objective procedures are needed to determine when a person's actions are suspicious and if they should be detained. Some policy needs to be set so that upper levels of management can be quickly accessed when they are needed.

AuthorAffiliation

Richard Gunther, California State University, Northridge

Rafi Efrat, California State University, Northridge

Subject: Shoplifting; Damage claims; False arrests & convictions; Retail stores; Case studies

Location: United States--US

Classification: 8390: Retailing industry; 4330: Litigation; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 2

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 87-98

Number of pages: 12

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables Equations

ProQuest document ID: 216303211

Document URL: http://search.proquest.com/docview/216303211?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 19 of 100

AMAZON.COM IN 2003

Author: Kargar, Javad

ProQuest document link

Abstract:

Jeff Bezos opened his Amazon's virtual book store in 1995 in Seattle, Washington. Amazon's online store was a big hit, with about $5 million in the first year of operations. To expand on his success, Jeff introduced other products, including DVD, and electronics. In 2002, Amazon was the world largest online retailers. Unfortunately, the business had not yet made any profit. After four years of single-minded focus on growth, in year 2000, Amazon focused exclusively on increasing its efficiency. Beginning late 2001, Amazon shifted its focus on growth prospects again. Jeff believed that Amazon had reached a point where it could afford to balance growth and cost improvement. This balance began to pay off in the fourth quarter of 2002, where the company generated $198 million in free cash flow for the first time. After falling out of favor along with the Internet sector in 2000 and 2001, Amazon's stock staged a rebound in 2002 as investors bought back into the idea that Amazon would be around for a long time and would start generating real profits. However, it seemed that survivability was still an issue for those investing in Amazon due to massive negative operating cash flow, excessive debt, significant payments for its suppliers and bondholders, intense competition, and the slow economy. As a low-margin retailer, the case opens with Jeff facing the dual challenge of trying to improve margins and service a large amount of debt. Numerous efforts by Jeff to advertise online and traditional media, lower prices, and free delivery had failed to attract more new customers. Jeff and some of his top level managers had different opinions on the solutions to their problems. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns making an online retail business profitable. Secondary issues include (a) assessing the long-term attractiveness of pure online retail industry, (b) understanding and comparing strategy elements and competitive advantages in e-commerce with traditional firms, and (c) evaluating growth strategies. The purpose of this case is to provide students with enough information about Amazon's business situation, to be able to chart the course of action the company should take at a given point in time. The case has a senior or second year graduate level difficulty. The case is designed to be taught in three class hours and three hours of outside preparation by students.

CASE SYNOPSIS

As a low-margin retailer, the case opens with Jeff facing the dual challenge of trying to improve margins and service a large amount of debt. Numerous efforts by Jeff to advertise online and traditional media, lower prices, and free delivery had failed to attract more new customers. Jeff and some of his top level managers had different opinions on the solutions to their problems.

INSTRUCTORS' NOTES

Information was basically gathered from the public interviews with Bezos and other company officials on TV and at the Company's quarterly conferences. Background information on the industry and the company was drawn mainly from annual reports of the company and publicly available information.

CASE OBJECTIVES AND USE

The case is primarily a Strategic Management/Business Policy case. It explores the unique challenges that Jeff Bezos, founder and CEO of Amazon faced as he grew his venture from one product to many variations. It provides a good opportunity to analyze the business strategy as it relates to financial alternatives. The case could be used as a means to discuss several managerial issues involved in strategy formulation and implementation. In this role, some or all of case discussion questions would be appropriate to assign in advance, and class discussion could be led to achieve one or more of the following objectives:

* To assess the long-term attractiveness and profitability of the online retail industry.

* To understand the main strategy elements of an online retailing firm.

* To help students understand that most elements of a strategy in e-commerce is not that different from traditional firms.

* To assess internal situation, and risk and uncertainties that an online retailer is facing.

* To assess the external environment of online retailers, and perform Porter's 5-forces of model.

* To illustrate the costs of growing fast without profitability.

* To provide students with an opportunity to assess Amazon's strategic situation, growth prospects and to recommend a set of strategic actions to improve its longterm competitive position and overall financial performance.

ANALYSIS OF CASE

Begin the discussion by asking a class member to briefly summarize the background of the case. Continue the discussion by asking the class: What can you tell us about Amazon's current situation? Record the class's comments on a flipchart or blackboard. You may use the following information to summarize the company's current situation.

January 2003 Profile

Losses:

* $149 million in 2002

* Is on track to lose money every year since its inception in 1995

* Is on track to lose money for the first three quarters of every year

* With the exceptions of year 2001 and year 2002, lost money every fourth quarters of year

* Cumulative Losses of over $3 billion

Not a Strong Balance Sheet:

* Total Equity: $(1,352,000,000)

* Total Long-term Debt: $2,277,300,000

* Total Assets: $1,990,400,000

* Current Ratio: 1.52

* Quick Ration: 1.22

* Working Capital: $549,700,000

Cash on Hand:

* $1.3 billion

How long Will It Last?

DISCUSSION QUESTIONS

The key questions for discussion at this point are:

1. What is your evaluation of Amazon's financial condition? What does Amazon's financial pulse tell us? What problems do you see?

2. What are the key elements of Amazon's business model? What are its main competitive advantages as an online retailer?

3. What were the main elements of Amazon's business strategy?

4. What was Amazon's generic business strategy? How well was it working?

5. What were the main details of the company's strategy?

6. How does a strategy differ for e-commerce vs. traditional firms?

7. Who were the stakeholders of Amazon's zShops, and how did zShops add value to the stakeholders?

8. What are some of the external risk factors that might affect Amazon's future performance?

9. Evaluate online retailing industry using Porter's five forces of model. Which of these forces were strongest? Which one was the weakest?

10. Based on the preceding evaluation of Amazon's situation, and industry environment, what problems and issues do you think Amazon's management needs to address? What is more critical?

1 1 . What recommendations would you make to Amazon to get the company on the road to profitability?

12. If for any reason Amazon does not make enough money to pay its bond interest and principal obligation, what additional sources of financing are available for the company?

ANSWER TO THE QUESTIONS

1. What is your evaluation of Amazon's financial condition? What does Amazon's financial pulse tell us? What problems do you see?

Everyone in the class should be able to see the symptoms of Amazon's weak financial condition:

* The speed with which Amazon is "burning" its cash reserves.

* Amazon had an accumulated retained earning deficit of $1.35 billion as of Dec. 31, 2002, and may incur additional deficit.

* As of December 31,2002, Amazon had incurred over $3 billion operating losses, and it may continue to incur more losses for the foreseeable future. The company's loss was growing till 2000, but it dropped in year 2001 and 2002.

* Big increases in losses per share of common stock till 2000, then dropping over the past two years.

* A sharp decline in the company's current ratio and quick ratio from 1997 through 2001. They were slightly improved in 2002.

It is very important to discuss why Amazon' s financial condition is not so strong. The causes of poor financial performance are what must be illuminated here. Several factors stand out:

* Company has a modest gross margin, and it is improving very slightly. Amazon's margin is low because of free shipping, inventory stocking, order fulfillment costs and inventory right-offs. These are part of the company's cost of goods sold.

* The big amortization costs for goodwill (a factor that hurts earnings but does not have adverse cash flow implications). Amazon's amortization expense dropped from $322 million in 2000 to $74 million in 2002.

* The big jump in marketing and fulfillment costs. For years, Amazon was spending more than its gross profits in marketing and fulfillment operations in order to achieve the revenue growth rate. For example, in 1999, Amazon's gross profit was $290 million and its marketing and fulfillment expenditures were $413 million. Within the year 2000, gross margin had grown to $656 million, but marketing and fulfillment expenses had shrunk to $495 million. Within the past two years, Amazon had better leveraged its marketing and fulfillment dollars. It is a good idea to compare gross profits with marketing and fulfillment expenditures.

* Big outlays for technology development expenses at the company's Web site. Amazon spent $160 million on its Web site and technology in 1999, $269 million in 2000, $241 million in 2001, and $216 million in 2002.

* Amazon has significant indebtedness. As of December 31, 2002, Amazon had total long-term indebtedness of $2.28 billion. Its indebtedness could limit the company's ability to obtain necessary additional financing for working capital, capital expenditures, debt service requirements in the future, and react to changes in technology and in the event of an economic downturn. Amazon may not be able to meet its debt service obligations. From 1 997 through 2002, the company reported as much as $ 1 1 .24 billion in revenue, and it had about $9 billion long term loan to meet its cash needs. That is about 80 cents for every $1 of merchandise sold.

* High interest expenses to bondholders. Amazon is paying over $111 million interest a year. Beginning in November 2003, Amazon will also begin to make additional semi-annual interest payments on its senior discount notes.

* It might be also a good idea to share the following trend analysis on some selected financial and operating ratios with the students, and see any ratio shows an improving trend.

* Poor inventory management in the past, but it has been improved greatly since year 2000. In 1999, when Amazon's sales grew 167% from the previous year, its inventories ballooned by 648%. When a company manages inventory properly, it should grow along with its sales growth rate. When inventory grows faster than sales, it might mean demand is slowing and the company is not selling as much as it is buying. Since buying inventory requires cash, an increase in inventory causes cash to fall. Conversely, when accounts payable increase, so do a company's cash balances. By delaying payments to creditors, management frees up cash. If you don't par creditors, they won't supply you in future. The inventory analysis below shows how costly a growth was in 1 999 without profitability, but it was improved in the last two years.

Also, Amazon's ability to turn over its inventory rapidly enough has declined in 1999. Amazon's rate of inventory turnover plummeted from 20.6 times in 1998 to 7.37 times in 1 999. The inventory process improved in 2000, and increased from 1 4 in 2000 to 20 in 200 1 . It seems that Amazon is beginning to manage the inventory process better with higher sales and an even more complex product mix.

Another interesting way to stimulate the discussion is to take a vote on the question: Is Amazon on the right track? Find out how many students think Amazon is growing too fast? Just about right? Too slow? Is the growth rate above or below what investors believe would be necessary to bring Amazon.com into profitability? What assumptions have JeffBezos and the "growing just right" voters made? What can go right? What can go wrong?

2. What are the key elements of Amazon's business model? What are its main competitive advantages as an online retailer?

The key competitive advantages of Amazon include:

* Amazon got to its market first. None of the big booksellers were given much thought to the Net in 1994.

* Amazon spent heavily on traditional advertising to establish a brand.

* Amazon' s site exploits the Net' s potential to build a "community" around a product. For example, Amazon publishes customer reviews as well as outside reviewers. It seems that the depth of potential discussion is an issue with the success of a site.

* Amazon's ability to maintain records of customer preferences and then act on that information gives it another advantage as an online retailer. Amazon asks people to name some of their favorite products - the books, or authors that they liked best. And then its software program tells a person what other people with similar tastes liked so that person can add it to his shopping list.

* Books are quasi commodities - there is no need to try them on before buying them. They are also small-ticket, and impulse items that are easy to ship. Established distribution channels mean that Amazon can maintain a low inventory, ordering only the books customer request. As a result, the firm's inventory turned over 42 times in 2002 versus only 2.1 times for Barnes & Noble.

* Amazon has lined up alliances and exclusive agreements with 28,000 sites, including Yahoo, and America Online. A customer who visit, say, StarChefs.com to check out recipes from celebrity chefs can click a button that lets him order cookbooks from Amazon. There are infinite array of topics that makes it easy to sell Amazon's product through other sites.

3. What were the main elements of Amazon's business strategy?

The principal competitive factors in Amazon's market segments included price, selection, availability, convenience, information, discovery, brand recognition, personalized services, accessibility, customer service, reliability, speed of delivery, ease of use and ability to adapt to changing conditions. For its services and third-party sellers channels, additional competitive factors included the quality of its services and tools, and speed of performance for its services.

Price was the most important factor of Amazon's sales-determining factors. Amazon attributed much of its growth to an emphasis on price-cutting, like free shipping for orders of $25 or more. The company would make that offer a permanent part of its business.

Amazon also had invested significant resources in the development and maintenance of its technology base. It had implemented numerous Web-site management, search, consumer interaction, recommendation, transaction-processing and fulfillment services, using a combination of its own proprietary technologies and commercially available, licensed technologies.

Amazon had its own warehouses and distribution centers in order to have better control over its inventory and shipping activities. Although Amazon' s distribution decision promised cost savings through larger volume ordering and lower shipping costs, it also meant that Amazon needed to generate much higher sales to justify its costs.

Amazon's online retail channel offered a broad range of categories of new products to customers. These products included books, music, DVDs, videos, electronics, computers, camera and photo items, software, computer and video games, cell phones and services, tools and hardware, outdoor living items, kitchen and house ware products, and magazine subscriptions.

Customer service was also critical to expanding and retaining its customer base. Customer service representatives were available 24 hours a day, seven days a week to provide assistance via both e-mail and toll-free telephone. The company's more than 200 customer service representatives were working in six customer service centers located in different parts of the country.

4. What was Amazon's generic business strategy? How well was it working?

Amazon's generic strategy was clearly aimed at building long-term competitive position at the expense of near-term profitability. Amazon has competed in ways that violated most aspects of a good strategy. Rather than focusing on profits, Amazon sought to maximize revenue and market share at all costs, pursuing customers through discounting, giveaways, promotions, and heavy advertising. Some people might argue that it may not be true. For example, Japanese succeeded in United States by similar strategy of initially building market share (volume) without concern for immediate profit. Rather than concentrating on delivering real value that earned an attractive price from customers, Amazon pursued indirect revenues from sources such as advertising and stock rather than cash from its corporate partners. Finally, Amazon used price as the primary competitive variable. For example, Amazon sold quality books at price below traditional booksellers. Probably Amazon was trying to integrate broad differentiation and low price strategies, but it had not been successful in doing so at the time of the case, and in fact it is very difficult to integrate these two elements.

The strategy can be said to be working well in terms of:

* Giving Amazon good market visibility on the Internet

* Generating good levels of traffic at Amazon's Web sites.

* Boosting Amazon's revenue and market share

* Narrowing losses

* Recently generating positive operating cash flow

But the strategy was not working in terms of:

* Producing profitability - Amazon's losses were high, but started dropping

* Generating better gross profit margin

* Putting the company on a sustainable financial footing * Affirming the company's business model and proving that Amazon is a viable company with a viable business

5. What were the main details of the company's strategy?

Record the class' comments on a flipchart or a blackboard. Students ought to be able to identify the following strategy elements for Amazon:

* Has an appealing, informative online store; an easy-to-use website; gives shoppers the tools to find a selection quickly

* Keeps the website on cutting-edge of technology (spend heavily!)

* Promotions and giving discounts

* Superior information technology infrastructure

* Superior knowledge database-Amazon accumulated and analyzed information on purchasing behavior of customers

* Consumer information-Offering community features such as book reviews from various sources and providing recommendations based on interests or previous purchases

* In-house order fulfillment. Unlike more online retailers, Amazon has built and maintained control over distribution creating its own distinctiveness

* Offering attentive customer service to promote repeat customers

* Fast and reliable product shipments to customers

* Reliability-Customers feel more comfortable when they give their credit card information than through an unknown individual online retailer

* Convenience of one-stop shopping with zShops

* Protecting customers by providing guarantee for purchases

* Facilitating 24/7 customer service

* Invested heavily in brand advertising

* Negotiates cross-promotional arrangements with other websites

* Advertise heavily on traditional media

* Sells advertising on the company's web site. Amazon pursues indirect revenues for advertising

* Economies of scale. Amazon had build economies of scale, both in infrastructure and in the aggregation of many buyers and suppliers that deter new competitors or place them at a disadvantage

* Economies of scope. As a pure retailer, Amazon has economies of scope in books, CDs, and Video products. In zShops businesses, Amazon is only taking advantage of economies of scope with its brand name, customer interface, and technological infrastructure, not of its knowledge database, warehouse infrastructure, or expertise in logistics

* Using price as the primary competitive variable

* Focusing on maximizing revenue, market share and cash flow

* Pursuing stock rather than cash from its corporate partners

* Grow the business by offering different products to consumers, and organizations, merging, acquisition, expanding into international markets, and establishing strategic alliances with major retail stores

6. How does a strategy differ for e-commerce vs. traditional firms?

This case shows that major elements of the strategy in e-commerce are not that different from traditional firms. The main different is technology used to reach customers. So the structure of costs to operate should differ somewhat as a result. Still need a product/service that serves a need for a cost-group and has an acceptable return for level of risk. When students figure this out for themselves, this is a good learning opportunity. As Porter points out:

Having a strategy is a matter of discipline. It requires a strong focus on profitability rather than just growth, an ability to define a unique value proposition, and a willingness to make tough trade-offs in choosing what not to do. Company must stay the course, even during times of upheaval, while constantly improving and extending its distinctive positioning. Strategy goes far beyond the pursuit of best practices. It involves the configuration of a tailored value chain that enables a company to offer unique value. (See "The Six Principles of Strategic Positioning," Strategy and Internet, p. 71.)

7. Who were the stakeholders of Amazon's zShops, and how did zShops add value to the stakeholders?

Unlike retail, where Amazon sells and controls the service to customers, Amazon acts as an intermediary in zShops, offering a cyber shop space, where the independent shops can sell their products to customers. Amazon changes a monthly flat fee and a commission on the transaction.

The three major stakeholders of the zShops are: customers, shop merchants, and Amazon.

Value of the zShops to Amazon's customers

* Convenience of one-stop shopping. With zShops, customers can enjoy a large number of product selections from one site, instead of spending time, surfing on the Web for every product they want to buy. In addition, customers avoid having to type their shipping address and credit card information every time they complete a transaction. But it can be very distracting with all the "pop-ups" about the other sites.

* Reliability. When customers order the product and give their credit card information, they feel more comfortable than through an unknown individual online retailer.

* Guarantee by Amazon. Amazon' s A-to-Z guarantee gives protection to its customers by providing a $250 guarantee for regular purchase and a $1,000 guarantee for purchases made through its 1 -Click ordering capability.

Value of the zShops to shop merchants

* Credibility. The individual zShops obtain credibility by being under Amazon umbrella.

* Brand recognition. By affiliating with Amazon, the shops benefit from the brand recognition Amazon has been able to build. An individual store would not be able to build a strong brand name in such a short period of time.

* Access to a large distribution base. By operating under Amazon's umbrella, zShops can have access to the large number of customers who visit Amazon. It would cost each individual shop a lot of advertising and marketing expenses to obtain even a fraction of Amazon's customer base.

* Technology infrastructure from Amazon. It will be too costly for a small retailer to open an independent online store that has the e-commerce capabilities Amazon has.

* Guarantee. Amazon's guarantee to customers of up to $ 1 ,000 for each purchase gives the individual stores a quality place to shop.

* Access to Amazon's client database. By sharing the information on customers accumulated and analyzed by Amazon, the individual stores can have a better understanding of customers' needs.

Value of the zShops to Amazon

* Additional stable source of revenue through the monthly fees paid by the stores. Since Amazon has a strong brand name and growing customer base, it should be easy for it to attract retailers to join the zShops network.

* zShops helped utilize Amazon's distribution system

* Amazon can accumulate and analyze customer behavior data in the much broader product range offered by the zShops. By providing better and more information to the customer will result in attracting and retaining an increased number of customers. But this is an issue of customer privacy. What if a customer does not want his name to be shared?

8. What are some of the external risk factors that might affect Amazon's future performance?

The following are some of the risks and uncertainties that might have negative impacts on Amazon's future performance:

* Amazon faces intense competition. The e-commerce market segments in which Amazon competes are relatively new, rapidly evolving and intensely competitive. Other companies in the retail industry may enter into business combinations or alliances that strengthen their competitive positions.

* Amazon's business could suffer if it is unsuccessful in making strategic alliances. Entering into third-party services arrangements is complex and initially requires substantial personnel and resource commitments by Amazon. This may constrain the number of such agreements Amazon is able to enter into and may affect its ability to deliver services under the relevant agreements.

* The seasonality of Amazon's business places increased strain on its business. Amazon's disproportionate amount of net sales is realized during the fourth quarter. If the company does not stock popular products in sufficient amounts, it can significantly affect its revenue and future growth. If the company overstocks products, it may be required to take significant inventory markdowns or write-offs, which can reduce its gross profits.

* Amazon's computer and communications systems and operations can be damaged or interrupted by fire, flood, power loss, break-ins, and act of wars. If this happens, it can damage its reputation and will be expensive to remedy.

* Amazon's stock is highly volatile. Future volatility in the stock price can force the company to increase its cash compensation to employees or grant larger stock option awards than it has historically. This can hurt its operating results.

* Government regulation of the Internet and e-commerce is evolving and unfavorable changes can harm Amazon's business.

* The imposition by state and local governments of various taxes upon Internet commerce can decrease the company's future sales.

* Amazon source a significant portion of its inventory from a few vendors. If they stop selling merchandise to Amazon on acceptable terms, it may not be able to acquire merchandise from other suppliers in a timely and efficient manner and on acceptable terms.

9. Evaluate online retailing industry using Porter's five forces of model. Which of these forces were strongest? Weakest?

Although some have argued that today's rapid pace of technological change makes industry analysis less valuable, the author believes the opposite is true. As Porter points out:

Whether an industry is new or old, five underlying forces of competition determine its structural attractiveness. Analyzing the forces illuminates an industry's fundamental attractiveness, exposes the underlying drivers of average industry profitability, and provides insight into how profitability will evolve in the future. The five competitive forces still determine profitability even if suppliers, channels, substitutes, or competitors change. Because the strength of each of the five forces varies considerably from industry to industry, it would be a mistake to draw general conclusions about the impact of the Internet on the long-term industry profitability; each industry is affected in different ways.

Our analysis of the competitive forces using Porter's five-forces model of the industry is presented below.

Competitive Pressures from Substitution - moderate to strong

Traditional retailers and discount stores are the principal substitutes. One of the best tests of the competitive power of substitutes is whether they are drawing sales and buyers away from the online retailing industry rivals. Here, it is online retailers that are eroding the business of traditional retailers (rather than the other way around)

* Most people are accustomed to buying products in stores where they can see what they are buying and make on-the-spot comparisons and decisions (=strong substitute)

* Online retailers can offer a wider selection than brick-and-mortar retailers, further weakening competitive pressures from substitutes (=weak substitute)

* Online retailers do not have a cost advantage over brick-and-mortar retailers (=strong substitute)

* It is unclear whether online stores can match offline stores in price, convenience, and service.

* Even if online stores do catch on with a growing number of people, offline stores could retaliate with a bricks-and-clicks strategy of their own, using their existing store locations as local warehouses for picking orders and sending out delivery, such as Wal-Mart (-strong substitute)

* Catalog retailers with toll-free numbers and automated fulfillment centers have been around for decades. Still the issue for catalog firms is print cost for catalog and mailing cost versus Internet site cost (=moderate substitute)

* Internet dampened the bargaining power of off-line retailers by providing online retailers with new, more direct avenues to customers (weak substitute)

Threat Of Additional Entry Into Online Retailing - moderate to strong

* Barriers to entry for new start-up online stores are reasonably high and there are already a substantial number of online retailers; new market entrants would need significant financial and advertising resources to develop brand recognition and the distribution capability necessary to serve the marketplace. In addition, until the existing companies prove that their business models and strategies are capable generating profits, there won't be a rush to enter the market (=a weaker likelihood of entry)

* The most likely entrants are the existing off-line retailers looking to expand their market presence and sales. Entry barriers especially for bigger retail giants like WalMart and Target are relatively low. They already posses much of the needed infrastructure. It may be only a matter of time before they start their own online operations. They also have significant advantages in having established brand recognition (=a strong likelihood of entry)

* New entry is also likely in the form of an existing online retailer acquiring or forming a strategic alliance with an online retailer (=a moderate likelihood of entry)

The Bargaining Power of Suppliers - moderate to strong

* The major manufacturers and distributors of products have no particular incentives to give online retailers the same deals as their high-volume customers (=strong bargaining power)

* At present, Amazon operates on a relatively large scale. It has the bargaining power that comes from buying in volume. But, because of the somewhat precarious financial condition of Amazon, whose losses are mounting, suppliers may impose relatively more stringent conditions on payment for the items supplied (=strong bargaining power)

* Amazon has few major suppliers (=strong bargaining power)

* Software, servers, and Web site hosting services are readily available at competitive prices from multiple sources (=weak bargaining power)

The Bargaining Power of Buyers - moderate to strong

* The buyers are individuals. No one person has the ability to bargain for and get better terms than is generally offered to all buyers. The only exception is buyers do not pay a delivery charge on large orders in some sites. There are millions of customers (=moderate power)

* Internet technology allows buyers to gather extensive information about products easily. Customers can also choose among many more options from which to buy, not just local retail stores but also various types of online retailers. Because the Internet reduces the importance of location, it widens the geographic market from local to regional or national (=bolstering buyers bargaining power)

* Low switching costs for customers. On the Internet, buyers can switch online retailers with just a few mouse clicks, and new Web technologies are systematically reducing switching costs even further (=high bargaining power)

* As customers become more familiar with the technology, their loyalty to their initial online retailers will decline, because they will realize that the cost of switching is low (=strong bargaining power)

* The power of customers will also tend to rise in the future. As buyers' initial curiosity with the Web wanes and subsidies end, companies offering products on-line will be forced to demonstrate that they provide real benefits (=strong bargaining power)

Rivalry among Online Retailers - very strong and getting stronger

* Rivalry among online retailers is influenced by the other four forces. Jockeying for position among rivals is active and centers around:

* Price discounting; Internet technology reduce variable costs and tilt cost structures toward fixed cost, creating significant greater pressure for companies among e-tailers to engage in destructive price competition (=increases rivalry)

* Ability to generate website traffic by different promotional programs and advertising

* Well-known reputation and brand image

* Selection

* Innovation in Web site functionality and features; buyers expect good features

* Accuracy of order filling

* Delivery times and delivery charges

* Attentive customer service (reps available on a 24/7 basis)

Other factors affecting the intensity of rivalry among the online retailers:

* Growing globalization of competition; there are already a substantial number of online retailers (=increases rivalry)

* The market for the products that Amazon sells is maturing - slow growth heightens rivalry, as competitors fight to build volume and market share. Achieving aboveaverage growth means being successful at stealing sales from traditional booksellers (=increases rivalry)

* Consumers have low switching costs; the switching of customers increases competition among rival online retailers (=increases rivalry)

* It is more difficult for online retailers to differentiate themselves, as they lack potential points of distinction such as personal selling. With more competitors selling largely undifferentiated products, the basis for competition shifts more toward price (=increases rivalry)

* The use of the Internet tends to expand the geographic market, bringing many more companies into competition with one another (=increases rivalry)

* Many established off-line companies are now more familiar with Internet technology and are deploying on-line applications; with a combination of new and old companies and lower entry barriers, online retailing will likely end up with an increase in the number of competitors and fiercer rivalry (=increases rivalry)

10. Based on the preceding evaluation of Amazon's situation, and industry environment, what problems and issues do you think Amazon's management needs to address? What is more critical?

The obvious issue is how best to extricate the company from impeding financial disaster. The company must find some ways to get the company to the point where it can generate more positive cash flow from operations. This is the point of the case. That much should be obvious.

* How to increase sales growth? This is the key to profitability. To cover present annual operating expense of about $928 million with a gross margin of 23%, Amazon needs annual sales of $4 billion to be profitable. Amazon is just about to realize this volume of sales.

* How to improve the company's gross profit margin? The company already brought the order fulfillment process in house. This will help improve the margin in the long term, if they last that long. Other moves involve having product lines with high margins, partnership with more physical retailers.

11. What recommendations would you make to Amazon's management to get the company on the road to profitability?

Students will find this the hardest part - translating good analysis into good recommendations for action is not easy, especially without a solid strategy. But this is a perfect case in which to push the class hard for sound recommendations on "what to do".

The author suggests the following actions be taken:

* Amazon management should only consider expanding its product line within the existing product groups that may grab the attention of customers - those that are popular brand, high margin and are hard to find in typical retail stores. Also stop selling unprofitable items.

* A new and different marketing/promotion campaign is needed to spark consumer interest in online retailing. Our recommendation would be to concentrate the company's marketing budget in the core business (book, CDs, and videos); for the company to prove its new business model and strategy are viable, it needs to be able to point to market success in at least one or two of its product groups very quickly. Once Amazon management learns how to attract users and build order volume in one or two product groups, the learning can be transferred to the other product groups. Amazon is good at having a large stock of hard-tofind books and music. It can be a category killer in this area only. Although, Amazon's overall revenue in the company's core books, music, and video segment was about 80% of its total revenue in 1999, it has dropped to 54% in 2001.

* The company should put all plans to enter additional product groups on hold until it is successful in its present product groups. Maybe part of the problem is its current mix.

* Stop growing in the international markets. It is costly to establish international facilities and operations, promote the brand internationally, and develop localized Web sites. Amazon may not succeed in these efforts. These operations may never be profitable.

* More focus on cash flow. Determination of cash flow per share will be a strong indicator of the price people might be willing to pay for a share of ownership in any company.

* Management probably needs to be more conservative in pioneering new Website technologies, until the company's financial situation improves. Management also should push hard for more cost reductions and improved operating efficiency (one of the keys to better profit margins and improved cost competitiveness). Amazon needs to prepare for increased price competition and get its costs in shape in case buyers become more pricesensitive and price competition becomes more of a factor. It might consider closing some of the distribution centers, because Amazon has squandered the company's financing by overbuilding its distribution network.

* Review ways to increase the effectiveness of the company's marketing budget. Amazon needs to find ways to reduce the costs of acquiring customers. It needs to figure out to better leverage its marketing dollars. Also, Amazon' s sales should be increased as fast and as much as possible.

* Enter into more alliances with Internet portals to help generate additional site traffic and build awareness of Amazon. Management should approach the Internet portals with whom it has contractual marketing agreements to explore the possibilities of stretching out its payments in the event that it has difficulty generating the cash to meet its obligations on schedule. We don't expect the portals to assume more risk. Alternatively, Amazon might agree to pay them a fee for referrals that result in sales.

* Divest some of the businesses. Management has also squandered its financing by investing in marginal online retailers, which are now failing. Given the challenges in these businesses, lower gross margins and higher marketing requirements, the prospects might not look good.

* Merger or Acquisition. Amazon is not an attractive take over, until the stock price goes much lower.

12. If for any reason Amazon does not make enough profit to pay its bond interest obligation, what additional sources of financing are available for the company?

Amazon has enough cash to make the few more interest payments on the bonds. After that, it will need to get to start generating profit on its sales. Again, becoming profitable might be difficult in this economy because of the way Amazon has set up its business model.

It is important to realize that a bond analyst of credit has a different job than an equity analyst. The value of equities is 100% in the future. Creditworthiness is completely tied to the present. If we estimate a company's value based on 2002 results and do not look into the future, we have a low chance of being right. But if we estimate its creditworthiness on 2002 results, we have a 1 00% chance of being right. Debt analysts look at the company financiáis. They want to know whether or not company has adequate cash to make its debt payments. In 2002, the company's "Times Interest Earned" ratio was 0.61, much lower than accepted ratio. As long as the company has cash flow, and can pay the coupon, the convertible bonds are more attractive. But equity analysts, on the other hand, are more focused on a company ' s growth outlook. They want to know what the catalysts are that will help earnings. Debt analysts have their own biases. They tend to do backward-looking and not at projected estimates or the potential of a company's business plan.

Bonds are supposed to be less risky than stock, because they carry a specific obligation by the company to pay interest regularly, and the full principal at maturity. Amazon shares, on the other hand, pay no dividend and their current price is less than half the $78 conversion price for the 4.75% notes. So investors in the convertibles have to rely on their interest payments for now, while hoping for a rebound in the stock to allow them to convert. Of course, an assumption for bondholders is that the borrower is making money at least enough to meet its interest obligation. If the payment of the coupon becomes questionable, then that changes the conclusion.

The only financing avenues we see are (1) selling additional shares to obtain additional equity capital or (2) finding a company interested in buying an equity stake in the company. With the existing economic slow down and capital market, we don't see that the company's prospects are bright enough to attract investors to buy additional shares. Offering additional shares means dilution of current shareholders, meaning that any future earnings for the company will be spread out over many more shares. Who would invest in a company that has an outstanding debt in the form of bond, not bank loans, that has no collateral and S&P credit rating of junk bonds? It has no ability to raise any more money in the public section. Given the concerns, Amazon shares should be valued like traditional retailers, with a multiple of one times projected annual revenue. That would value Amazon at about $12 a share, calculated below:

Finding a company (perhaps a giant retailer such as Wal-Mart or a big supplier willing to risk putting $1 billion in venture capital into the business seems to the best choice.

References

REFERENCES

Afuah A. (2001). Internet Business Models and Strategies New York: McGraw-Hill.

Arango T. Analysts Talk Credit Crunch at Amazon,

Dignan Larry, "Amazon crumbles on debt, sales growth worries,"

Hof, R.D. (2000). Can Amazon Make it, Business Week (July 10, 38.

Kim Y, M. E. Lopez, S. Schiavelli, H. Shayovitz & S. Yoon, (1999). mAmazon.com: zShop Analysis New York: New York University Stern School of Business.

Porter M.E. (2001). Strategy and the Internet, Harvard Business Review (March), 63-78.

Vickers M. (2000). Debt vs. Equity Analysis: Whose Call Counts? Business Week (July 10), 25.

www.thstreet.com/comment/herbonthestreet/979956.html.

www.thestreet.com/_yahoo/tech/internet/1324388.html.

www.zdii.com/industry_list.asp?mode=news@doc_id=ZE504617.

AuthorAffiliation

Javad Kargar, North Carolina Central University

Subject: Electronic commerce; Retailing; Business growth; Financial performance; Case studies; Strategic planning

Location: United States--US

Company / organization: Name: Amazon.com Inc; NAICS: 454111

Classification: 2310: Planning; 9130: Experimental/theoretical; 8390: Retailing industry; 5250: Telecommunications systems & Internet communications; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 2

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 99-122

Number of pages: 24

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables References

ProQuest document ID: 216274191

Document URL: http://search.proquest.com/docview/216274191?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 29 of 100

JET BLUE: A NEW CHALLENGER

Author: Box, Thomas M; Saxton, Susan E

ProQuest document link

Abstract:

On February 11, 2000, JetBlue launched operations with its inaugural flight from New York's John F. Kennedy Airport to Fort Lauderdale, Florida. With $160 million in startup capital, David Neeleman, CEO and founder, was flying in the face of conventional wisdom. Since deregulation of the U.S. airline industry - mandated by Congress in 1978 - the market had seen the demise of 87 new airlines due to cost pressures and unremitting competition.

Neeleman was a young, successful entrepreneur with two prior airline startups under his belt. In 1993 Neeleman sold his first airline (Morris Air) to Southwest Airlines for $130 million. After a very short five month tenure with Southwest Airlines where Neeleman reports "They (Southwest executives) were as sick of me as I was of them", he was fired and forced to sign a domestic noncompete agreement. Recruited by executives in Canada, he cofounded WestJet where he employed many of the tactics and strategy he had learned at Morris Air. Neeleman also created Open Skies (based in Salt Lake City) an accounting and reservation software firm serving the airline industry. In the late 90s Neeleman sold most of his interest in WestJet and began accumulating venture capital funding and regulatory permission to begin JetBlue.

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this business policy case concerns the competitive strategy and background of a new, very successful airline -JetBlue Airways (JetBlue). The time frame of the case is from the firm's inception to the end of fiscal year 2002. The case has a difficulty level of four five, appropriate for senior level undergraduates or first year MBA students. The case is designed to be taught in one seventy minute class and will require approximately two to three hours of outside preparation by the students.

CASE SYNOPSIS

JetBlue is a new, very successful low cost airline. In their first full year of operations (2001) they achieved a $32 million net profit on revenues of approximately $320 million. This is particularly notable in that the entire industry lost approximately $10 billion during the same y ear. JetBlue flies point to point routes - much like Southwest Airlines and offers distinctive service features -reserved seating, leather seats, seat back TVs (24 channels) and very customer oriented personnel.

JetBlue, at least superficially, appears to be an example of a Low Cost Leader. In their initial foray into the New York to Florida market they offer ed ticket price s about half of the existing competitor's ticket prices anda serious focus on customer convenience - including such things as no mandatory Saturday night stay to get the lowest ticket price. All tickets are sold online or through a unique Salt Lake City reservation system. They were the first airline to introduce electronic ticketing and their use of Information Technology is extensive. Jet Blue' s founder- David Neeleman - is a young (43 year old) career entrepreneur with dyslexia. He is a practicing Mormon with nine children and prior to founding JetBlue had experience with two prior airline startups.

INTRODUCTION

OPERATING STRATEGY

JetBlue is a low cost, highly competitive airline, serving selected East Coast and West Coast markets. Aircraft are exclusively Airbus A 320s. These 162 seat planes have a slightly lower operating cost than Southwest Airlines' Boeing 737s and are equipped with leather seats and seat back TVs. No meals are served - even on transcontinental flights - thus saving the cost of meals and galley equipment. All planes in the fleet have been purchased new from Airbus and are decorated in a distinctive blue cabin interior. Two of the distinctive competencies are JetBlue's targeted gate turnaround time of 30 minutes and its choice of airports - generally away from the congestion of the major airports.

JetBlue has a unique approach to personnel. All pilots, for example, are required to interview with top executives prior to being hired. Competency as a pilot is not enough to secure a position - attitude is evaluated and only those with attitudes fitting the JetBlue culture are employed. All personnel are indoctrinated with a sense of providing superior customer service. Neeleman has said on numerous occasions that, "We don't want jaded people working here. If you don't like people or can't deal with rude customers, you'll be fired." This sort of customer service attitude manifests itself in many ways. On one occasion when a JetBlue plane had a rough landing at JFK, all passengers were handed free roundtrip tickets on JetBlue. On another occasion a pilot on a delayed flight walked into the cabin and offered his personal cell phone to the passengers so they could make arrangements. On a number of occasions when weather delays resulted in late departures, Neeleman and other executives called passengers at home to inform them of the delay. This sort of customer service results in high levels of customer satisfaction and Jet Blue - thirteen months after its first flight - won the designation as #2 Domestic Airline in the 2001 Zagat Airline Survey.

JetBlue has also utilized Information Technology (IT) as an important aspect of its Operating Strategy. Reservations are handled either online at its website or by phone with a unique reservation system based in Salt Lake City (Neeleman's hometown). Reservation agents are independent contractors, working from home, on equipment provided by JetBlue. The advantage of this arrangement is the life style (and quality of work life) afforded to the reservation staff and the avoidance of capital investment in reservation facilities. JetBlue does not book flights through travel agents and, thus, avoids the expense of travel agent's fees. IT is also employed in the cockpits of their planes. All flight manuals are on CDs and each pilot is equipped with a notebook computer. This makes it easier, faster and cheaper to update manuals and avoids the necessity of providing storage space and administrative support for bulky traditional manuals.

Security, too, has been augmented at JetBlue. Following "9/1 1 " they were the first and one of the few airlines to install security doors in the cockpits. Additionally, they were the first airline to install four security cameras in the cabin, which the pilots can view from the cockpit. The added expense for these security measures is probably recouped in incremental sales to airline passengers who are, quite naturally, concerned about airline security following the devastating tragedy of "9/11".

DAVID NEELEMAN:

Forty three year old David Neeleman, CEO and Chairman of the Board of JetBlue, has been a life-long entrepreneur. As a Mormon, he was required to work as a missionary in Brazil for a year. Of the $2500 of expense money supplied by his father, Neeleman managed to save $1300. Neeleman's father, Gary, attributes his entrepreneurial spirit to Neeleman' s grandfather who opened the first convenience store in the United States on State Street in Salt Lake City.

Neeleman, one of seven siblings, has nine children of his own. A staunch Mormon, he neither drinks nor smokes and travels around New York City on the subway. He has a number of interesting personal characteristics. Claiming dyslexia, he focuses on innovation and creativity something often seen in dyslexies. He is a "fountain" of new ideas and clearly thinks "outside the box" - sometimes to the distraction of friends and fellow executives. His college career was not a glowing success - he dropped out of the accounting program at the University of Utah, founded a tour business and quickly joined with two partners to start Morris Air.

He has an interesting approach to hiring executives for Jet Blue. One of his early hires was Ann Rhodes - head of HRM at JetBlue, but the executive that actually handed him his "pink slip" when he was fired at Southwest Airlines. Dave Barger, JetBlue's President, was formerly vice president for the Newark hub of Continental Airlines. Thomas Kelly, Executive Vice President and General Council, was an executive with Open Skies and Morris Air. John Owen Is Executive Vice President and CFO. He had been Treasurer and Vice president for Operations Planning and analysis for Southwest Airlines.

Testifying before the Senate Commerce, Science and Transportation Committee on March 13, 2001, Neeleman articulated the rather unique operating Philosophy of JetBlue:

* JetBlue Airways is New York's low fare hometown airline.

* JetBlue has a unique business model encompassing a dedicated staff, reserved seating, numerous amenities, no Saturday night "stays", very new aircraft, the highest utilization rates in the industry and extremely competitive low fares.

* JetBlue serves a number of important markets in upstate New York and New England which previously had no direct to New York air service or extraordinarily high ticket prices.

FINANCIAL RESULTS

JetBlue's financial results have been nothing short of miraculous. Total Revenue in 2001 was $320 Million. With cost of revenue at $186 million, gross Profit was $134 million. Net Income from continuing operations was $38.5 million. It should be noted that this was a remarkable accomplishment during 2001 when the US Airline industry, as a whole, lost more than $10 billion.

Performance in 2002 was even better than 2001 . Net income increased to $54.9 million on revenues of $3 14.8 million. Cost per available seat mile - a major performance metric in the airline industry - was 6.43 cents compared to an industry average of 9.58 cents.

ROUTES FLOWN

JetBlue began operations on February 11, 2000 with daily flights between JFK and Fort Lauderdale. During calendar year 2000, JetBlue added flights to Buffalo, NY, Tampa, FL, Orlando, FL, Ontario, CA, Oakland, CA, Rochester, NY, Burlington, VT, West Palm Beach, FL, Salt Lake City, UT and Fort Myers, FL. By the end of 2000, JetBlue had 10 Airbus A320s flying.

By November 9th, 2001, JetBlue had taken delivery of 10 additional Airbus A320s and had added daily flights to Seattle, WA, Denver, CO, Long Beach, CA, New Orleans, LA and Washington DC. A notable "first" in the industry was JetBlue's installation of bullet-proof, dead bolted cockpit doors in the entire fleet by November 1 - only a month and a half after the infamous "9/11 " terrorist attacks on the Pentagon and New York City.

Also during 2001, JetBlue established its second focus city - Long Beach, CA and began "head on" competition with Southwest Airlines for the West Coast market. Jet Blue's entry into the West Coast market prompted Southwest Airlines to begin offering $19 one-way fares to Las Vegas from four California airports.

By the end of 2002, JetBlue was flying to 17 cities from JFK and 4 cities from its new Long Beach hub.

DISCUSSION QESTIONS

1. Go to the JetBlue web site (http://www.jetblue.com/) and the American Airlines web site (http://aa.com/). Pick cities serviced by both JetBlue and American Airlines, select travel dates and number of passengers and determine the difference in fares. What is the percentage difference? What does this suggest?

2. Got to http://fmance.yahoo.com and look up the information on JetBlue. Which of their financial ratios are significantly different than the industry? What are the implications?

3. Do a SWOT analysis on JetBlue. What are the most important SO strategies suggested by the SWOT analysis? Are there any WT strategies?

4. Which of Porter's generic strategies does JetBlue seem to be following? In what ways might their generic strategy be somewhat different than what Porter suggests?

5. Conduct a Five Force Analysis of the airline industry. How do you assess the threat of New Entrants?

6. On June 10, 2003, JetBlue announced an order for 100 new EMBRAER 190 aircraft. Does this new equipment order suggest a new business model? What are the risks?

References

REFERENCES

Blue skies (2001, July 30). Time Magazine, Retrieved July28, 2001, from http://www.bankboscap.com

Brown, E. (2001, May) A smokeless Herb. Fortune Magazine, Retrieved July 24, 2002, from http ://www.business2 . com/articles

CBSNEWS.COM. JetBlue: Flying higher (2002, October 16). Retrieved October 27, 2002, from http://www.cbsnews.com/stories/2002/10/lbll

DiCarlo, L. (2001, January 31). JetBlue skies. Forbes.com. Retrieved December 16, 2002, from http://www.forbes.com/2001/01/03/013 ljetblue.html

JetBlue 10K for 2002.

JetBlue Airways News Release (2002, November 4). Retrieved November 4, 2002 from http://www.investor.jetblue.com

JetBlue Airways Timeline, (n.d.). Retrieved June 16, 2002, from http://www.jetblue.com/learmnore/timeline.html

JetBlue gets approval for 75 slots at JFK (1999, September 17). Retrieved from http://web.lexis-nexis.com

JetBlue to buy Airbus A320s (2002, January 14). Retrieved October 27, 2002, from http://money.cnn.com/2002/01/14/international/airbus/

Porter, ME. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York: The Free Press.

Porter, ME. (1996). What is strategy? Harvard Business Review , November-December, 1996.

Sweat, J. (2001, January 1). Generation dot-com gets its wings. Information Week.com. Retrieved July 24, 2002, from http://www.informationweek.com/818/neeleman.html

USA Today.com (2002, April 30). Travel: JetBlue Airways CEO David Neeleman. Retrieved June 3, 2002, from http://www.cgil.usatoday.com/mchat/2002043001/tscript.htm

AuthorAffiliation

Thomas M. Box, Pittsburg State University

tbox@pittstate.edu

Susan E. Saxton, Capella University

drsesaxton@aol.com

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 10

Issue: 2

Pages: 3-7

Number of pages: 5

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Conference Proceedings, Business Case

ProQuest document ID: 192412162

Document URL: http://search.proquest.com/docview/192412162?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2003

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 45 of 100

POWER WB HOST: GROWTH STRATEGY

Author: Kargar, Javad; Brothers, Kimberly; Dutch, Latisha; Graham, Claudia; Steele, LaTonya; Thornton, Edward

ProQuest document link

Abstract:

The primary subject matter in this case is formulating strategic decisions that need to be made regarding a small entrepreneurial firm's future direction. The owners are a couple who are faced with the decision of whether or not to expandas well as with the challenges of obtaining the necessary financing, structuring the organization for growth, and allocating management time. This raises several issues and illustrates several lessons. In particular, management proposes potential changes, offering students the opportunity to critique their plans. Evaluated carefully, students should identify the critical success factors and whether and how these elements can be leveraged as they implement their expansion plans. The purpose of this case is to provide students with enough information about the business situation to be able to chart what course of action the company should take at a given point in time. This case has a difficulty level of four, appropriate for senior level. It is designed to be taught in two class hours and is expected to require four hours of outside preparation by students.

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

During the summer of 2003, the owner s of Power Web Host, Mark and Susan Hamidi, began to assess their current position within the Web hosting industry and their alternatives for expansion. After eight years in operation, the company had achieved a reasonably stable, yet not highly profitable financial footing. Both owners are experiencing considerable pressure to expand their organization. They believe that opportunities exist to franchise the operation, or grow by expansion. The case ends with the co-owners faced with making a strategic decision about the best way to expand and how to find both the managerial and financial resources to do so. An implicit question in the case involves the long-term viability of the business.

INTERNAL ENVIRONMENT

Brief History

The two entrepreneurs responsible for Power Web Host's success were Mark Hamidi and Susan Hamidi, founder and Chief Technology Officer, and CEO/Director of Marketing respectively. They have worked as a team since 1995, when Mark founded Power Web Host. Initially, Mark operated the business on a part time basis from the basement of his home. Through word of mouth and various search engines in the initial stages of the Internet boom, businesses requested services from Power Web Host. By June 1996, it had 100 customers and Mark had moved the business out of his basement into the company's first office. In 1998, the company became incorporated, and by June 1999, it had reached a milestone of 1,000 customers. In the first quarter of 2003, the company had grown to a client base of more than 2500 in 42 countries, and the owners believed that the business was only operating at about 60 percent capacity.

Management and Personnel

There were five employees at Power Web Host including Susan and Mark Hamidi. Susan was President and CEO of the company. She joined the venture in 1996 and had previously worked as a Staff Accountant at a network-marketing firm for three years. After graduation from the University of London, where she earned a Bachelors degree with honors in Biology and Psychology, she studied accounting and passed the Certified Public Accountants exam in May 2002. Her managerial responsibility included direct supervision of two employees, Mary and Pam.

As CEO, Susan's primary goal was to increase the customer base in the state of North Carolina in which the company operated. She felt that one of her biggest strengths was the ability to relate to women. On the contrary, Susan stated time management as her major weakness.

Products and Services

Power Web Host's operations consisted of Web hosting, Web design, IT solutions and other Web services. Under Web hosting, the company offered both dedicated and virtual Web hosting packages. Dedicated plans started at $149 per month, while virtual plans ranged from $19 to $60 a month. A standard dedicated hosting package included generous amounts of bandwidth, several email accounts, user accounts, virtual hosts, large amount of disk space, a back-up server, and 24/7 technical support. These features were relatively consistent among competitors in the hosting industry. According to Mark, "One component to the company's growth is our flexible hosting plans that range from virtual hosting plans to dedicated and managed hosting."

Unlike most of the Web hosting firms, Power Web Host did not have an established fee for every feature or service. After a potential client noted where his/her interests lay, the company would begin negotiating procedures with the customer until an agreement was formed between them. The company was also able to offer e-commerce websites, which often included flash animations and database driven features.

Operations

Power Web Host's office included a reception area, three offices and one room dedicated for servers and technical equipment. The company owned and operated the servers guaranteeing them with a 99.99% uptime. According to Mark, the servers needed to be replaced every twelve to eighteen months. The company's Data Center was outsourced to a local company. Although Power Web Host had back up files, it was very difficult to switch the Data Center if the need should arise. The Data Center staff provided continuous observation through a closed circuit TV system to protect against unauthorized entry. The Network Operations Center was the central nervous system for the Data Center, and it included servers that were housed in a high-tech, locked cabinet with customer security at heart.

Strategic Partnerships

A chief component of Power Web Host's strategy was to partner with organizations that would add to its content and service offerings. To provide full e-commerce solutions to its customers, Power Web Host had partnered with ten organizations.

Power Web Host's Customers

The customers served by Power Web Host were both individual resellers and businesses around the world. Susan estimated thatabout2,500 customers used the Web design and Web hosting services of the company in early 2003. In the USA, the largest customer concentrations were found in the states of Texas, North Carolina, California, New York, and Florida. They had only 216 customers in their own state of North Carolina. Of the USA's customers, eighty percent were small businesses, fifteen percent were medium sized companies, and large businesses accounted for about five percent. In the foreign market, the larger customer bases were located in Germany, Australia, England, West Africa, Portugal, Sweden, and Thailand.

Marketing and Advertising

Power Web Host's marketing objectives were to attract more users, to retain the business of current users, and to enhance the company's brand awareness. To achieve these objectives, the company used newspaper advertising, direct mail, trade publications and magazines, yellow page advertising, brochure distributions at trade shows, referral incentives, and presentations at professional association meetings. In 2002, the company's marketing and advertising budget was about $19,600, the majority of which was focused on growing the customer base.

Customer Service

Power Web Host's management believed that attentive customer service was critical to retaining and expanding its customer base. Customer service representatives were available 24 hours a day, seven days a week to provide assistance via e-mail or phone. Customers could call the company at any time during the day and speak with one of the associates. Although there was no on-site staff at the company's office twenty-four hours a day, the company had a system that received calls after business hours. Customers needing tech support would either email or call Power Web Host. After business hours, the on call person who was designated according to rotation, would be responsible for checking the email messages from home and carrying the pager that indicated when the company had received telephone calls. Furthermore each server was checked every 2.5 minutes by an automated machine, and if there were a problem, the machine would page the person on duty. These methods allowed the company to have a quick response time to customer's problems.

Historical Financial Performance

Like many new ventures, Power Web Host's first three years of operation were financially unstable, in part because their services were new to the market. Early marketing efforts generated positive publicity as well as numerous word-of-mouth referrals among clients. By the fourth year of operation, the financial picture had stabilized as a result of improving operations. In 1998, Power Web Host made its first operating profit of approximately $2,500 on nearly $175,000 of revenues, after paying modest salaries to the directors.

Historically, the business' growth had been financed through retained earnings, and a line of credit with Bank of America. In 2000, the company had its highest amount of long-term debt of $26,038. As of 2001, the company had no long-term debt. In general, the management did not like debt, but occasionally they drew cash on a credit line and paid it off within two weeks. In particular, operating profits in year 2002 had declined. Further, even though total revenue had been growing in previous years, it became evident that its rate of growth had started to slow or remain at 28 percent.

Mark and Susan wanted to reverse these trends and insure a strong position for their business in the future. The company had been making positive profits, and there still existed a lot of upside potential. Thus, no thought was being given to abandoning the business.

INDUSTRY AND COMPETITIVE ENVIRONMENT

The Web hosting industry was characterized by a wide variety of different types of providers, most of them small. In 2003, it was estimated that there were over 10,000 Web hosting providers worldwide. Providers ranged from One-Source Providers, to Application Services Providers and Managed Service Providers. Products and services from One-Source Providers included custom Web site design, custom programming, strategic consulting, marketing and promotion. Application Service Providers incurred the costs of building and maintaining applications and databases for their corporate clients. With Managed Service Providers, the clients had their own servers in addition to being provided with full monitoring and maintenance services and around the clock technical support. Numerous innovations were occurring in the Web hosting market. In 2003, the Web hosting market was highly competitive, in part because the market was saturated, supply remained greater than demand and there was a high degree of fragmentation. Many Web hosting providers had turned their differentiation efforts to the customers.

Between 2001 and 2002, the largest threat to Web hosting providers was the poor state of the economy, which generated little consumer confidence in any business. The new trends in 2003 had included substantial price discounting, more standardization of Web hosting products and services and use of do-it-yourself software and books.

Outsourcing marketing functions and public relations of Web hosting providers were also developing trends in 2003 . Marketing agencies could assist Web hosting firms with all components of marketing communications, from developing the marketing plan and strategy to actual execution of advertising plans or public relations. Advertising and marketing agencies could negotiate media-buying rate discounts of up to 40 percent on behalf of Web hosting clients. These volume discounts provided an economies-of-scale cost savings that even large Web hosting companies could not achieve on their own. Another service that marketing agencies provided was a lead-generating service that helped hosting providers develop new business more efficiently.

POSSIBLE GROWTH STRATEGIES

Susan and Mark believed that timely decision-making was critical to the long-term growth of the firm. Given the competitiveness of the Web hosting business, it was foreseeable that Web hosting would become as competitive in the future. Opportunities lost would not be easily regained. Mark believed that the companies that provided low prices would eventually decline and go out of business due to the lack of qualified support staff. They felt they needed to make plans and could not afford to wait another year and adopt a "wait and see" attitude. In addition, they had to think about where the funds for the expansion were going to come from should they decide to pursue growth.

Mark and Susan were considering franchising the company's operations thinking that it would increase profits with minimal investment on their part. Because they knew little about the pros and cons of franchising, Mark and Susan contacted a team of MBA students to help them analyze this option. In exploring the franchise option with the help of the team, they found some guidance on what makes a franchise successful.

Another possible growth option was to grow via expansion, such as through branch offices, or through licensing of the concept. Still another was to pursue niche strategy through focusing on either one attractive industry globally or all small businesses in the state of North Carolina. Still another option was to pursue diversification through consulting.

FUTURE DIRECTIONS

With all of these alternatives facing them, Mark and Susan knew they had to make some choices and begin planning Power Web Host's future. With financial and managerial resources a primary concern in this decision, the question was which direction to choose and how to best plot a path toward a successful future. To Mark and Susan, none of the choices sounded all that great. Maybe there was something they were missing.

AuthorAffiliation

Javad Kargar, North Carolina Central University

Kimberly Brothers, North Carolina Central University

Latisha Dutch, North Carolina Central University

Claudia Graham, North Carolina Central University

LaTonya Steele, North Carolina Central University

Edward Thornton, North Carolina Central University

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 10

Issue: 2

Pages: 53-57

Number of pages: 5

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Business Case, Conference Proceedings

ProQuest document ID: 192412158

Document URL: http://search.proquest.com/docview/192412158?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2003

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 46 of 100

AMAZON.COM IN 2003

Author: Kargar, Javad

ProQuest document link

Abstract:

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

Jeff Bezos opened his Amazon's virtual bookstore in 1995 in Seattle, Washington. Amazon's online store was a big hit, with about $5 million in the first year of operations. To expand on his success, Jeff introduced other products, including DVD, and electronics. In 2002, Amazon was the world largest online retailers. Unfortunately, the business had not yet made any profit. After four years of single-minded focus on growth, in year 2000, Amazon focused exclusively on increasing its efficiency. Beginning late 2001, Amazon shifted its focus on growth prospects again. Jeff believed that Amazon had reached a point where it could afford to balance growth and cost improvement. This balance began to pay off in the fourth quarter of 2002, where the company generated $198 million in free cashflow for the first time. After falling out of favor along with the Internet sector in 2000 and 2001, Amazon 's stock staged a rebound in 2002 as investors bought back into the idea that Amazon would be aroundfor a long time and would start generating real profits. However, it seemed that survivability was still an issue for those investing in Amazon due to massive negative operating cashflow, excessive debt, significant payments for its suppliers and bondholders, intense competition, and the slow economy.

As a low-margin retailer, the case opens with Jeff facing the dual challenge of trying to improve margins and service a large amount of debt. Numerous efforts by Jeff to advertise online and traditional media, lower prices, andfree delivery hadfailed to attract more new customers. Jeff and some of his top level managers had different opinions on the solutions to their problems.

COMPANY HISTORY

In 1994, Jeff was the youngest Senior Vice President in the history of D.E. Shaw & Co. During the summer ofthat year, one statistic about the Internet quickly caught his attention. The statistic revealed that Internet usage was growing at 2,300 percent a year. That was his wake-up call. He quit his job and drew up a list of twenty possible products that could be sold on the Internet, and quickly narrowed the prospects to books and music. He thought both books and music had potential advantages for on-line sale. There were about 1.5 million English-language books in print and 3 million books in all languages worldwide. Bezos initially chose books. In order to start his new venture, he left New York City to go to Seattle. Renting a house in Bellevue, a Seattle suburb, he started working out of his garage. He settled on Seattle, mainly because of its proximity to the Roseburg, Oregon, warehouse of Ingram, the giant book distributor. Bezos and four software designers set up shop in his garage to create the foundations of their company's Web site. He also raised several million dollars from some private investors. Bezos opened the virtual doors of Amazon.com in July 1995. Six weeks after opening, Jeff moved his new venture to a 2,000-square-foot warehouse in Seattle. Six months later, he moved once again to a bigger building in an industrial neighborhood in Seattle.

PRODUCT/MARKET STRATEGY

Amazon's main goal was to be the earth's biggest online retail store, where anyone could buy anything and everything. To accomplish this goal, the company had developed three sales channels: online retail, marketplace, and third-party sellers. The online retail channel offered a broad range of categories of new products to customers. Amazon purchased the products from vendors and held them in its distribution centers to fulfill orders. Traditional retail sales for most of the company's products usually had increased significantly in the fourth calendar quarter of each year. Insufficient stock of popular products could significantly affect its revenue and future growth. On the other hand, overstock products might require the company to take significant inventory markdowns or write-offs, which could reduce gross profits.

The company organized its operations into four principal segments: U.S. Books, Music, and DVD/Video; U.S. Electronics, Tools and Kitchen; Services; and International. Revenue from each sales channel was recorded in one of these operating segments. U.S. Books, Music and DVD/Video segment had net sales of $1.69 billion, $1.70 billion, and $1.3 billion in 2001, 2000, and 1999, respectively. U.S. Electronics, Tools and Kitchen segment had net sales of $547 million, $484 million, and $151 million in 2001, 2000, and 1999, respectively. Service segment consisted of commissions, fees earned from its business-to-business strategic alliances. The Services segment had net sales of $225 million, $198 million, and $13 million in 2001, 2000, and 1999, respectively. In 2001, Amazon entered into numerous strategic alliances with such companies as America Online and Target in the U.S., and Virgin Wines in the U.K. In addition, Amazon entered into strategic alliances with Expédia, and Hotwire to create its travel store. International segment included all retail sales in its five international Web sites. They shared a common Amazon experience, but were localized in terms of language, products, and customer service. Net sales for the International segment were $661 million, $381 million, and $168 million in 2001, 2000, and 1999, respectively.

AMAZON'S TECHNOLOGY INFRASTRUCTURE

Amazon was more than just an online storefront. Like Microsoft Windows, and Sun's Java, it was also a software platform. In much the same way, where the best e-commerce companies were licensing their platforms to other retailers, Amazon had partnered with Borders, Circuit City, Target, and Toys "R" Us to operate joint online stores. In the first quarter of 2002, Amazon generated $53 million in revenue from deals like the Target agreement, adding $10 million to the bottom line. Amazon was also negotiating to become the software engine for AOL's shopping channels. The company's strategy was to focus its development efforts on creating and enhancing the specialized, proprietary software that was unique to its business and to license or acquire commercially-developed technology for other applications where available and appropriate. Access of the company's Web sites by too many customers within a short period of time could create system interruptions. In addition, the company's computer and communications systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, break-ins, and earthquakes, acts of war or terrorism and similar events. Amazon neither had backup systems and a formal disaster recovery plan, nor inadequate insurance coverage to compensate the company for losses from a major interruption. Computer viruses and electronic break-ins could cause system interruptions, loss of critical data, and could prevent the company from providing services.

MARKETING STRATEGY

Amazon's marketing strategy was designed to strengthen and broaden the Amazon brand name, increase customer traffic to its Web sites, build customer loyalty, encourage repeat purchases, and develop incremental product and service revenue opportunities. The Company spent heavily on traditional advertising and promotional methods to achieve these goals. Amazon also benefited from public relations activities as well as online and traditional advertising, including radio, television and print media, and direct marketing. Amazon also directed customers to its Web site through its Associate Program, which enabled associated Web sites to make products available to their audiences with fulfillment performed by the company. As of late 2001, over 700,000 Web sites had enrolled in the Associates Program. To attract more customers, Amazon also offered lower prices than a conventional store and free shipping. It was believed that the strategy of increasing efficiency and lower prices, which worked for Wal-Mart and Dell, could also work for Amazon. In one of the toughest retail markets in years, sales at Amazon.com increased 28 percent, to $1.43 billion, in the fourth quarter of 2002. During that period, Amazon sold about 56 million items. Its 2002 sales were $3.9 billion, up 26 percent. Amazon attributed much of its growth to a renewed emphasis on price-cutting, like free shipping for orders of $25 or more. The company said that it would make that offer a permanent part of its business.

CUSTOMER SERVICE

With all the marketing exchanges that were taking place in Amazon's online world, it was no surprise that customer service was critical to expanding and retaining its customer base. Jeff believed that the company's ability to establish and maintain long-term relationships with its customers and to encourage repeat visits and purchases depended in part, on the strength of its customer service operations. Amazon continually sought to improve the Amazon customer service experience. Customer service representatives were available 24 hours a day, seven days a week to provide assistance via both e-mail and toll-free telephone. The company's more than 200 customer service representatives were working in six customer service centers. The customer service department at Amazon was a mix of old-fashioned handling, and modern technology.

WAREHOUSING AND DISTRIBUTION

The company knew the design of its Web site or the number of site hits would be meaningless if it failed to ship its products on time. Amazon also believed that by expanding its own distribution centers it could decrease shipping costs and make order fulfillment more efficient. As of late 2001, the company leased and operated U.S. fulfillment facilities in Delaware; Kansas; Kentucky; Nevada; and North Dakota; as well as a seasonal fulfillment center in Seattle, Washington. Amazon also leased and operated three European fulfillment centers that were located in the United Kingdom, France and Germany. In Japan, the fulfillment services were provided by Nippon Express. Although Amazon's distribution decision promised cost savings through larger volume ordering and lower shipping costs, it also meant that Amazon needed to generate much higher sales to justify its costs. Order volume had not yet reached levels that could allow Amazon's warehouses operations to realize scale economies. The new distribution centers gave Amazon more control over the distribution process and facilitated the company's ability to deliver merchandise to customers on a reliable and timely basis.

INTELLECTUAL PROPERTY

Amazon regarded its trademarks, service marks, copyrights, patents, trade secrets, proprietary technology and similar intellectual property as critical to its success. Basically, Amazon relied on trademark, copyright and patent law, trade-secret protection and confidentiality and/or license agreements with its employees, customers, partners and others to protect its proprietary rights. Amazon had been issued a number of trademarks, service marks, patents and copyrights by U.S. and foreign governmental authorities. Amazon also expected to license in the future, certain of its proprietary rights, such as trademarks, patents, technologies or copyrighted materials to third parties.

FINANCIAL SITUATION

Amazon had incurred significant losses since it began doing business. As of December 31, 2002, the company had an accumulated deficit of over $3 billion, and its stockholders' equity was a deficit of $1 .48 billion. Amazon, which had lost money in the first three quarters of 2002, posted a quarterly profit of $2.7 million. Its total loss in year 2002 was $149 million. However, as it was planned, Amazon generated $198 million cash from operations in 2002. Its cash at the end of 2002 was about $1.3 billion. The free cash flow was not sufficient to refinance the $2.2 billion in bond. Amazon essentially funded its revenue growth and overall operations through a variety of sources. From 1997 through 2002, the company had received $2.2 billion from its bond offering to meet its cash needs. In January 1999, Amazon sold $ 1 .25 billion of 4.75 percent convertible bonds maturing in 2009. In February 2000, it sold 690 million euros ($681 million) of 6.88 percent convertible bonds maturing in 2010. Amazon also had $2 million of 10 percent Senior Discount Notes outstanding, maturing in 2008. The company made annual or semi-annual interest payments on the indebtedness under its two convertible notes, which were due in 2009 and 2010, respectively. When Amazon issued the debt, the market for e-commerce stocks was flying, and it looked like the company might be able to call the notes and force investors to convert their notes for shares of its stock. For its U. S. debt, Amazon could call the 1 0-year notes for stock if the company's stock traded above $1 17.04 per share for 20 out of 30 consecutive trading days. All of a sudden dot-com land had changed abruptly, competition was becoming stronger, and the capital market was looking at the bottom line-profitability. In early 2000 and 200 1 , investors had lost their patience with most Internet companies and punished those that couldn't show a path to profitability. Amazon's stocks started dropping sharply and top tech-fund managers began to reduce and even eliminate Amazon from their portfolios. In Late December 2002, Amazon stock was trading in the $18-$23 range, down about $90 from its high of $1 13 in December 1999.

INDUSTRY AND COMPETITIVE ENVIRONMENT

In year 2002, the e-commerce market segments in which Amazon competed were relatively new, rapidly evolving, and intensely competitive. In addition, the retail environment for Amazon's products was generally intensely competitive and Amazon had many competitors in different industries, including the Internet and retail industries. While it was relatively easy to create a Web site that functioned like retail stores, the big challenge for an online retailer was to generate traffic to the site in the form of both new and returning customers. Online retailers could offer consumers significantly broader product selection, the convenience of home shopping, and 24-hour-a-day, seven-day-a-week operations available to any foreign or domestic location with access to the Internet. Physical-store-based retailers had to make significant investments in real estate, inventory, and personnel for each store location. It was cost-effective for online retailers in various ways to offer a broader range of products and information than brick-and-mortar retailers.

It was more difficult for on-line retailers to differentiate themselves on the basis of product selection. On the Internet, buyers could often switch suppliers with just a few mouse clicks, and some new Web technologies were systematically helping switch suppliers even further. In addition, the Internet technology reduced variable costs and tilted cost structures toward fixed cost, creating significantly greater pressure for online retailers to engage in destructive price competition to build volume.

Online retailers were more aggressive in discounting their prices and running special promotions like free shipping than traditional store retailers, and brick-and-mortar retailers with online stores. Online retailers could offset the revenue loss from price discounting with the fees they earned from selling advertising space on their Web sites. But, the rate of growth of Web advertising was slowing in 2000.

To turn losses into profits, online retailers had to achieve a large volume of sales and, at the same time, keep a tight rein on marketing costs and other parts of the operations. To build sales and market share, online retailers had to build strong brand awareness and generate heavy site traffic. The big Internet retailers were willing to pay to lock up advertising space and Web links on the leading portals for as long as two to four years. In addition, most online retailers shifted the basis of competition toward price, making it harder for anyone in the industries to turn a profit.

Porter predicted that the power of customers would rise in the future. "As buyers' initial curiosity with the Web wanes and subsidies end, online retailers will be forced to demonstrate that they provide real benefits. And as customers become more familiar with the Internet technology, their loyalty to their initial online retailers will also decline; they will realize that the cost of switching is low," said, Porter.

Online retailers were also subject to general business regulations and laws, as well as regulations and laws specially governing the Internet and e-commerce. Future laws and regulations might impede the growth of the Internet and online services. These regulations might cover taxation, user privacy, pricing, content, copyrights, electronic contents, and consumer protection. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for online retailers and could decrease their future sales.

FUTURE OUTLOOK FOR AMAZON.COM

Jeff believed the company had a promising future. Nonetheless, he knew the challenges ahead were formidable. The company had a weak balance sheet, negative operating cash flow, competition was becoming stronger, and all of a sudden dot-corn land changed abruptly and the capital markets were looking at the profitability. Amazon had lost over $3 billion since it opened, with the accumulated deficit of over $1 .35 billion. The company's cash at the end of 2002 was about $1.3 billion.

Amazon's debt load was also a source of concern. It raised $2.2 billion to meet its cash needs. Bondholders were being paid over $130 million interest payments a year. There was still another issue that related to the company's efforts to implement its strategy for growth. In year 2002, Amazon shifted its focus on growth prospects as it had in its earlier years. By adding more product lines, and building distribution centers all over the country, the job of policing its inventories became much more difficult. Some bond analysts following the company felt that the excessive debt and poor inventory management would make Amazon's operating cash flow situation worse the more it sells. Moreover, the company was more susceptible to macro factors than its own specific ones. With improving cost structure, still the main threat out there was the slow economy.

Although Jeff still wasn't giving up on his empire-building dream, he was beginning to wonder whether Amazon would run out of money soon, and default on its notes payments. He had to decide which business model and strategy made the most sense for Amazon. It seemed that there were some main questions out there for investors: What was the longer-term growth of this company? What was the prospect of making profit in 2003? How could the company get to better gross margins? Would any bank take out the existing bondholders? Jeff Bezos, founder and chief executive officer of Amazon.com was wondered, "What to do?"

AuthorAffiliation

Javad Kargar, North Carolina Central University

jkargar2003@yahoo.com

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 10

Issue: 2

Pages: 59-64

Number of pages: 6

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412206

Document URL: http://search.proquest.com/docview/192412206?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2003

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 48 of 100

QUALITY TABLECLOTH MANUFACTURING: A CASE STUDY IN ALTERNATIVE FINANCING

Author: Griffin, Harry F

ProQuest document link

Abstract:

This case study addresses the choices faced by a small start-up firm when presented with a situation that could either secure the firm' s place in its market niche or drive it out of business. A very large order is placed with a small firm that has exhausted its ability to raise operating capital through traditional means. A referral from the local Chamber of Commerce solves the problem by putting the CEO into contact with a factor that can pur chase the firm 's existing accounts receivable. The sale of the accounts receivable provides the necessary operating capital to fulfill the large order. The case culminates with the calculation of the factoring cost.

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

This case illustrates the use of factoring as an alternative source of financing when the firm is refused traditional bank financing for reasons that may include a lack of seasoning, financial stress, or even due to a general economic credit tightening. Because factoring focuses upon the creditworthiness of the factoring firms ' customers, the factoring firms ' financial condition is generally of minor consideration in the decision to pur chase the firm 's accounts receivable.

INTRODUCTION

Cathy owns Quality Tablecloth Manufacturing Company Incorporated. Quality manufactures a distinctive line of tablecloths for the restaurant industry. The tablecloths are manufactured at the Quality textile plant and with an invoice, shipped to her customers. The invoice is a legal document, stating what was purchased, how many of the tablecloths were purchased, and the agreed-upon price for the total purchase on a per unit basis. Further, the invoice states the Quality Manufacturing's trade credit terms. The majority of Quality customers immediately pay the invoice in order to take advantage of favorable trade credit offered by Quality. However, there are a few of her customers who decline the immediate trade credit discounts, preferring to pay at a later date. These are the customers that have created the small balance in the accounts receivable ledger at Quality. The American Society of Tablecloth Manufacturers, the tablecloth manufacturer' s trade association, reports that on average, customers take approximately seventy days to pay their invoices for the tablecloths that they have received. However, there is a caveat. The caveat is that the major consumers of tablecloths, such as the United States government, and major retailers such as Wallace Market, Stears, etc., often dictate the trade credit terms that they require if manufacturers want to do business with them. For example, a major retailer like Wallace Market might require ninety day terms. Then, when the payment is made in one hundred days, they are only ten days late, thereby allowing the retailer to maintain their current credit ratings. A smaller retailer with thirty day trade credit terms would be seventy days late, and the smaller retailer's credit rating would reflect that fact. However, manufacturers cannot afford not to deal with the maj or retailers, because they do spend a lot of money, especially with Quality Manufacturing.

Quality Manufacturing has been in business about four years. Cathy, as both the CEO and the principal sales representative, has shepherded her firm through an expansive economic environment. Both the firm and Cathy have been rewarded by the marketplace.

The good economy has also rewarded the hotel industry. Both business and pleasure travel has increased. The travel industry has also noticed that as more people are traveling, they are staying longer at their destination hotels, and eating more often at their hotel restaurants. This is seen as an industry trend, and several of the more economically astute hotel franchises has decided to replace their tablecloths. Dan, a Western Seaboard major hotel chain principal, has approached Quality with a purchase order for $ 1 00,000 of tablecloths, enough to refurbish every hotel restaurant in California and Oregon.

Assuming a total production cost of sixty percent for each tablecloth, this order constitutes a cost basis of $60,000. The remaining earnings before taxes of $40,000 is available for use as Quality management sees fit. However, as a young start-up firm, Cathy does not have the $60,000 necessary to begin production. Cathy now finds herself in a precarious position. As an entrepreneur, Cathy rents her building, leases her manufacturing equipment, and has a zero inventory because she sells everything that Quality manufactures. With respect to the largest order that she has ever received, Cathy 's success has now become her worst enemy.

She cannot go to a bank and ask for a loan, because she has nothing to offer as loan collateral. While looking over her most recent financial statements, she remembers that her accountant had suggested that she lease her equipment, because generally a lease appears as an asset on the balance sheet. Leasing also negates the necessity of expending capital for equipment acquisition. Cathy realizes that a detailed accounting approach and reasonable tax practices have worked to her detriment at the bank. Cathy has put her business degree to the test, engineering a relatively modest amount of earnings before taxes. Her efforts have been successful, resulting in a paltry tax bill and representative net income. These are the same efforts that now thwart her attempts to secure bank financing. Because of Quality's minimalist earnings, the firm does not qualify for bank financing.

Let us assume for the moment that the bank president is an old friend of Cathy 's family, and has personally known Cathy since her birth. Hence the bank president waives the rules against the loan and personally approves Cathy 's loan request, granting a loan of $25,000. Cathy, a good entrepreneur, immediately puts the money into Quality. The bank loan now becomes debt, and Cathy becomes frustrated in her efforts to repay the debt. While she is able to maintain the service on the debt, her attempts to grow Quality beyond the debt are stymied. Quality's growth has, in effect, been capped by the debt because Cathy has pledged all of Quality's assets to the bank. Quality is ineligible for another bank loan, because of the debt the firm is currently carrying. She decides to go to her family for money, but that means that she may have to sell some or all of her equity in the firm that she personally conceived, designed, and created. However, that is not the case. Cathy 's parents decide to make the $60,000 advance from their retirement account. Cathy gratefully accepts the funds, purchases the necessary materials to meet Dan' s order, and delivers the tablecloths on time. Upon delivery of the order, Cathy also delivers to Dan a Quality invoice for $100,000. She then settles in for the expected forty five to sixty days of waiting for the invoice to be paid.

Two weeks later, Cathy is in her Atlanta hotel room one evening after having attended a textiles trade show when her telephone rings. Dan is calling, and informs her that he is very pleased with her firm's work. Moreover, he wants to submit a second order for an additional $100,000 of tablecloths. Immediately Cathy recalls the anguish involved with securing the $60,000 necessary to produce the previous order. She cannot go to the bank, and she has no more family from which to make a loan request. Cathy mentally runs through her list of available alternatives. She realizes that if she cannot fill the second order, there is a good chance that she will lose all of Dan's future business, as well as any business that Dan may refer to her. She quickly calculates the future value ofthat business, and realizes that losing that much business is not an option. Recognizing that her market segment is relatively small, Cathy envisions that other tablecloth buyers will know that Dan has moved his business to another textiles firm, and will probably follow suit, believing that Quality is in financial trouble. Cathy accepts that marketplace expectations might actually drive Quality out of business. She must immediately develop another source of funding, because she cannot borrow from either the bank or her family.

Cathy turns to her contacts at her local Chamber of Commerce for advice. The Chamber of Commerce representative refers Cathy to Joe Merriwether, a factoring broker who has access to funding sources nationwide. The next day, Joe meets with Cathy in her office. Joe informs Cathy that through ABC Funding, he can provide monies to Quality Manufacturing, with no consideration given to either Quality's financial statements, or to the fact that she cannot qualify for bank financing. As an independent factoring broker, Joe informs Cathy that she can establish a factoring account for Quality with ABC Funding. Once the account is established, ABC wire-transfer' s funds directly into Quality's bank account overnight. ABC Fundings' contract has no minimum time requirements concerning participation. Quality can exit the contract whenever Cathy deems necessary. The funding contract carries no stipulations concerning either a minimum dollar amount of accounts receivable, or a minimum number of required transactions over any period of time.

It is also the responsibility of ABC Funding to ascertain the legitimacy and accuracy of the invoice that Quality has submitted. Until the invoice is confirmed as true and accurate, and that the counterparty has agreed to pay ABC Funding rather than Quality, no monies are transferred into the Quality bank account. ABC Funding transmits a query to Dan in order to ascertain the legitimacy of the invoice. Dan acknowledges that the invoice determinants are accurate, and agrees to pay ABC Funding rather than Quality. Dan does so because he likes the terms. He will still pay the invoice in the same fifty to sixty days, choosing to do so because he can earn some risk free interest during the float period.

If Dan refuses to recognize ABC as the legitimate owner of the asset and refuses to pay ABC, the funding source has several recourse options available. ABC Funding can authorize an account receivable exchange with Cathy. She could exchange an equal in value current receivable with the funding source for the older one. She could exchange several smaller current receivables that sum to the same value as the older receivable. Finally, she also has the option of returning the advance.

Cathy is both interested and intrigued by the concept of generating funds through the use of factoring Quality's accounts receivable. She decides to open the account and proceeds with the necessary documentation. Further, she immediately submits Dan' s outstanding invoice for $ 1 00,000 to ABC Funding.

Generally accepted accounting principles (GAAP) allows Quality to record the sale to Dan as a revenue instance, and also records the credit sale in the account receivable ledger. While GAAP allows this sale to be recorded as an asset, it is still an asset wherein no cash has been transacted. ABC Funding purchases this asset from Quality at a discount. While the amount paid for the asset may be less than the invoiced amount, the payment is made to Quality the next day after the product is received by the counterparty. Quality has the funds necessary to begin work on its next order. All that is necessary for ABC Funding to continue to provide Quality cash advances in exchange for future accounts receivable invoices is that Quality has financially stable customers.

Hence factoring provides firms access to funding without reference to financial statements or bank credi tability. Factoring requires only that the firm have both sales and credit customers.

The Quality contract states that ABC Funding will pay an advance to Quality the amount of 75% of the invoice amount, $75,000 in this case. Sixty days later, Dan pays $100,000 to ABC Funding to satisfy the short term debt. ABC Funding owes Quality the balance of $25,000 less a discount fee. The discount fee is stated as a four percent fee for the first thirty calendar days, and a two percent for every 15 calendar days thereafter. Hence the total discount fee is calculated as

According, ABC Funding pays Quality the balance of $25,000 less the $8,000 discount fee, for a net payment of $17,000.

Assume that Quality offers to Dan trade credit terms of 2/10, net 30 (a 2% discount is authorized if the invoiced price is paid in ten days, otherwise the total invoice price is due in sixty days). Dan always paid his bills in sixty days, ignoring the credit terms. What is the cost of the trade credit Cathy extended to Dan? Continuing, assume that QUALITY had entered into a factoring contract with ABC Funding prior to extending the trade credit to Dan. Ignoring any opportunity cost, what is Quality's cost of factoring?

INSTRUCTORS' NOTES

The cost of trade credit may be approximated by beginning with the basic interest equation interest= (principal) (rate) (time) (1)

Assuming a 30 day month and a 360 day year, rewrite the above equation solving for rate in terms of interest, principal, and time.

Applying equation (2), we can calculate that Dan, by bypassing the trade discount and paying in 60 days, incurs an expense of

Compound interest was not considered in the simple APR calculation. To consider the influence of compounding, we can use the following relationship:

where i is the nominal rate of interest per year and m is the number of compounding periods within a year. This cost of credit relationship is frequently referred to as the Annual Percentage Yield or APY.

Assume the factoring account is already in place, and that all due diligence concerning Dan' s firm has been satisfactorily accomplished. Hence Quality is receiving funds overnight on accounts receivable invoices faxed to ABC Funding. While ABC Funding does not charge an interest rate for factoring, the invoice is sold to ABC Funding at a discount for $92,000. This implies a discount of $8,000, or a discount rate of 8%. What is Quality's annualized cost of factoring? Using equation (3) we find that Quality's cost of factoring is calculated as

.00947, or 0.95%. This is less than 1% annualized.

AuthorAffiliation

Harry F. Griffin, Sam Houston State University

hgriffm@shsu.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 10

Issue: 2

Pages: 67-71

Number of pages: 5

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Conference Proceedings, Business Case

ProQuest document ID: 192412178

Document URL: http://search.proquest.com/docview/192412178?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2003

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 53 of 100

BUDGETING IN THE NOT-FOR-PROFIT AMBULATORY HEALTHCARE ENVIRONMENT

Author: Coleman, Clarence; Letourneau, C Angela

ProQuest document link

Abstract:

The Healthcare delivery system has gone through major changes over the past ten years. Employers provided employees Health Maintenance Organizations (HMO) as an option to the traditional indemnity plans. Several states initiated Medicaid HMO's as an alternative to their traditional Medicaid programs. Medical savings accounts have been incorporated in some employers' cafeteria plans. All of these actions have been undertaken to arrest the spiraling cost of health care. While significant attention has been given to the plight of not-for-profit hospitals, little attention has been given to the financial issues of not-for-profit ambulatory Healthcare providers in general and Community Health Centers (CHC) in particular. The community health center program is Authorizes under section 330 of the Public Health Service Act, Public Law 94-63. The objective of the program is to provide support for the care of medically underserved populations in rural and inner city areas. At the end of 2002, there were 3400 sites across the country, serving approximately 11 million patients. The centers are required to establish a fee schedule designed to cover the reasonable cost of providing care to all of its patients and are mandated to make reasonable collection efforts. Medicaid and Medicare reimburses the centers prospectively based upon a per visit capitation rate that encompasses all medical services provided. The amount reimbursed in any year is based upon the allowable cost as determined from the preceding year's cost report. The dilemma Health Centers face each year is budgeting and justifying the amount of federal support funds they should receive. This budgeting process is complicated by the potential loss of Medicaid patients to a state's HMO plan, reduction in allowable charges by traditional indemnity plans, disallowance of non-Medicare cost in CHC cost report and a host of other issues. The challenge to the student is to calculate the federal grant required to balance the Center's budget given changes in patient mix, cost structure and reimbursed rates.

Full text:

Headnote

CASE DESCRIPTION

This case illustrates the crucial role third party insurer and patient mix play s in establishing the amount of federal grant funds a Community Health Center is eligible to receive. The federal grant financing of these centers is designed to provide the necessary funds to provide care for the indigent patient population. The case allows for the discussion of Medicare and Medicaid prospective payments systems as well as the traditional indemnity insurers such as Blue Cross Blue Shield. The case is targeted to senior level and MBA students and requires approximately two to three hours of outside class preparation. It may be covered in one or two class periods, depending upon the complexity of the issues introduced by the instructor.

CASE SYNOPSIS

The Healthcare delivery system has gone through major changes over the past ten years. While significant attention has been given to the plight of not-for-profit hospitals, little attention has been given to the financial issues of not-for-profit ambulatory Healthcare providers in general and Community Health Centers inparticular. The dilemma Health Centers face eachyear is budgeting and justifying the amount of federal support funds they should receive. This budgeting process is complicated by the potential loss of Medicaid patients to a state's HMO plan, reduction in allowable charges by traditional indemnity plans, disallowance of non-Medicare cost in CHC cost report and a host of other issues.

This case revolves around the financial debriefing between Marty (CEO) and the departing Rita (CFO) of the People's Family Health Center. Lynn, the newly hired accountant, must provide Marty the necessary financial information he needs to negotiate the federal grant with the regional office of the Department of Health and Human Services. The issue to be decided is how much of a federal grant is required to balance the health center's budget so they can continue providing the same level of medical care to the indigent population in the county.

CASE OVERVIEW

BACKGROUND INFORMATION

People's Family Health Center has been in operation for more than twenty years. The CEO, Martin (Marty) Lambert has witnessed many changes in the Health care industry. Marty had worked as a mid level manager in a hospital before assuming the leadership role at the Community Health Center; he was very excited about applying the financial management and other skills he had learned in the for profit environment to the local health center. Wellness Hospital, his former employer, had an $80 million budget and employed over 300 persons. He felt certain that a not-for profit health center with a two million dollar budget could not rival the latter in financial complexity. When Marty first joined People's Family Health Center five years ago, Rita Martinez was the chief financial officer. Rita was very bright, having earned an accounting degree at Basthrop University and passed the CPA examination on her first sitting. In their very first meeting, Rita informed Marty that the family Health Center was a cross between a hospital and a physician's private practice. The Health Center like the Hospital, Rita explained, is reimbursed on a prospective payments system (PPS) for both Medicare and Medicaid patients. The reimbursed amounts for visits during the current year are based upon the previous years cost report. To simplify billing, Community Health Centers are permitted to lump together medical cost (e.g. physician charges, laboratory fees, radiology) into one composite rate per visit. The composite rate, often referred to as a per-visit capitation, includes all of the associated administrative cost of providing the medical services. Again like the hospitals, if the Health center's cost report revealed that it was reimbursed at an amount that exceeded its medical cost per visit, a liability to the government must be recorded.

Marty could hardly believe what he was hearing. Rita indicated that health centers are unlike physician practices because of the range of services offered and because they are required to be operated in a manner such that no person shall be denied services because of inability to pay (42CFR, Part 51c.303.) Health Centers are often located in remote rural and blighted urban areas. It is often the only source of healthcare for rural and urban patients; consequently, the government has encouraged these centers to become comprehensive in nature. Hence, they often offer dental and pharmaceutical services, environmental health analysis, transportation, nutrition counseling and a number of other disease mitigation and prevention services. Unfortunately, government agencies do not often coordinate policy. Medicare will only reimburse the centers for medical services. The direct cost of dental, pharmaceutical, nutrition counseling and other disease prevention and mitigation services as well as the pro rata administrative cost are not all allowable cost in the Medicare cost report. Disease prevention and mitigation services are approximately 15% of Peoples Health Center's budget.

"That brings us to third party insurers," Rita began. "Like the private sector, the center has witnessed a steady reduction in the amount paid by insurance companies. As the Health maintenance organizations began to expand and the insurance industry consolidated, the insurance companies have substantially ignored the health centers and pay according to their own fee schedule. " This was not a new revelation to Marty, since he was familiar with the financial stress Wellness hospital experienced when faced with similar unanticipated fee reductions. Rita remarked that when she started working with Peoples Family Health Center, twenty percent of their patients had some form of insurance. The number is down to ten percent, due in large measure to decline job opportunities because a local TV assembly plant moved its operations to China. The number of self-pay patients has correspondingly increased as the unemployment in the county has risen.

Marty recalls the first time he heard the term self-pay. He thought that pay category would be the major source of the Center's revenue. He was mistaken. Rita explained that there were essentially three sub-categories of self-pay patients. Patients are assigned a pay category based upon their family income. Patients whose family income exceeds 200% of the Health and Human Services (HHS) poverty guidelines are required to pay 100% of their bill. Patients whose family income is less than or equal to 100% of the HHS poverty guidelines are asked to make a fixed nominal payment upon each visit. Patients whose family income is greater than 100% of the HHS poverty guidelines but less than 200% are assigned a pay category 20%, 40% etc. based upon the relationship of their income to the poverty guideline. The higher the patient's family income, the greater the percentage of charges to patient becomes personally liable.

FINANCIAL OVERVIEW

Marty remembers very well his initial meeting with Rita and is saddened to see her leave. She has accepted a job to become the CEO of a very successful hospital management company. Prior to her departure, she has recruited Lyn Jones, a recent accounting graduate of Basthrop University. Marty has asked that he, Rita and Lyn meet to conduct a financial management exit conference. He has asked Rita to discuss both internal financial issues and emerging external risk faced by the People's Health Center. Rita's comments were not very encouraging. Recognizing the relative success of HMO's in the private sector, the state started a Medicaid HMO two years ago. The Health Center may lose as much as 25% of its Medicaid visits. In addition, the state is experiencing a severe budgetary crisis and if it does not receive federal support soon, it has indicated that it will Cap capitation reimbursements at $60 a visit. For as long as Rita can remember the health departments has given the center all the immunization and vaccines it needed. The Health department has informed the center that it may not be able to continue the program. If the Health department discontinues this program, the current variable cost per visit ($21.88) will rise to $25 per visit. Like most governmental agencies the county is not immune to the financial crisis currently being experience by the state. In search of re-election safe revenues, the county has proposed that not-for profit organizations pay a fixed fee in lieu of taxes for fire, police and sanitation services. Such a fixed fee would add $25,000 to the Center's current budget. Rita has prepared the preliminary revenue and expense budget which appears in Table 1 below.

Based upon the full and part time Physicians employed, under contract, and the support of the nurse practitioners, Rita estimates that the center will see approximately 27,674 patients in the coming year. She indicated that the center is approaching its physical capacity of 30,000 patients a year. The Center has experienced a significant migrant visits, particularly during the picking season. In order to increase physical capacity to 45,000 patient visits a year, the center would incur an additional $40,000 in annual fixed expenses. Variable costs comprise approximately 30% of the Center's budget. A breakdown is provided in Table 2 below.

The estimated revenue budget and reimbursement rates are presented below in Table 3.

Medicaid will pay the Center slightly more than Medicare because it supports certain preventive healthcare programs. After presenting the proposed budget, Rita thanked Marty for all his support over the years. Before leaving to catch a plane, Rita assured Lyn that Marty would provide her with all of the necessary technology and consultation she needed to efficiently manage the CFO's office. Marty has asked Lyn to study the information presented by Rita. He had an appointment at the Office of Health Grants Management within a week and needed to be prepared to answer all questions put forth by the grant management team.

References

REFERENCES

Garrison, R. H. & E. W. Noreen. (2003). Managerial accounting (Tenth Edition). McGraw Hill/Irwin.

Title 42, Code of Federal Regulations, part 51c. Section 303.

Title 42, United States Code, 9902 (2).

AuthorAffiliation

Clarence Coleman, Winthrop University

colemanc@Winthrop.edu

C. Angela Letourneau, Winthrop University

letourneaua@Winthrop.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 10

Issue: 1

Pages: 11-15

Number of pages: 5

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Conference Proceedings, Business Case

ProQuest document ID: 192412004

Document URL: http://search.proquest.com/docview/192412004?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2003

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 55 of 100

LABOR RELATIONS AT SMEAD MANUFACTURING COMPANY'S CEDAR CITY PLANT

Author: Johnson, Roy B; Calvasina, Gerald E

ProQuest document link

Abstract:

Bob Smith sat at his desk contemplating his responsibilities over the coming months. In the year 2000, he had been transferred to the Smead Company production facility in Cedar City, Utah as the plant Human Resource (H.R.) Director. The preceding H R Director had left the company after unsuccessfully resisting an employee unionization effort. This effort had been contentious as the employees battled for higher pay and the company resisted. Even after the employees had voted to support the union by a two-to-one margin, the company was slow to cooperate. It had taken almost a full year after the union was voted in for the contract to be negotiated and the company gave little in the way of concessions. Now that contract was set to expire it would be largely his responsibility to negotiate a new one and, on a more basic level, to help set an overall labor relations strategy. Given everything that had already happened, what were his options and what decision would be the best for his company?

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns labor/management relations. Secondary issues examined include company strategies in Labor Relations, Collective Bargaining, and Legal issues associated with Labor/Management Relations. The case has a difficulty level of four to five and should be appropriate in both undergraduate and graduate courses in labor/management relations, human resource management, or strategic management. The case is designed to be taught in either one or two class hours depending on instructor preference, with one to two hours of outside preparation by students depending on the use of the bargaining role-play exercise.

CASE SYNOPSIS

This case examines the relationship between a company and labor union nearing the end of their first contract. The key issue to address is management's overall labor relations strategy to date and what is and is not working. This assessment will then become the basis for management preparation to begin bargaining of a new agreement. There are a number of secondary issues that can also be explored through the case including the company's decision to re-locate the plant from the Los Angeles, California area to a remote rural area in Southern Utah. An assessment of management's approach to bargaining over the first agreement and its outcome should also be explored. Depending on the amount of time the instructor chooses to devote to the topic, the case also presents a collective bargaining role-play opportunity.

INTRODUCTION

SMEAD MANUFACTURING COMPANY

Smead manufacturing company produces thousands of modern filing products in order to make records management more efficient and economical. It is a family owned American company that began in 1906. Smead's basic business principle is to provide quality filing products that best serve the needs of their customers.

As of 1996, Smead had 6 plants in: Locust Grove, Georgia; Logan, Ohio; McAllen, Texas; McGregor, Texas; River Falls, Wisconsin; and Pico Rivera, California (Exhibit 2). Each of these plants had on average between 250-500 employees working fulltime. This is in addition to the headquarters plant in Hastings Minnesota, which has between 500-1000 employees. The McGregor, Pico Rivera, and Hastings, plants were each unionized.

With Smead's rapid growth rates, some of its plants began reaching capacity. The plant in Pico Rivera, California had grown from one building to three. Because of the limited space and structure, these buildings were not designed in such a way that efficiencies could be captured. Costs were increasing and new space was needed. Smead began to look for the best place to build a new plant.

Smead needed a good location for shipping and a better production setup (one building with capacity to grow) where economies of scale could be realized. A key consideration in choosing a new site was a need to reduce costs. Smead paid attention to differences in labor costs, taxes and utilities. The company also looked at relocation incentives offered by municipalities giving breaks in taxes, utilities and rent in exchange for jobs. After examining several possible locations, Smead decided to build a new plant in Cedar City, Utah and to close the Pico Rivera plant.

CEDAR CITY

Companies are moving here to exploit lower wages.

Russ Taylor, PACE union negotiator

Contrary to its name, Cedar City is a small town of about 22,000 in rural southwest Utah. It is located in Iron County, which had a total population of about 30,00 in 1996. The average wages in Cedar City are at 64 percent of the national average while the cost of living is 93 percent. According to Iron County - Cedar City Economic Development Director, Clark Krause, this wage rate is an improvement. Several years ago, he said, the wage level in Cedar City was at 56 percent of the national average.

Since then, the city had aggressively recruited businesses with relocation incentives. Most of these were small manufacturing firms, though two of the largest new employers were telemarketing firms

While increasing the number of jobs, the new companies paid only slightly higher wages. A local industry association called the Southern Utah Manufacturers Association (SUMA) was formed to further the companies' joint interests. This association came under attack for allegedly colluding to fix prices. SUMA president Ray Smith denied any collusion and claimed that low wages were simply the result of supply and demand. "It is my belief that the wages are established by the market and there are people here with skills who want to live here and are willing to perform j obs at a lower wage here than they would be in Orange County, or Chicago," he said. "And I'm one of those." Support for Smith's claim can be seen in an annual population growth rate of over four percent in 1990's. In spite of low wages, over a thousand new residents were settling in Iron County every year.

Cedar City had other advantages for businesses as well. While in a rural setting, Cedar City is centrally located in the western states; less than 600 miles from Denver, Los Angeles, Phoenix, and San Francisco. The town is less than two hours from Las Vegas and three hours from Salt Lake City. It lies on Interstatel 5 the main route between Salt Lake City and Los Angeles. It also had rail access provided by Union Pacific and Utah's second largest municipal airport. Worker compensation and tax rates are lower in Utah than most other states as are utilities and land costs. According to an article in Fortune magazine (Feb. 14, 1993) "Utah has the lowest cost of doing business of any state in the nation."

LABOR PROBLEMS

Smead's loyalty to its employees is reciprocated by the very personal dedication to Smead's customers among its personnel. You can rely on the stability, consistency and personal service that naturally accompanies long-term employee commitment.

Smead Website

We're treated like cattle. In some instances, I think cattle are treated better.

Sheila Colclasure, Worker at Smead's Cedar City plant

It didn't take long for difficulties to develop. Within two years of the move, workers at Smead's Cedar City plant began to grumble. They had discovered that they were paid on average about $2.00 less per hour than employees at Smead's two other plants in Hastings, Minnesota and McGregor, Texas. In 1999, workers at Hastings, for example, started at $10.58 per hour, while Cedar City packers began at $7.06 per hour. The average employee at Smead made about $9.50 an hour. According to the 1999 annual Out of Reach report issued by the National Low Income Housing Coalition, residents had to earn at least $11.69 an hour to afford a standard two-bedroom apartment.

Employees tried to change policies at Smead but to little avail. By 1999 they had noticed one major difference between their plant in Utah and the other, higher paying plants: those plants were unionized while the Cedar City plant was not. While Southern Utah is extremely conservative with strong anti-union attitudes, employees began to consider the option. If Smead organized, it would be the first unionized plant in the area and the employees were noticeably reluctant to take this step. "This is not about greed on our end, it's about surviving," Rusty Galetka, a worker at Smead said. "It's the wages," said a case manager atthe local shelter, "These people aren't lazy. But, on these wages, it's hard to support kids, a house, a car." Sheila Colclasure, another Smead worker called unionization, "a necessary step forward for us." She said, "We need job, benefit and wage security to better raise our families and contribute to our community as well. " According to a union representative, Smead brought the union vote on itself. "Quite frankly the company has done nothing for three years," he said. "It's not like the people haven't told them. The company has completely ignored the workforce."

UNIONIZATION DRIVE

Seventy percent of the employees signed authorization cards authorizing the Paper, Allied Industrial, Chemical, & Energy Workers International Union (PACE) to represent Smead production and maintenance workers for the purpose of collective bargaining. Initially, PACE sought voluntary recognition by Smead management but was rebuffed. With the federally mandated thirty percent showing of interest in hand, PACE petitioned the National Labor Relations Board to conduct a representation election to certify the union as the exclusive representative of the employees.

The campaigns of both Smead management and PACE were fairly close to the norm for these situations. Smead management chose not to wage their campaign in the media, preferring to focus on the employees on site and in their homes. When questioned by reporters, Smead officials said, "the vote on whether to unionize is a matter between them and their employees" and declined further comment. Smead showed its workers mandatory "anti-union" films twice a week. Letters home from the Cedar City Plant Manager were also utilized to communicate directly with the employees. Smead's strategy included pulling out all stops in attempting to remain union free. While the company had no public response, internally, the company's position was clear. (See Exhibit 1).

On December 2, 1999, by a 2 to 1 majority, the hourly workers at Smead voted to authorize PACE to represent them. The final vote was 182 to 90 out of 277 eligible voters. With the vote, Smead became the first large Cedar City factory to have its employees represented by a labor union.

CONTRACT NEGOTIATIONS

Nobody got rich and we knew we weren't

Russ Taylor, PACE union negotiator

While the workers celebrated the victory, the fruits of unionization remained to be seen. Goodall had threatened that, "If the Union won the election, and if bargaining took place, I can promise you that we would bargain legally, but we would bargain hard, over our own bargaining goals." By winning the election, PACE became the employee's agent in collective bargaining. In January negotiations on a new contract began. While employers are required to bargain with unions in good faith, much latitude in negotiations remains.

While the company and union negotiators tried to resolve differences, PACE continued its public relations campaign. This campaign focused on the issue of wages.

Spurred by the unions, local newspapers printed several articles during this time with titles like: Union Committee Seeks Higher Wages; Workers Talk about Low Wages at Union-Sponsored Meeting; and Union Accuses Cedar City Companies of Colluding to Maintain Low Wages. PACE also took out a full-page newspaper advertisement to call attention to the issue. Smead, in contrast, continued to have, "no comment."

Finally, on December 16, 2000, after almost a year of negotiations, union members unanimously approved a new contract. It contained modest raises, which, according to union negotiator Julie Hauzer, are "reflective of Smead's refusal to pay wages higher than other Cedar City manufacturers." Hauzer said, "I don't know why people in Cedar City aren't outraged," by the refusal of manufacturers to raise wages. According to the contract, Smead workers, including those not in the union, would receive two raises. The first raise ranging from 3 to 4.2 percent would be retroactive to January. The second raise of 3.25 percent would occur on April fools day 2001. This contract is effective until June 2003. Workers' wages at the Cedar City plant remain $2.00 to $3.00 less than at Smead's other plants.

In spite of this, the union put a positive spin on the contract. According to Russ Taylor, another PACE negotiator, "...It gives us a bigger say. A lot of good came out of it." Hauzernoted that the contract increases the worker's ability to question decisions made by Smead. "There's no more employment at will at Smead," she said. There were also some changes in rights of seniority and the granting of vacation time for overtime assignments. Smead had no comment on the contract. In the time since the election, union membership is down to 103 employees, less than half of the company's 200-plus workforce. Union membership and finances at the Cedar City plant are so low that, according to a Cedar City Union representative, the union can't even afford to process a grievance, let alone work for more sweeping reforms.

SUMMARY

There's nothing wrong with making a profit, but there's something really wrong with economic development that exploits a community.

Robert Wages, PACE Executive Vice President

It was now getting close to the time when the contract would have to be renegotiated. This was a good time to review the company's labor relations and human resource management strategies. While Smead was the only unionized company in Southern Utah, things could have gone much worse. Mr. Smith sipped his coffee as he pondered whether there was anything that needed to be changed.

Sidebar

Exhibit 1

From: Winiecke, Roxie

Sent: Thursday, September 14, 2000 9:00 AM

To: Kelly, DeVey; Shorter, Alan; Griffith, Cathy; Sawyer, Dallin;

CC: Goodall, Gordon

Subject: RE: SOS (Temporary Staffing Firm)

Do you agree with the decision to hire all of these permanently? Have you noticed any particular Union alliance with these SOS associates? Let's not shoot ourselves in the foot by bringing on permanent people who are known Union supporters. If any of these SOS people have been wearing the stickers, I would question if we want them as Smead employees. Please let me know immediately if anyone should not be hired. Thanks

AuthorAffiliation

Roy B. Johnson, Southern Utah University

johnsonr@suu.edu

Gerald E. Calvasina, Southern Utah University

calvasina@suu.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 10

Issue: 1

Pages: 39-44

Number of pages: 6

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Conference Proceedings, Business Case

ProQuest document ID: 192412130

Document URL: http://search.proquest.com/docview/192412130?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2003

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 56 of 100

WAL-MART: GOOD NEIGHBOR OR GOOD RIDDANCE? THE CASE OF ASHLAND, VA

Author: Johnston, Timothy C

ProQuest document link

Abstract: None available.

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns the issues "social marketing" and ethical issues. Secondary issues examined include suburban sprawl, the pros and cons of a big box retailer entering a community, and the efforts of one retailer (Wal-Mart) to overcome the resistance of some citizens of a small town. Students should have a basic knowledge of marketing and general business issues, but the technical requirements are low and thus the case has a difficulty level of one (freshman level). The case is designed to be taught in two sessions of 50 to 75 minutes. A third session can be used to show the documentary video. Preparation time varies from less than one hour, to two to four hours for students who are assuming a role in the case.

CASE SYNOPSIS

This case focuses on the defining event of a 20-month conflict between developer s for WalMart Stores, Inc. and local citizens who were concerned about the impact of "sprawl" that a WalMart Supercenter would bring to a small town, with elected town council members caught in between. A growing list of communities had fought the development of Wal-Mart stores at the time of this case (104 "victories" according to Norman, 2002c). The Town Council is set to vote on the Wal-Mart proposal, with the emotions of people in standing room only crowds running high. The intensity is heightened by the fact that the "pro-business" council members were defeated in recent elections, but their "anti-Wal-Mart" replacements have not yet been installed. Also, the process has been the subject of a documentary filmmaker.

This case should prompt students to think more deeply and to understand the multiple facets of the issues of free enterprise and local control in a community. Students should assume the roles of a young Wal-Mart employee sent from the corporate office to the town, and of the owner of a small business in town. Their arguments for and against a new Wal-Mart store are listed. (The people in the case are real.) The class discussion may be staged as a town meeting or debate format. The case facts and a great deal of information on the movement against "sprawl" are available in books, articles, the documentary video, andwebsites. Research material is listed in the references section of the teaching note, along with an epilogue. The debate in small towns is ultimately about values. Which are more important to a community? Who gets to decide?

THE SITUATION IN BENTONVILLE

"Arggh!," groaned Keith Morris. "We have problems in Ashland again." Mr. Morris works as the Community Relations Manager for Wal-Mart Stores, Inc. of Bentonville, Arkansas. He explained to his boss: "I thought we were home free after our proposal passed the planning commission. We risk getting shut out of Ashland if the mayor and city board of aldermen do not approve our zoning variance. I had better get up there and convince the people that getting a WalMart Supercenter is a good thing."

Silently, he thought to himself-how did this situation get so out of hand? The responsibility of saving the Ashland project from defeat was an awesome one for Keith, who was just a few years out of college. Who were the key players in Ashland, both for and against allowing the development of a Wal-Mart Supercenter? What arguments could he make to convince the Town Council to approve the rezoning needed to develop a Wal-Mart store in Ashland?

THE SITUATION IN ASHLAND

"We can't afford to lose this vote," said Mary Leffler, referring to the proposal to come before the Town Council to approve Wal-Mart's rezoning development request. Mary knew that as the leader of the "Pink Flamingos" (a group of citizens who opposed the Wal-Mart project) she had to make a convincing argument that the Town of Ashland deny Wal-Mart's request to build a Supercenter in town. Personally, Mary wanted to preserve the viability of the downtown business area, in which she owns a small coffee shop. How can a small group of volunteers like the Pink Flamingos stop a huge, powerful corporation like Wal-Mart? What arguments could she make to convince the Town Council to deny the request by Wal-Mart to develop a store in Ashland?

The showdown between the anti-Wal-Mart townspeople and Wal-Mart representatives is set to occur in two days, at which time the Town Council will vote to approve Wal-Mart's request to build a Supercenter in Ashland. The stakes are high for both sides.

BACKGROUND

Wal-Mart Stores, Inc. At the time that Wal-Mart was attempting to build a store in Ashland, the company was the largest retailer in the world, with over $100 billion in sales and 3,000 stores in the U.S. as well as chains in Britain, Germany, China, Korea, Mexico, Brazil and Argentina. It was opening a Supercenter every two days. It was the U.S.'s largest private employer (925,000 employees), and the second largest employer after the Federal government. The company also owned the largest computer and the world's largest fleet of trucks (Straus, 2001).

Here is how Wal-Mart management described its business: "Wal-Mart is a very large but straightforward business. In the United States, our operations are centered on retail stores and membership warehouse clubs. Internationally, our operations are centered on retail stores, warehouse clubs and restaurants. We have built our business by offering our customers quality merchandise at low prices. We are able to obtain lower merchandise costs and pass them on to our customers through our negotiations with suppliers and by efficiently managing our distribution network. The key to our success is our ability to grow our base business. In the United States we grow our base business by building new stores and by increasing sales in our existing stores, including offering new kinds of goods and services to our customers. Internationally, we grow our business by building new stores, increasing sales in our existing stores, through acquisitions and by offering new goods and services to our customers. We intend to continue to expand both domestically and internationally" (Wal-Mart, 2002).

Wal-Mart usually relied on an outside, local attorney to represent its development interests to cities and towns. Local law firms can know the local politics and zoning laws of each project better than Wal-Mart employees in Bentonville, Arkansas. The advocacy of the Wal-Mart project in Ashland was the responsibility of Jay Weinberg, an attorney at a law firm in Richmond. Mr. Weinberg had shepherded the Ashland project for Wal-Mart through the approval process of Ashland.

Wal-Mart's position is that the company has a legal right to develop property in Ashland for commercial purposes, just as any other business. As long as Wal-Mart complies with the zoning and development laws of Ashland or any other local government, the company should be free to exercise its property rights. Mr. Weinberg won an important victory for Wal-Mart when the Ashland Planning Commission voted four to one to forward the proposal to the Town Council with a recommendation for approval. While some residents oppose the location of Wal-Mart in Ashland, other residents welcome Wal-Mart, and the elected Town Council has the authority to determine whether or not Wal-Mart's proposal complies with the town's laws.

The Town of Ashland. Ashland, VA (pop. 7,200) is affectionately known as the "Center of the Universe" by residents for its central location within the state. Developed by the railroad as a mineral springs resort, the origin of the town dates back to the late 1840s. Officially incorporated on February 19, 1858, the town was named "Ashland" after native son Henry Clay's estate in Kentucky. Ashland is a community of seven square miles that enjoys prosperity fueled by the Randolph Macon College, a growing private sector and a strong regional economy. Ashland is committed to stable growth that benefits its citizens while preserving the historic district, quaint residential neighborhoods and system of parks and trails. The downtown is considered a national historic district.

The history of Ashland is reflected in the town's vision statement: "Ashland is a small village in a metropolitan area where residents enjoy a high quality of life. Living or working within Ashland provides a sense of feeling at home, of belonging to a small town community which preserves the past and looks eagerly toward the future. Our vision is to maintain those assets that are most dear and which link together to make Ashland: our people, places of worship and business, our history and architecture, "maples and oaks," the railroad and the College" (Ashland, 2003).

The Pink Flamingos. When people in Ashland got wind of the Wal-Mart project, several local businesses started petitions. Mary Leffler, who owns a local coffeehouse, and writer Phyllis Theroux drafted an invitational flyer calling concerned citizens together to meet about the Wal-Mart issue. Thirty townspeople showed up, and the Ashland-Hanover Citizens for Responsible Growth was born. The group chose the symbol of the pink flamingo for their group, displaying them at the coffeehouse with signs such as "smart growth" and "small is beautiful."

As opposition to Wal-Mart grew in Ashland, more townspeople displayed flamingos in their front yards to show their support for the citizens' group. The Pink Flamingos conducted meetings, hired a lawyer, and held fundraising yard sales and informational evenings to educate the rest of the community on the issues (PBS, 2001). The Flamingos even hired Al Norman, author of "SlamDunking Wal-Mart" (Norman, 1999a) and consultant to people who want to block "big box" retailers from entering their community.

TOWN COUNCIL MEETING

Prior to the Town Council meeting, Keith reviewed in his mind the arguments for allowing Wal-Mart to build a store in Ashland. First, when a Wal-Mart store, or any business, proposes to build in a community, if they follow the guidelines that the local municipality has in place, the business should be allowed to proceed with its plan (Morris, 2001). Regardless of Wal-Mart's right to develop a store, the residents should welcome Wal-Mart to town.

1. A Wal-Mart store will bring jobs to Ashland. A Fortune magazine poll noted that Wal-Mart is one of the 100 best companies to work for in America.

2. A typical Wal-Mart Supercenter brings in $1 million in sales per week. The town will get $110,000 per year property and sales tax revenues, after expenses, to improve the town.

3. Wal-Mart's large selection of products at low prices will give shoppers the convenience of one-stop shopping and more for their money.

4. Wal-Mart is proposing to pay the town about $4 million up-front in "proffers" for road construction, town infrastructure, etc.

5. Free enterprise, growth, and property rights are the American way. Wal-Mart should not be discriminated against.

6. The people who oppose Wal-Mart are a minority of small business owners who don't want to compete with Wal-Mart; most people in town want the store.

Prior to the Town Council meeting, Mary reviewed in her mind the arguments against allowing Wal-Mart to build a store in Ashland.

1. So what if Ashland's local laws would allow a Wal-Mart Supercenter? Isn't the purpose of development laws ensure that the business and personal quality of life in Ashland are maintained? A Supercenter would have a drastic change on life in Ashland that existing laws did not anticipate when they were written. What should prevail-the will of the people or the rule of laws written to protect the people?

2. A Wal-Mart store would hurt Ashland more than help. Tax revenues to the town will increase, but expenses for roads, law enforcement, etc. will increase also so that having a Wal-Mart will cost Ashland money.

3. Wal-Mart would destroy the livelihood of the quaint, historic downtown business district. Eight-four percent of the store's business would come at a loss to existing stores.

4. New Wal-Mart jobs would replace locally-based jobs and small businesses. Money that local businesses would have returned to the community and charities will be sent to Bentonville, Arkansas. We have heard stories that Wal-Mart has labor problems because their jobs are not so great.

5. The large scale of Wal-Mart will bring more people and traffic than Ashland can easily accommodate. A lot of residents (such as me) moved to Ashland from big cities to get away from traffic, crowding, and crime. Wal-Mart brings with it the problems of "sprawl" (Norton, 1999b), including destruction of the natural environment, besides being just plain ugly.

6. We already have access to Wal-Mart-there is a store within a 10 minutes drive in any direction from Ashland.

Emotions were likely to be running high at the Town Council meeting. Recently the town held elections for the Council, and the pro-Wal-Mart council members, including the Mayor, were defeated. The upcoming meeting would be their last official duty. The Pink Flamingos are planning to ask the Council to defer the vote on the Wal-Mart proposal until the new Town Council is installed and can vote. Past meetings were so crowded that hundreds watched on closed-circuit televisions from the lawn of the courthouse.

If the Council votes to delay the proposal, then there is a chance that the incoming Town Council members will vote against the Wal-Mart store in Ashland. If the "lame-duck" outgoing council members decide to not delay the vote, then there is a good chance that the proposal for a Wal-Mart Supercenter in Ashland will pass. Wal-Mart has jumped through all of the legal hoops and answered the objections of the Planning Commission and the Council, so there is a chance that Wal-Mart will sue Ashland if the proposal is denied.

Adding to the excitement and anxiety of the people involved was the fact that the meeting may determine the "winner" of a 20-month confrontation between Wal-Mart and the Flamingos. A documentary filmmaker had recorded this process, making the Ashland project much more that a typical decision on retail development (Peled, 2001).

AuthorAffiliation

Timothy C. Johnston, The University of Tennessee at Martin

johnston@utm.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 10

Issue: 1

Pages: 45-49

Number of pages: 5

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412086

Document URL: http://search.proquest.com/docview/192412086?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2003

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 60 of 100

BUILD-A-BEAR WORKSHOP

Author: Lane, Wilburn C; McCullough, Mike

ProQuest document link

Abstract:

This case pertains to the creative-marketing enterprise Build-a-Bear Workshops founded by Maxine Clark. This case chronicles the growth, profiles Ms. Clark, elaborates on the concept, and describes the store and the customer's experience in the store. Students analyzing this case will learn of the marketing and ongoing innovation strategies of this company and challenge themselves to think about the implications of what has transpired thus far and what the future might hold for Build-a-Bear Workshops.

The first Build-A-Bear Workshop opened in October of 1997 in the St. Louis Galleria. The store was a huge success, and its sales by the end of 1997 had reached almost $400,000. It was obvious that Ms Clark had developed a winning formula, and she decided to open more stores.

The Build-a-Bear company was founded as an interactive entertainment retail experience based on the enduring love and friendship that connects us all to stuffed animals, especially teddy bears. The company reminds us that, "children use teddy bears to keep them warm at night and comfort them while protecting them from the monsters under the bed.

The name of the retailer profiled in this case is Build-A-Bear Workshop. Maxine Clark, who left the May Company in 1996, got the idea for the business when she went on a field trip to a toy factory with a friend and her children. She saw how excited they were in learning more about the toys and decided to open her own store where children could actually make their own toys-stuffed teddy bears. The first Build-A-Bear Workshop opened in October of 1997 in the St. Louis Galleria. The store was a huge success, and its sales by the end of 1997 had reached almost $400,000. It was obvious that Ms Clark had developed a winning formula, and she decided to open more stores. Initially she put $750,000 of her own money in the business and secured another $12 million of capital from other sources. To date she has been able to raise over $40 million dollars in capital, some of which is her own money. This has allowed her to rapidly expand the number of stores. At the end of 2002, she had 109 stores and sales of almost $170 million.

Build-A-Bear Workshop has already sold more than 10 million bears. The average sales volume per store is over $2 million a year. They are projecting to have almost 300 stores in the United States and Canada by the end of 2006, and they eventually plan to have 400-500 stores in North America.

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns marketing and strategic marketing or strategic management. Secondary issues examined include the social psychology of marketing. The case is appropriate for senior level strategy, marketing, or organizational theory courses, or MBA marketing, organizational theory or strategic management courses. The case is designed to be taught in a 50-75 minute class and is expected to require one-half hour of outside preparation by students.

CASE SYNOPSIS

THE OWNER

The driving force behind Build-A-Bear Workshop is Maxine Clark-the Chief Executive Bear. While Ms Clark is only 4'1'' tall, she is a retailing giant. In 1995, Discount Store News named her one of the "30 Most Powerful People in Discount Store Retailing". She is a member of The Committee of 200-the premier international organization for female entrepreneurs and top corporate executives. In 1999, she received the Award for Emerging Entrepreneur of the Year from Ernst and Young.

Ms Clark has thirty years of experience in retailing. After graduating from the University of Georgia in the early 1970's with a degree in communications, she passed up a career in journalism to become an executive trainee with The May Department Store Company. She started at the Hecht Company division in Washington, D.C. She rose through the merchandising ranks at Hecht's and was named Manager of Merchandise Development for the May corporate staff. In 1978, Ms Clark was named Director of Merchandise Planning and Research and became an integral player in the 1979 acquisition of The Volume Shoe Company, which was renamed Payless ShoeSource. In 1980, she became Vice President of Marketing for Venture Stores, Inc., May's discount store division. Ms Clark was promoted to Senior Vice President and Executive Vice President of May's Famous Barr Division in 1985. From August 1986 through December 1987, Ms Clark was the Vice President of Merchandising for Lerner, New York, the valued-priced division of The Limited, Inc. She left Lerner to return to May as Executive Vice President of Venture's Softline, until November of 1992 when she became President of Payless ShoeSource. Under her leadership it became a $2.3 billion chain of 4,500 family shoe stores. During her three years as President, Payless' market share grew from 16% to over 20% of all shoes sold in America, and she helped expand Payless Kids from 20 stores to over 750 stores and become the largest seller of children's shoes in the world. These experiences have given her senior management experience in department, discount, and specialty store retailing.

Ms Clark developed a great appreciation for retailing as a small child. She has fond memories of going shopping with her mother in her hometown of Miami. She recalls that on Saturday they would dress up and go shopping. She remembers the shopping experience not as drudgery but as a social occasion. One of her fondest memories was shopping at Burdines. She especially liked the "Little Shop" that had everything really low so children could reach the merchandise. She says there was always something going on at Burdines. One of the things she enjoyed the most was the rooftop circus. Also, she had the opportunity to sit on the Teen-Board for Burdines. These experiences have had a great influence on her life and on what she thinks a retail store should provide.

During her twenty-five years with the May Company, she developed her ability for spotting emerging retail and merchandise trends. She formed partnerships with companies such as Disney, American Greetings, and Mattel. When she left the May Company in 1996 with the financial security that most of us could only dream about, she immediately began to look for new opportunities. She decided that she wanted to create a business for children that was fun and entertaining, but she had no idea what. She began to research manufacturing businesses she could buy and develop into a retail business. As part of the research process, she decided to live like a kid; and so she set out on a journey that took her to many places-including a factory that made toys while she was on a field trip with a friend and her children. She saw how the children responded to the most basic of activities. Later she went on a bakery tour for business, and again, she saw the same thing-wide-eyed wonder about how things are made. She asked herself how she could recreate this wonder in a retail store? She tried unsuccessfully to buy a toy factory. They just could not see her vision. Not to be thwarted, she decided to reinvent the idea in a mall based setting. Thus, Build-A-Bear Workshop was born.

THE STORE

Most of the stores are about 3,000 square feet and are found in malls. They usually have 25-30 feet of store frontage and are adjacent to appropriate children and family retailers. They do have larger stores (4,000-6,000 square feet) that are found in tourist markets, and they have smaller stores (2,000-2,500 square feet) that are located in smaller markets. The average sales per square foot of a Build-A-Bear Workshop is over $700, which is about twice the national average for stores in its category. The stores are located in 90% of the top 20 U.S. markets, and they are in 88% of the top 50 U.S. markets. Amazingly 60% of the entire U.S. population lives within 30 miles of an existing store. About 75% of the stores are located in destination malls with the remaining 25% located in entertainment/tourist venues. When asked how they decided where to locate new stores, Ms Clark responded, "We are tuned into the market very well and know the best malls and have targeted those. We also have data in our storybook database that lets us understand the demographics of our Guests and we look to prioritize markets that best reflect these demographics." She also indicated that some of the e-mails she gets from children include suggestions for where to have a new Build-A-Bear Workshop.

The Target Market

At first glance most people would probably define Build-A-Bear Workshop's target market as young girls ages 3-13, but actually their clientele includes boys, teenage girls and their boyfriends, parents, grandparents, gift givers, special interest collectors and leisure travelers. In addition there are organizational customers like schools, scout troops, daycare providers, and other child-centric organizations. As you enter a Build-A-Bear Workshop you will see people of all ages actively engaged in the process. No matter who they are, there is one thing they will have in common. They are all having fun and will remember the experience.

The Concept

Unlike most businesses where the shopping experience is something you have to endure to get your product, Build-A-Bear Workshop actually makes the shopping experience an enj oyable and important part of the product. Build-A-Bear Workshop is based on the premise that if a firm could bundle experiences along with value and affordability into its products, and if customers were allowed to walk in and customize products, shoppers would come to store locations in droves. In an article entitled "Redefining Retailtainment" found in the March 2001 issue of Chain Store Age, Maxine Clark says, "Experiential retailing is where the opportunity lies. You have to give people ways to interact with your brand."

The company was founded as an interactive entertainment retail experience based on the enduring love and friendship that connects us all to stuffed animals, especially teddy bears. The company reminds us that, "children use teddy bears to keep them warm at night and comfort them while protecting them from the monsters under the bed. As they grow, the teddy bear becomes a symbol of romance and love. At all stages of life, teddy bears represent happiness and safety, and they cheer us up when we feel lonely or depressed. They are a constant friend, and we develop a bond with them." It is this natural love for teddy bears combined with the interactive shopping experience that makes the Build-A-Bear Workshop so successful.

THE EXPERIENCE

There are two main ways to experience the store. You may simply walk in and come under the capable influence of one of the well-trained associates (called a Master Bear Buildersm), or you may come in as a member of a birthday party at which you are either the one having a birthday or a guest of a friend who is. Either way, the experience begins at the front of the store and takes you in assembly-line fashion through multiple stages until you leave with your own stuffed animal.

The morning we visited, they had a birthday party scheduled in the store for 10 o'clock. After everyone arrived, it got underway at 10:15, with the Master Bear Builder, Jody, leading it. That morning there were five children in the party group, three boys and two girls, with one of the girls, Lauren, being the birthday girl.

Jody tells the children in a kindergarten-teacher voice, that they will each be allowed to spend $25. This becomes significant later, when they pick out their bear, which range in price from $10 to $25; and its clothes and other items, which range from $2 to $12.

After each child has received a nametag, Jody says a few things to gain their confidence and to create an expectant and joyful attitude among them. In this spirit, she asks them if they can hop up and down on both feet at the same time. She demonstrates by hopping herself. The children have no trouble with this request. Next, she asks them to hop with her over to where the animals are.

Once they have hopped over to the shelves of animals, Jody points out the various prices. The animals are similar in size and come in a variety of bright colors, although some are darker, perhaps to accommodate the tastes of boys or at least the parents of boys. It only takes about five minutes for all the children to determine which animal will be theirs, and they are off to the next station.

Suspended from the ceiling are signs that lead you through the process of making a bear. In order, the stations to work through are: Choose Me-where you select your animal skin, Hear Me-if you want to implant a sound into your animal, such as a roar, a bark or bell, Stuff Me-where you pump the air pedal with your foot to blow stuffing into your animal, Heart and Stuff-where you put the heart into your bear preceded by a series of rituals, Fluff Me-where you can shower your bear with what appears to be a water sprayer, which actually sprays air, and where you can brush your animal's fur, Dress Me-where you choose your animal's clothes and put them on, name me-where you input your personal information into the computer, including address, phone number and email address and where the computer prints out a birth certificate for your animal, and Take Me Home-where you get you are given (the Cub Condo) a cardboard box printed to look like a house, into which you insert your animal to make it easy to carry.

The children were each given a heart to place in the bear with the stuffing and sound mechanism. Together they went through "birthing rituals" such as holding the heart to their foreheads and thinking of something they did that showed how smart they were. One child said he could use the computer, so Jody encouraged this child to think of that while holding the heart to his head. This would give the bear his intelligence. The heart was transferred to the bicep, where it got strength, and to their heart, where it was given love and warmth. The children were enthusiastic in their response to Jody's every instruction, while the parents and grandparents took pictures, smiled and encouraged their child.

MARKETING

Direct mail is Build-A-Bear Workshop's primary form of advertising. This is an integral part of their marketing program. When the customer fills out the birth certificate for the teddy bear, they are asked to give their name, address, age, gender, and e-mail address. This is very valuable information that is used to market directly to their current customers. They now have over 3 million households in their database. They do six catalog mailings a year to over 2 million households per issue. They do bi-monthly e-mails to over 3 million Guest each year. They use these direct marketing techniques to make Guests aware of fresh products, new store openings, seasonal promotions, and events.

Their direct marketing effort is closely tied to sales promotions, and a lot of their marketing effort is build around events. Below are just a few of the events they have promoted:

They have two mascots that are used to enhance these events. They have Bearemy, who is an adorable ambassador of bear hugs. He is a bear mascot that represents Build-A-Bear Workshop at Grand Opening Cele-bear-ations, mall and charity events, and in the community. They also have Pawlette, the Fashion Advisor to the Furry Famous. This is a rabbit that hosts Furry Fashion shows to keep the furry friends in the latest styles. They also place a lot of emphasis on birthday parties and other types of parties. They send each Guest a notice about having a birthday party 90 days in advance of their birthday. They have had over a million Guests party with them. Their website www.buildabear.com has over 500,000 guests each day. It has won several awards and is very informative. It provides local store information and highlights upcoming events.

Build-A-Bear Workshop has received a lot of publicity. More than 350 stories about Build-A-Bear Workshop have appeared in magazines and newspapers. These stories have created an estimated 175 million audience impressions. Over 130 stories have appeared on television with an estimated audience reach of nearly 22 million.

While all these marketing techniques have certainly raised awareness among members of the target market, their most effective and efficient technique is their customers. Maxine Clark says, "Our guests are often our best spokespeople." Ben McConnell and Jackie Huba in their book, Creating Customer Evangelists, use Build-A-Bear Workshop as an example of how loyal customers become a volunteer sales force. They explain how important loyal customers are to a business, and how Build-A-Bear Workshop has been able to build a 100 + million dollar business in a few short years because of their Guests telling their friends about Build-A-Bear Workshop.

AuthorAffiliation

Wilburn C. Lane, Lambuth University

lane@lambuth.edu

Mike McCullough, University of Tennessee at Martin

tangamc869@cs.com

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 10

Issue: 1

Pages: 61-66

Number of pages: 6

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Conference Proceedings, Business Case

ProQuest document ID: 192412034

Document URL: http://search.proquest.com/docview/192412034?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2003

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 65 of 100

MARTIN INDUSTRIES, INC.

Author: Shonesy, Linda B; Kerner, Jim; Gulbro, Robert D

ProQuest document link

Abstract:

Martin Industries, Inc. is located in Florence, Alabama and began as a family-owned business almost one hundred years ago. At the turn of the twentieth century, two brothers bought a small cast iron foundry in Sheffield, Alabama called King Stove and Range Company. It made stoves and ranges for cooking. This family business started at a time when "customers were friends and employees were like an extended family" (www.martinindustries.com/homepage.html. Although it began as a privately held corporation, Martin Industries has changed over the past ninety years to become a broad-based manufacturer of area comfort appliances and leisure products. One thing that did not change was that Martin continued to be very employee centered and friendly to all customers over the years, and even became 33% employee-owned (http://hoovers.com). Martin describes itself as a business that designs, manufactures and sells high-end, preengineered gas and wood-burning fireplaces, decorative gas logs, fireplace inserts and gas heaters and appliances for commercial and residential new construction markets in the United States. They believe that their past success reflects their commitment to customers, their team employees, and sound financial management (www.martinindustries/.com/homepage.html). Evidence of the company's beliefs is reflected in their mission statement.

Full text:

Headnote

CASE DESCRIPTION

The subject matter of this case concerns a company that has been in business for nearly 100 years and is falling prey to the complicated issues in today's economy. Issues to be examined by the student include financial management issues, strategies used by management, and the effect of economic issues on a company's operational policies. This case is intended for use in undergraduate strategic management or business policy courses. It is designed to be taught in three to four hours of class time and is expected to require two to four hours of outside preparation.

CASE SYNOPSIS

Martin Industries manufactures home heating products, which are marketed under the Martin Gas Products, Martin Fireplace and Atlanta Stove brand names. These products include a variety of gas logs, gas stoves, pre-engineered wood and gas fireplaces and heaters for commercial and residential new construction and renovation in U.S. markets. The firm has locations in northwest Alabama with its headquarters in Florence, Alabama. The company began when two brothers bought a small cast iron foundry at the turn of the 20th century. The company has maintained a good reputation for high quality products and good customer service over the years. However, in the late 1990s this small company began to show a decline in sales, in part from a slowdown in housing starts and because of problems in the economy. This led to a critical lack of working capital and problems obtaining adequate funding www.martinindustries.com/omepage.html).

This case covers the time frame from 1999 until the present and tracks the journey of a once very successful small business through the minefields of financial distress, which may well lead to bankruptcy and extinction. The final fate has not yet been decided. Students will be able to walk the journey and speculate about the outcome.

INTRODUCTION

Martin describes itself as a business that designs, manufactures and sells high-end, preengineered gas and wood-burning fireplaces, decorative gas logs, fireplace inserts and gas heaters and appliances for commercial and residential new construction markets in the United States. They believe that their past success reflects their commitment to customers, their team employees, and sound financial management (www.martinindustries/.com/homepage.html).

Evidence of the company's beliefs is reflected in their mission statement. The statement is as follow:

THE SITUATION

Martin Industries worked hard to meet the demands of an ever-changing marketplace. However, beginning in the late 1990s, problems in the American economy began to have an effect on the housing market. According to company administrators, this was the beginning of their difficulties with sales and then cash flow. At this time, in addition to the heating appliances and fireplace inserts, Martin also manufactured gas barbeque grills under the Broilmaster line and designed and made do-it-yourself utility trailer kits, known as NuWay (www.martinindustries.com/homepage/html).

In late December, 1999, Martin announced the planned closing and consolidation of its Huntsville, Alabama manufacturing facility. The company planned to move production from this facility to existing facilities in Athens and Sheffield, Alabama and to the company's Canadian subsidiary, Hunter Technology, Inc. (http://yahoo.marketguide.com/MGI/).

The company reported a net loss of $2.7 million for the fourth quarter, 1999. Other problems that had developed were declines in utility trailer sales ($2.0 million) due to the loss of a major customer in late 1999. In addition, Martin planned to introduce a redesigned trailer in late 1999, which caused some early season orders to be delayed (News Release, April 2, 2001).

Beginning in 2000, Jack Duncan assumed the role of President and CEO for Martin Industries, replacing Robert Goucher. He led the charge to use strategies to turn the company around. The company focused efforts on increasing production, sales, cash flow, and cost reduction (http://yahoo.marketguide.com/MGI/).

They realized that to reduce costs, the company needed to relieve itself of the part of the company that was not making money. Therefore, Martin began to seek a buyer for the Broilmaster grill line to bring in cash and help eliminate losses.

Martin also proposed to expand their market into the Western and Southwestern United States. It appeared that with the lower interest rates the housing markets were enjoying, expansion could be supported as new housing starts improved. They realized that improved sales would depend on the company being able to ship on time, on continued acceptance by their customers, favorable weather for housing starts, and a reasonable economic situation, some of which was certainly beyond their control (News Release, August, 15, 2001).

Several changes were made in the year 2000. Martin consolidated its operations into a single U.S. and a single Canadian facility, and reduced employees by approximately 330 people, a 37% decrease, and saved the company $10 million annually. Also, in late 2000, Jim Truitt was named CFO replacing Roderick Schlosser (News Release, April 2, 2001).

RETRENCHMENT RESULTS

The company reported a net loss of $14.2 million or $1.81 per share for the fourth quarter ending December 31, 2000. This compares with a net loss in the fourth quarter of 1999 of $2.7 million or $.37 per share. Net sales were $12.0 million for the fourth quarter of 2000 as compared with $21.3 million for the same quarter in 1999, which was a 43% decline for the period. The company felt this decline resulted from a significant decline in orders for home heating products, caused by prior manufacturing or distribution problems. Sales were also adversely affected by lower housing starts and the depression in the manufactured home industry (News Release, April 2, 2001).

For the full year 2000, Martin reported a net loss of $24.6 million or $3.19 per share on net sales of $63.7 million. Net sales declined 25.6% in 2000 from $85.7 million in 1999. (News Release, April 2, 2001). According to management, the decline in net sales resulted from the conditions noted above, along with the problems in implementing a new distribution system put in place in early 2000 and the consequential failure of the company to produce and ship its products on a timely basis.

Beginning in 2001, CEO Jack Duncan stated that the main challenge for the year was to increase revenue. Acknowledging shipping problems in 2000, he said customers had remained loyal due to the quality of products and that several new accounts had been added. He felt confident 2001 would present a better year because of the cost reductions that had taken place (News Release, April 2, 2001).

One of the major problems facing Martin was to secure a new lender in 2001 and replace its existing line of credit. The ability to replace their line of credit was especially critical, as customers did not want to place orders until the company showed more stability. Extensions by the current lender were granted, however, customers knew these were temporary. (News Release, March 16, 2001).

In June, 2001, AmSouth Bank extended Martin's line of credit at $11million, until October, when it would drop to $6 million. This line would extend until March, 2002 (News Release, December 21, 2001).

Another major problem was the possibility of being delisted from the Nasdaq National Market, because the company's common stock had failed to maintain a minimum market value of public float of at least $5 million over 30 consecutive trading days, as required by Marketplace Rule 4450(a)(2) for continued listing. The company had also not met Nasdaq's requirement that the stock maintain a minimum bid price of $1.00 for 30 consecutive trading days (News Release, March 16, 2001).

For the first quarter of 2001, Martin reported a net loss of $2.7 million on net sales of $15.3 million. This compared with a net loss of $32.0 million on $27.6 million in net sales for the first quarter of 2000 (News Release, May 16, 2001). The company received a blow in May, 2001, when it was notified that it would be delisted from the Nasdaq. Its stock moved to the Over the Counter Board (News Release, May 21, 2001).

Even though the sales were lower, the net loss for the second quarter of 2001 was $3.5 million, a $1.2 million decrease over the prior year ($4.7 million). That was a 25% improvement. For the six-month period, net sales were $28.5 million, a 24% decrease for the same period in 2000 ($37.4 million). The net loss was $6.2 million, which was slightly less than the $6.6 million for the first half of 2000 (News Release, August 15, 2001).

The company did seem to be beginning a slight turnaround. However, 9/11 events were just around the corner. By the third quarter of 2001, net sales decreased $3.7 million or 25.8% to $10.6 million. For the nine-month period, sales were $39.1 million, which was a 24.4% decrease from the same period in 2000. The net loss for the third quarter, 2001 was $4.1 million compared to $3.7 million in 2000. For the nine-month period, the net loss was $10.3 million, which was basically unchanged from the net loss of $10.4 million in 2000 (News Release, November 13, 2001).

The company began looking for a buyer for the Broilmaster grill line and a sale was completed at the end of November, 2001 to Empire Comfort Systems, Inc. The sale price was $4.97 million. This was to be used to provide working capital and to pay down debt (News Release, November 30, 2001).

In early December, 2001, Bill Hughey, who had been a former employee as well as a CEO and Director, left the Company (News Release, December 7, 2001). This was the beginning of several changes in administration of the company over the next year.

In early 2002, Martin transferred the shares of its Canadian subsidiary, Hunter Technology, Inc. to Roger Vuillod. He assumed all debt and obligations. Also $4.3 million of intercompany debt, which Hunter owed Martin, was assigned to Mr. Vuillod. He was to repay a percentage of the collection of this debt to Martin, as it was collected. Also assigned to Hunter were the assets used to manufacture and distribute NuWay trailers. Hunter sales less than 15% of Martin's sales (News Release, February 21, 2002).

At the end of March, 2002, the balance on the line of credit with AmSouth Bank was $5.6 million and that was extended until July, 2002 with the stipulation that should the company be unable to repay the debt, they would give the lender a warrant to purchase common stock in the company equal to 10% of the outstanding shares. In addition, three Directors, William Biggs, Jim Caudel, and John Duncan agreed to loan the company $1.5 million for six months at an annual interest rate of 12%. The loan was secured by the mortgage of all of the company's real estate (News Release. April 3, 2002).

Martin reported a net loss for 2001 of $15.9 million compared with a net loss of $24.6 million in 2000. This reflected the sale of Broilmaster, and the transfer of Hunter Technology, Inc. Net sales were down at $34.9 million from $63.7 million in 2000. Sales in the first quarter of 2002 were flat at $7.1 million compared to $7.2 million in the same period of 2001 (News Release, May 15, 2002).

By June, 2002, William Biggs resigned from the Board of Directors. He was one of those who loaned the company money. He stated that he felt that he could be more productive in arranging financing for Martin if he was not on the board. (News Release, June 14, 2002) A temporary extension was again granted by the bank through August, 2002 (News Release, July 3, 2002).

Finally, on September 17, 2002, this company that had existed for three years on a wing and a prayer came to a screeching halt.. It was on that day that employees at the Athens plant were called together and told that the plant would be closed, at least temporarily. The plant had employed about 350 workers, but many had already been laid off during the three-week period prior to the seventeenth. The reason given to the employees was that they lacked the working capital needed to continue operations. Of the 100 workers who were still there, some had their previous week's paycheck bounce. The facility in Florence also closed. A spokesperson for the company cited a shortage of funds forced the closings and said that both closings were temporary (www.decaturdaily.com).

AmSouth Bank extended a $750,000 line of credit to cover paychecks and fill existing orders. Martin hired a Florence company, Phillip+Company, Inc to oversee the restart of the company operations. At this point, in November, 2002, Directors Jim Caudle, John Duncan and Charles Martin resigned from the Board. Caudle and Duncan were principals in MTIN, LLC, the secured creditors of the company (http://yahoo.marketguide.com/MGI/).

William Neitzke was appointed as a Director and made President and CFO to replace Mr. Duncan and Mr. Truitt. The number of Directors was limited to three and so the others who had left were not replaced. Mr Neitzke was associated with Phillip+Company, the consultants to Martin Industries, before joining Martin (http://yahoo.marketguide.com/MGI/).

QUESTIONS

1. Analyze Martin Industries' internal strengths and weaknesses and external opportunities and threats (SWOT).

2. What specific strategies does Martin use throughout this case and what strategies would you recommend for them?

3. Describe your impression of the company ' s corporate culture and evaluate the management of Martin Industries, Inc. based upon the history of the company and information concerning the make-up of the executives. What problems are evident?

4. What problems at Martin were caused by the economic situation in the U.S. for the past several years, in your opinion? Is it the major cause of their problems? Discuss the other causes that you can discern, based upon the information provided.

5. With the temporary closing of both facilities on September 17, 2002, what options do you see for the Company at that point? Select the option that you feel is the best. Support your chosen option with reasons.

6. Using the tables provided, compare the net sales and loses for the three years from 1999-2001 and compare to the first three quarters of 2002, then decide whether you think Martin Industries can manage a turnaround based upon the financial information.

References

REFERENCES

Martin Industries, Inc. Company Capsule. Retrieved January 6, 2003, from http://www.hoovers.com.html/

Martin Industries, Inc. Company Information. Retrieved September 26, 2002, from http://www.martiniindustries.com/companyinfo.html/

Martin Industries, Inc. Company Information. Retrieved September 26, 2002, from http://www.martinindustries.com/homepage.html/

Martin Industries, Inc. News Release (March 16, 2001). Martin Industries requests hearing to continue NASDAQ listing. Martin Industries, Inc., Florence, Alabama.

Martin Industries, Inc. News Release (April 2, 2001). Martin Industries reports results of fourth quarter and FY 2000. Martin Industries, Inc., Florence, Alabama.

Martin Industries, Inc. News Release (May 16, 2001). Martin Industries reports extension of financing and first quarter 2001 results. Martin Industries, Inc., Florence, Alabama.

Martin Industries, Inc. News Release (May 21, 2001). Martin Industries stock moves to OTCBB. Martin Industries, Inc., Florence, Alabama.

Martin Industries, Inc. News Release (August 15, 2001). Martin Industries reports second quarter and first half results. Martin Industries, Inc., Florence, Alabama.

Martin Industries, Inc. News Release (November 13, 2001). Martin Industries reports third quarter and nine-month results. Martin Industries, Inc., Florence, Alabama.

Martin Industries, Inc. News Release (December 7, 2001). Bill Hughey resigns as director of Martin Industries. Martin Industries, Inc., Florence Alabama.

Martin Industries, Inc. News Release (December 21, 2001). Martin Industries announces extension of financing. Martin Industries, Inc., Florence, Alabama.

Martin Industries, Inc. News Release (February 21, 2002). Martin Industries transfers ownership of Canadian subsidiary. Martin Industries, Inc., Florence, Alabama.

Martin Industries, Inc. News Release (April 3, 2002). Martin Industries announces extension of bank financing; loan by directors; financial results for fy 2001. Martin Industries, Inc., Florence, Alabama.

Martin Industries, Inc. News Release (May 15, 2002). Martin Industries reports first quarter results. Martin Industries, Inc., Florence, Alabama.

Martin Industries, Inc. News Release (July 3, 2002). Martin Industries announces extension of financing. Martin Industries, Inc., Florence, Alabama.

Multexlnvestor. Retrieved September 26, 2002, from http://yahoo.marketguide.com/MGI/

Turner, W. (September 26, 2002). Martin Industries says some workers may be called back. The Decatur Dally, Retrieved September 29, 2002 from http://www.decaturdaily.com/decaturdaily/news/020926/martin.shtml/

AuthorAffiliation

Linda B. Shonesy, Athens State University

lshonesy@athens.edu

Jim Kerner, Athens State University

kerneji@athens.edu

Robert D. Gulbro, Athens State University

gulbror@athens.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 10

Issue: 1

Pages: 89-97

Number of pages: 9

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Conference Proceedings, Business Case

ProQuest document ID: 192412029

Document URL: http://search.proquest.com/docview/192412029?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2003

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 69 of 100

MANAGING A PRODUCT FAILURE LAWSUIT

Author: Vollmers, A Clyde; Vollmers, Stacy M

ProQuest document link

Abstract:

During the summer of 1999, Professor John Peterson and his wife Becky had started a volunteer strategic planning process for Enriching Your Marriage Ministries. Enriching Your Marriage Ministries (EYMM) offers a 14-week marriage enhancement course that is offered in more than 90 countries through the efforts of over than 30,000 volunteer group leaders.

Professor Peterson taught Strategic planning and Marketing at large regional university located in the upper Midwest. John and Becky also owned a consulting business through which they offered strategic planning and marketing services. They specialized in serving start-up businesses or small businesses with sales under $50,000,000. In addition, they also provided strategic planning and marketing services to a wide variety of non-profit organizations and ministries.

EYMM was considering adding three new courses through their worldwide system of volunteers. The new course included 1) a pre-marriage program, 2) a child-rearing course, and 3) a personal finance course. Adding three products to an existing one-product pipeline of volunteers posed significant organizational and distribution challenges, requiring a more complex organizational structure and distribution channel. Mike Brown, the co-founder of EYMM, realized that EYMM was not currently equipped to facilitate the necessary growth; therefore strategic planning was essential to achieve successful expansion.

Over the next year, the Petersons returned to Denver several time to further the strategic planning process. And during the summer of 2000, the Petersons returned to Denver to for a sixweek stay to finalize the strategic plan and start the implementation process. During this stay, Mike and Shelia Brown, the co-founders of EYMM formally asked John and Becky to join the EYMM staff to lead the implementation process to incorporate the three new products and to pursue growth into more countries. The Petersons agreed to accept the position as full time volunteers establishing a starting date of January 1, 2001.

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns plaintiff's strategies in a product failure lawsuit. Secondary issues examined include ethics and liability. The case has a difficulty level of one. The case is designed to be taught in one class hour and is expected to require one hour of outside preparation by students.

CASE SYNOPSIS

The Petersons looked at their basement ceiling in disbelief and shock. The I-beam above their head was twisted more than 30 degrees and almost looked like the ribbing on a stick of licorice. They didn't know if their home would continue standing or if it would fall into the basement crushing their possessions and dreams.

Two years earlier, the Peterson family accepted jobs in Denver, Colorado, purchasing a patio home for $225,000. During the 15-month period after moving into the home they discovered substantial construction flaw s which had created $200,000 of damage to the home.

The Petersons contemplated their legal alternatives. They could sue the builder for failing to conform to building codes. However, he had only $3,000,000 of insurance coverage and there were already $7,000,000 of claims pending against him regarding this development. If the Petersons took this route, they had to decide if they should try to become named defendants in the development's class action, or if they should pursue their own case.

Other parties to the sales transaction also had failed to perform diligently. The sellers had apparently lied about two different but critical points on the seller's disclosure statement. The real estate agent had failed to complete reasonable due diligence. And the home inspector retained by the Petersons altered his recommendation substantially between the oral report used to close the home and the written report that arrived after closing. The Petersons had to determine which of these parties, if any, they should consider for legal action.

Lastly, the Petersons had to establish their expectations for the lawsuit because these would impact their strategy. Did they want to break even? Seek punitive damages to teach the offenders a lesson? Get as much money as possible to help them retire?

BACKGROUND

PURCHASING A HOME

John and Becky started looking for a home to purchase. On the recommendation of Mike Brown, they used Shawn Rook as a real estate agent. Shawn had completed the EYMM course with his wife and she had also worked for the ministry. During their discussions of housing needs, Shawn stressed that the one concern in the southwestern suburbs of Denver was bentonite in the soil, but he also stressed that he knew the area intimately and he would make sure they found a house with no problems.

After looking at a variety of homes, the Petersons found a beautiful one-year old townhouse just two miles from the EYMM office. It was a one-story home and except for a bathroom, the basement was unfinished.

As part of the purchase process, they retained a house inspector, Dallas Johnson, to evaluate the condition of the home. Shawn recommended Dallas and stressed that some real estate agents did not like Dallas because he tended to find too many problems that stopped sales. However, Shawn felt that inspectors were supposed to find construction problems.

During the inspection, John and Dallas visited and Dallas reported that he carried a $1,000,000 malpractice insurance policy. He also invited the Petersons to try his church when they arrived in Denver. His inspection determined that the clearance under the basement floor was less than it should be but he checked with zoning and reported that it was legal. Since the sale was conditional on the inspection and there was a five-day window to complete the inspection, a verbal report was given to the Petersons. As Dallas shared his findings, he stated that there were no serious flaws in the house, so the Petersons paid $225,000 for the property and closed in early September of 2000. Several weeks later his written report arrived, but since the Petersons already owned the house, they did not brother to read it.

THE BENTONITE ISSUE

All houses are built on land that contains different types of soils. All soils expand, contract, and move over time in response to moisture changes or freezing and thawing. However, bentonite is extremely expansive and moves more than other soils (bentonite is the clay used to make clumping cat litter).

Therefore, houses built on bentonite soil employ a unique basement and foundation design. First, a number of cement columns are sunk to bedrock, many feet below the surface. Then the foundation and basement walls are suspended on the columns. By law, there must be eight inches of air below the foundation to allow the bentonite to expand.

The basement floor consists of stringers and sheets of plywood fastened to the basement walls and supported by the necessary I-beams. And by law, there is supposed to be an 18 inch void below the floor to provide room for the bentonite to expand. If the home is wide, there is also an I-beam to support the middle of the basement floor.

HINTS OF THE PROBLEM

To provide security for the house during the four months until the Petersons moved to Denver, a couple from EYMM housesat. Upon arriving in at their new home in late December, the house sitters told the Petersons that the basement toilet was not working because it had been raised off the floor. To solve the problems, a few floorboards were removed the dirt that was pushing the toilet off the floor was removed.

After the Petersons lived in the home for a few months, they started noticing a few cracks appearing in the dry wall. And over time, more cracks appeared and the existing cracks got larger. Further, the corner beads on the sheet rock were shifting creating hairline cracks along all of the corners in some of the rooms. Cement work also showed signs of shifting as both the garage floor and the sidewalks were buckling. All of the interior and exterior doors started sticking. In fact, Becky did not have the strength to open or close the front door!

The Petersons were startled when neighbors started asking if they were joining the class action lawsuit. That is when they discovered that a class action lawsuit against the primary contractor had been filed in September 1999, almost a year before they purchased their home. During July 2001, after living in the home for about six months, the Petersons realized they had a major problem on their hands. Therefore, they called the law firm handling the suit to determine their alternatives.

They were advised that a mailing had been made to them during the four months they owned but did not occupy the home. In that mailing, they had been advised that three alternatives existed. One, if damage was significant, they could become named plaintiffs and would have an opportunity to collect a significant amount towards their damages. Two, they could remain members of the class but not become named plaintiffs, in which case they could share a small amount of the award that would probably total between $3,000 to $8,000 for each class member. And three, those individuals that felt they had no damages could opt out of the case entirely and collect nothing.

However, the closing date for becoming named plaintiffs had now passed and therefore, they could only remain in the suit as class members. The plaintiffs' attorney also suggested two courses of action. First, it appeared that the case could be delayed and if that happened, they could file an appeal to become named plaintiffs. And secondly, they were advised they could pursue the case on their own through another lawyer. If they pursued this alternative and they settled before the class action suit, their lien would be first in line against the contractor's assets.

The attorney also reported that the current claims against the contractor totaled about $7,000,000. This amount far exceeded the insurance coverage of the construction company that was reportedly about $3,000,000. Of course, the contractor did not have any assets.

THE EXTENT OF THE PROBLEM

In early 2002, a home inspection by a professional engineer revealed significant damage. He reported that inadequate drainage allowed too much water into the soil around and under the house. As the soil became saturated, the bentonite soil expanded by moving upward into the voids under the floor and inward by placing additional pressures on the exterior basement walls.

A few of the engineer's recommendations to solve the problem included: building counterfort walls to support the basement walls and keep them from clasping ($45,000); excavating under the basement floor to remove dirt that was forcing the floor upward ($65,000); removing sidewalks and garage floor to level them and to install proper drainage under them ($35,000); repairing sheet rock and other cosmetic applications ($10,000); and repairing the deck and putting columns under it ($8,000). The estimate for the total repair bill totaled $200,000.

In early, May 2002, Becky woke to a loud cracking sound in the middle of the night. She thought a wall had collapsed and got out of bed to check. The wall was still there so she went back to bed.

About a week later, another of the defendant's engineers asked to inspect the house and after a minute in the basement, called the Petersons down. They ran to the basement, and what they saw left them cold! The I-beam supporting the middle of the main floor had twisted more than 30 degrees.

The professional engineer employed by the Petersons immediately called a reconstruction company and asked them to stop by and make emergency repairs. John and Becky could only hear his end of the conservation, but after the reconstruction company said something, he replied, "you're not hearing me, I want you here now, tomorrow morning is not good enough." At that point, John and Becky were not concerned about a wall collapsing but about the entire house falling into the basement.

Emergency repairs were completed that evening and a few days later, emergency excavation of the basement started. When the basement floorboards were removed, the contractor discovered that the entire void was filled with bentonite and it was pushing the floor up. The law required an 18-inch void! The I-beam under the basement floor had been pushed up 1.25 inches off the cement columns. It had in turn driven the steel post between the floors up causing it to bend over at the top and that twisted the upper I-beam.

Two days into the project, the foreman immediately stopped work when he found raw sewage from the basement toilet. The sewer line had been crushed between the bentonite and the floor. Later the crew returned with bio-security equipment to insure they were not infected by the raw sewage. The reconstruction company also found evidence of earlier repairs to the sewer pipe and it appeared that the flooring had been removed to facilitate the repairs.

At this time, John and Becky also read the home inspection report and it contained several statements that Dallas never shared with them verbally as they purchased the house. One was a recommendation that they hire a professional engineer to inspect the basement. He knew the timeline, and it appeared that he intentionally failed to disclose material information until after the house closed.

At about the same time, the Peterson learned that a neighbor had suffered chest pains one evening. When the paramedics arrived, they could not get the front door open because of the pressure from the house moving. They tried to enter through the garage but could not get their equipment through that door into the house. To provide medical attention, the medics were forced to call the fire department to go through the front door with fire axes!

PETERSON'S DILEMMA

As John and Becky relaxed on their crooked deck drinking coffee, they recognized that they faced a very serious legal problem. A $200,000 loss would cut into their life savings significantly. They had a number of decisions to make.

1. They recognized they had been careless in several decisions. Further, they had been very slow to recognize the problem. They asked themselves, "How much of the loss is our responsibility?

2. They considered the merits of joining the class action suit as named defendants. The attorneys suggested that they thought the suit would be delayed so this seemed possible but would the judge allow the petition? The two-year statue of limitations had started running when they purchased the home early in September 2000.

3. A second alternative is bringing an independent suit. While finding a qualified attorney and paying the up-front fee for expert witnesses are issues, this alternative provides the opportunity to sue and settle before the class action suit. This possible could put the Petersons first in line for the insurance policy.

4. They also considered two sweet elderly widows who sold them the home. While they seemed so nice, the evidence suggests they lied on their sale disclosure statement. And they were legally required to disclose the lawsuit on the disclosure form and they failed to do this.

5. While Dallas, the inspector probably had not intentionally misled them; the Petersons felt that he had not disclosed a very critical recommendation during the verbal portion of his report. In fact John had called Mr. Johnson three times to specifically check on his recommendations regarding the space between the soil and the basement floor. Not once did he suggest a problem. John was very frustrated by the difference between the oral and written reports.

6. The Petersons also evaluated suing their real estate agent Shawn. He failed to deliver on his promise to avoid the benignity. And while his promise may have been only sales talk, a few quick phone calls would have revealed the problem. He failed to complete his due diligence.

7. A very dear friend recommended to the Petersons that they sue everyone and let them fight it out in court. This way, each of them would try to defend them selves by blaming the others. As a result, each of the defendants actually built the case for the plaintiffs. What potential costs might be associated with this strategy? What are the legal implications of pursuing this strategy?

8. And lastly, the Petersons thought about their goal. What was the purpose of the lawsuit? Should they attempt to get back what they had paid for the home, $225,000? House in Denver had appreciated substantially during the intervening two years and their home was now worth about $270,000. Should they focus on trying to get a fair market value for their home? Should they seek damages for the stress and anxiety that the situation had inflicted on them? Should they seek punitive damages to teach the builder a lesson?

9. For church affiliated schools only. What are the Biblical implications, if any, that the Petersons should consider as they proceed? Are Biblical instructions something that Christians should consider in their business and private lives?

AuthorAffiliation

A. Clyde Vollmers, Northwestern College

clydev@nwciowa.edu

Stacy M. Vollmers, University of St. Thomas

smvollmers@msn.net

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 10

Issue: 1

Pages: 113-118

Number of pages: 6

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Conference Proceedings, Business Case

ProQuest document ID: 192412146

Document URL: http://search.proquest.com/docview/192412146?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2003

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 70 of 100

The relation between BPR and ERP systems: A failed project

Author: Paper, David; Tingey, Kenneth B; Mok, Wai

ProQuest document link

Abstract:

This case discusses Vicro Communication's (a pseudonym) efforts to reengineer its basic business processes with the aid of data-centric enterprise software; specifically, examining Vicro management team's mistake of relying completely on the software to improve the performance of its business processes. This case describes how the reengineering effort failed miserably, even after investing hundreds of millions of dollars in software implementations. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

Vicro Communications (we use a pseudonym to mask the identity of the organization) sought to reengineer its basic business processes with the aid of data-centric enterprise software. Vicro management however made the mistake of relying completely on the software to improve the performance of its business processes. It was hoped that the software would increase information sharing, process efficiency, standardization of IT platforms, and data mining/warehousing capabilities. Management however made no attempt to rethink existing processes before embarking on a very expensive implementation ofthe software. Moreover, management made no attempt to obtain feedback or opinions from employees familiar with existing business or legacy systems prior to investing the software. Unfortunately for Vicro, the reengineering effort failed miserably even after investing hundreds of millions of dollars in software implementation. As a result, performance was not improved and the software is currently being phased out.

BACKGROUND

Vicro Communications is an international provider of products and services that help companies communicate through print and digital technologies. As a leading supplier of document formatted information, print outsourcing and data based marketing, Vicro designs, manufactures and delivers business communication products, services and solutions to customers.

Vicro operates in complementary marketplaces: Forms, Print Management and Related Products which includes Label Systems and Integrated Business Solutions including personalized direct marketing, statement printing and database management. With more than a century of service, Vicro owns and operates over 100 manufacturing and distribution/ warehousing facilities worldwide. With approximately 14,000 employees serving 47 countries, it provides leading edge, high-tech solutions that enable companies to adapt to the dynamics ofchange. Vicro is a large company with approximately 2.45 billion in 1999 and 2.26 billion dollars in 2000 revenue. The appendix contains additional financial information.

Vicro provides consulting, project management, reengineering and distribution of high volume, customized communications to its clients. It delivers personalized, easy-to-read documents intended to facilitate a positive impression on an organization's customers. Its reengineering and redesign services intend to ensure that an organization's business communications have high quality and clarity.

Equipped with the latest print and digital technologies, Vicro has become a market leader in managing critical business communications. It offers products and services that include statement/billing, cards, government noticing, policyholder and plan member communication, and database marketing.

SETTING THE STAGE

Vicro is a conservative organization in that (it purports that) it doesn't embrace "bleeding edge" technology to obtain a competitive advantage. It has been in existence for many years and depends on a good reputation with its clients and positive "word-of-mouth" to attract and maintain its client base. Hence, Vicro wants to deploy proven technology that will help satisfy and exceed customer requests and expectations. The major technologies utilized include mainframe systems to store centralized production data and serve the core applications of the business and client-server technologies for development and daily operations such as e-mail, file transfer, web access, etc.

Vicro Communications was chosen as a case study because the authors knew that it had experimented with business process reengineering (BPR) to streamline its operations and that information technology (IT) was intended as a key facilitator. Since we were interested in why BPR efforts (facilitated by IT) succeed or fail, and had contacts at Vicro, we initiated this research project. We chose the case study approach to gain a rich understanding of what really happened and why events unfolded as they did.

Business process reengineering (BPR) was used as a literature base to frame the study. The BPR literature reveals that many BPR efforts are unsuccessful. Based on this premise, it seemed a good research undertaking to explore why this is the case.

A synopsis of salient BPR literature is included as a resource for the reader. In the early 1990s, business process reengineering (BPR) came blazing onto the business stage as a savior of under performing organizations. Early advocates of BPR (Davenport, 1993; Hammer & Champy, 1993; Harrington, 1991) touted BPR as the next revolution in obtaining breakthrough performance via process improvement and process change. However, BPR has failed to live up to expectations in many organizations (Davenport, 1993; Hammer & Champy, 1993; Kotter, 1995; Bergey et al., 1999). Some ofthe reasons include adoption ofa flawed BPR strategy, inappropriate use of consultants, a workforce tied to old technologies, failure to invest in training, a legacy system out of control, IT architecture misaligned with BPR objectives, an inflexible management team, and a lack oflong-term commitment (Bergey et al., 1999). As one can see from this list, it seems obvious that many organizations failed to realize the scope and resource requirements of BPR.

Patience is another key aspect. BPR initiatives can lose momentum as managers face limited resources, slow pay-off, diminished employee enthusiasm, and increased resistance to change (Harkness et al., 1996). When short-term BPR results are not obtained, management tends to lose interest and top management is less willing to allocate new resources to the project (Paper, 1998a). One solution to this problem is targeting a BPR initiative that is 'manageable' and that will garner quick results (Paper, 1998a). Another solution is for top management to be actively involved in the effort (Kettinger et al., 1997).

Assuming that the organization understands the scope of BPR and is patient, the project still may not succeed without careful consideration of the type of process initiative. Paper (1998a) argues that the BPR initiative should be driven by a focus on the customer, strategic business issues or senior management directives. Failure to do so greatly reduces the chances for success.

IT has been touted as one of the key enablers of BPR (Davenport, 1993). However, IT can be one of the biggest obstacles if not properly aligned with business objectives (Broadbent et al., 1999). The heritage ofa legacy system can contribute greatly to BPR failure (Bergey et al., 1999). Many legacy systems are not under control because they lack proper documentation, historical measurements, and change control processes (Bergey et al., 1999; Paper, 1998b). Due to the scope and complexities inherent to a typical legacy system infrastructure, it should be treated with the same priority as the cultural and organizational structures when undergoing process change (Broadbent et al., 1999; Clark et al., 1997; Cross et al., 1997).

Although the proliferation of research articles has been abundant, research findings have provided limited explanatory power concerning the underlying reasons behind BPR failure. To address this problem, several recent in-depth case studies have appeared in the IS literature to add explanatory power to this issue (Broadbent et al., 1999; Clark et al., 1997; Cooper, 2000; Cross et al., 1997; Harkness et al., 1996; Paper, 1999). However, much more work of this type needs to be undertaken. Hence, we embarked on a case study to gain insights into the IT-enabled BPR phenomenon.

CASE DESCRIPTION

Vicro Communications was under-performing according to its board of directors and major stockholders. That is, its market share was declining, its revenues were not growing as expected, and its share price was plummeting. The stakeholders agreed that drastic improvements were needed. It thereby decided that reengineering of its basic business processes was the correct path to undertake. In addition, it was agreed that the BPR efforts would be facilitated by data-centric enterprise software. The stakeholders believed that the power of IT would complement BPR efforts. We mask the name of the vendor by calling the software high profile technology (HPT). Since Vicro is conservative in terms of IT investments, it chose enterprise software that had been in existence for over 30 years with worldwide name recognition. It was hoped that this software would facilitate automation of redesigned processes while improving overall system performance in terms of increased information sharing, process efficiency, standardization of IT platforms, and data mining/ warehousing capabilities.

Although the software investment was very significant, top management felt that it was a good decision. Top management based the software investment decision solely on vendor promises, market share of the software in its market niche, name recognition, and CEO endorsement. No effort was made to obtain opinions and/or feedback from employees at the process level or those engaged in existing systems development and maintenance. Moreover, the state of legacy systems and processes were never considered as a factor in the decision.

In short, Vicro management attempted to solve its performance problems with expensive enterprise software. There appeared to be a communication breakdown between what the stakeholders wanted and the decided course of action because the original intention of the stakeholders was to complement BPR with IT, not to depend solely on an IT solution to solve the problem. The communication breakdown extended even further. Top management mandated the plan to use the enterprise software without interactions with other managers and process workers. Furthermore, Vicro made no attempt to align business process changes with business objectives or IT objectives. The BPR literature agrees that this is one of the biggest reasons for failure.

The remainder of the case description attempts to illuminate for the reader what happened to the reengineering effort. We describe in detail how we gained and analyzed the data for the case. We adhered to a phenomenological approach. The strength of this approach is that it allows themes to emerge from the case over time. These emergent themes then become the basis for classification of the data so that it can be analyzed in an organized fashion.

Data Analysis

The phenomenological approach called for us to identify a set of patterns or themes that emerge from the data. To accomplish this we set up a series of interviews that were subsequently transcribed and analyzed. The formal interviews were conducted with our main contact. Informal interviews were conducted with several site employees over time. Each researcher iteratively combed through the transcripts for several hours to allow a set of common patterns or themes to emerge from the data. Each theme was color coded to facilitate easy identification in the transcript. The colors were negotiated and agreed upon after the first iteration. After each iteration, (we did three complete iterations), the researchers met to compare themes. After the final iteration, the researchers negotiated a set of themes or categories that are laid out later in this section technology usage, process improvement, HPT adoption, CEO mandate, enterprise integration, and resistance to change. Using these themes (which actually became categories to facilitate organization of transcribed data), the researchers were able to more easily analyze the case as pieces of the transcript naturally fell into one of the categories. Placement of the data from the transcripts into one of the themes was based on the experience and judgment ofthe researchers and verified by member checks with the main respondent.

The general theme of the formal interviews was to obtain information about the use of breakthrough technology in the BPR process. The interviews began with general questions concerning the use of computers to manage processes. The interviewee was then encouraged to divulge his opinions and ideas related to process redesign and the use of high profile technology (HPT) to facilitate or inhibit such initiatives (we use HPT to mask the name of the software vendor). The interviews were audio taped to maintain the integrity of the data and to allow proper analysis ofthe transcripts produced. The interviews were framed within the context of technology usage and process improvement to provide an easily understandable context for the interviewee and guide the discussion. Informal interviews were conducted with several employees onsite. These interviews were done on an ad-hoc basis, that is, we conducted them when we saw an opportunity to do so. Since we have close ties with Vicro, we were able to informally speak with several employees about the BPR effort and its relationship with HPT.

The initial contact that enabled entry into Vicro Communications was Ron Dickerson (the name has been masked to protect the respondent from reprisal). Ron is the National Manufacturing Systems Project Manager. He is also one ofthe key facilitators of reengineering and new technology initiatives at Vicro. Ron was the major direct player and contact in the case, but we did meet and speak with several users, project managers, and business managers on an informal basis (informal interviews). Ron is located at the headquarters of the technological communications division of Vicro. As such, this site is responsible for streamlining business systems and facilitating process reengineering across the organization.

The first contact with Ron was a phone interview on December 4, 2000, to garner preliminary information and discuss the merits ofthe research. Another phone interview was conducted on February 2,2001 to discuss the fundamentals of BPR at Vicro and some of the major obstacles to success. Preliminary phone interviews were conducted to set up a time for a formal `sit down' interview and acclimate the interviewee to the 'essence' of the topics to be discussed. The first formal interview with Ron was conducted on April 16,2001. We administered two additional formal interviews on May 29,2001, and July 1, 2001.

In the remainder of this section, we summarize (and synthesize) the analyzed data by classification theme. The information garnered from the data is based on in-depth analysis of the recorded transcripts and other data collected from telephone and e-mail interactions. Each section is a negotiated theme wherein the data summarized from the transcripts is presented and discussed. Included are pertinent segments of the respondent's comments (comments are indented) followed by an explanation of how these comments relate to the theme.

Technology Usage

This theme relates to the importance of computers at work. That is, are computers important for accomplishing tasks, activities, and objectives within delineated processes?

In my job, [computers] are essential. I live and die with my computer. If used correctly ... [computers] can help. Used incorrectly, they can be a burden. We have ... personal computers ... I have a laptop because I travel a lot and take it with me everywhere I go ... The plants have mainframes where all of their data is fed to clients ... a lot of servers that store and work our data, but the facilities in particular use mainframes ... so we have kind of both worlds [personal computers connected to servers and mainframes].

In his job, Ron cannot get by without computers. He uses them for data collection, analysis, reporting, communicating, and documenting. The nature of the business Ron manages is communication services. Hence, the business makes demands on technology in order to facilitate data collection, storage, migration, reporting, communication, etc. Computers are critical in facilitating day-to-day operations as well as data-centric problem solving. Computers are important because they store the business data of the organization. Discussions with other employees on an informal basis were consistent with Ron's assessment. Everyone we spoke with believes that computers are vital part to accomplishing daily routines and assignments.

Process Improvement

This theme relates to the relationship between BPR and data-centric enterprise technology. That is, does technology facilitate or inhibit BPR and, if so, how does it do this?

The idea [of] enterprise system[s] is that what someone does helps someone else down the line and that information is fed to them. This is not always the case. Our biggest problem was that we were not willing to change our processes ... [When we got HPT] we ended up trying to modify the software to fit our processes which was a horrible approach ... we didn't change anything and in the end we ended up bolting on hundreds of different systems ... because no one was willing to change and they wanted to keep doing the same process.

The relationship between BPR and technology was essentially nonexistent. There was no consideration for the existing process prior to implementation of HPT. No attempt was made to design new processes or redesign existing ones to match the procedures of HPT. That is, there were no synergies between the business objectives and the technology. In addition, Vicro Communications programmers were not allowed to alter the enterprise system (HPT) to match existing processes. This is not uncommon when purchasing enterprise software. Looking at a common desktop operating system can draw an analogy. In most cases, source code is proprietary and is therefore not open or shared. Vendors of these types of products often force compliance to their rules as terms of the purchase. In this case, HPT did not enable information sharing across the enterprise.

A lot of people sent up tons of red flags, but when it came down to crunch time they hada lot of pressure from up above to get this in ... [existing processes] were working reasonably well, but there was a lot of room fro improvement. They could have eliminated a lot of redundant steps. There were a lot of manual processes. Even just automating it would have helped to some degree, obviously it wouldn't have changed the process, but it would have taken maybe the manual labor out of it

HPT has what it calls `best practices,' but its best practices are many times too generic. Vicro Communications is in the communications business and its best practices should be based on the best performing organizations in its industry, not on those dictated by HPT. Top management decided to implement HPT without consideration for: 1) the existing processes, 2) how existing processes could be redesigned or 3) the match between the enterprise software's view of best practices and the best practices of the industry within which Vicro Communications operates. Process workers knew that there was a mismatch between their processes and the ones dictated by HPT. However, they were powerless to resist the mandates from top management.

HPT Adoption

This theme relates to the adoption of HPT (and the issues surrounding the adoption of the technology itself). That is, why was HPT adopted and for what purpose?

We do mailings for our clients and we bring in millions of dollars... to cover the cost of mailing... We bring that in and we just sit on it... We love to have the cash flow and the float on the cash ... but... its client funds and it's a liability. There [is] no way to handle [this] in HPT... we had a system that was written 12-13 years ago to track those funds, and then they had to be manually keyed into the GL, and system is still in place... we modernized [the program], but it is still the same system and we automated it somewhat so that instead of hand-writing journal vouchers to be keyed into HPT, now the system will automatically kick them out. Someone still has to take them now from this home-grown system and key them into HPT, because there [is] no interface.

HPT was adopted to streamline processes and standardize databases on one platform. However, the `best practices' built into the software did not match the existing processes. The result is that legacy systems are still in place to handle many processes that are unique to Vicro Communications. HPT is not flexible enough to handle customization of processes. Instead of improving process flow, HPT actually doubled activity because it is running and the legacy systems still have to operate as they have always done. The bottom-line is that HPT didn't work as planned and the postage funds example (mailings) shows that business could not have been conducted using HPT for this process.

We got into time issues ... do we want to spend all of this time investigating it and coming up with a new ... process ... or is it easier just to keep the old process and try to... bolt on to HPT [and] dump the raw numbers in? ... or instead of actually doing it with HPT, keep doing it the way we were doing it andjust dump it in there ... the training expense with HPT was unreal.

The time commitments to learn how to use the software and apply it to existing processes are prohibitive. HPT is not user friendly. It also has a tremendous learning curve. Further, `best practices' built into HPT do not align well with Vicro Communications existing processes. HPT is not a flexible software tool.

You almost have to become an expert in one part of the finance module... not only in just [one] module, but one part ofa module. The human resources for that are unreal.

There are over 20 modules in HPT. Just one part of one module takes tremendous time and practice to master and gain expertise. Further, mastery does not guarantee that the best practice will work for a given process. That is, once a module is mastered, it may not be useful for automation of a process that doesn't fit the rules of the HPT best practices. In short, HPT is not easily customizable and it forces its idea of best practices on an organization regardless of industry or business.

CEO Mandate

This theme relates to the HPT mandate called for by the CEO to implement HPT. That is, why was the mandate forced upon the organization?

The reason why HPT is so marketable is because it says 'we will force everyone.'

HPT appeared to be an ideal solution to BPR problems since the HPT vendors advocated its ability to standardize all processes on one platform. Assuming that HPT is completely implemented, it effectively forces everyone to use a standard. Thus, a non-technical CEO can easily be tempted to opt for solutions like HPT. Of course top management found out that the HPT solution was not as effective as promised.

There were time constraints from above, they had spent a lot of money on [HPT], and the board of directors was saying, we want to see some results, so just get it out there, which didn't leave time to investigate and change processes. Instead, we took the old processes and the old systems in a lot of cases [and] just took the numbers from them to dump them into HPT There was some [tension] ...between divisions. Our division does it this way and we don't want to change, we like it and the other division says, we do it this way, so there was obviously some battle of wills.

Since the boards of directors (including the CEO) have invested hundreds of millions of dollars in HPT over the past several years, they wanted results. However, top management had no real experience with BPR or data-centric enterprise software. The CEO and board may have had a good understanding of the business and industry within which Vicro Communications competes, but it did not understand the fundamentals of IT-enabled process flow redesign.

In our division, we were working on our own ERP [enterprise resource planning] system ... we had spent a number of years developing a data collection system that collected data from the production floor, employee hours, machine hours, pieces, feed of paper ... actually it was a pretty good system ... when HPT came along, they [top management] just put it on hold ... because HPT is going to replace it ... now that HPT out of the hundreds and hundreds ofpeople that were employed just for that [HPT development], they are down to 4 or 5 people. Guess what we have been doing for the last year? Updating the old system again for our division, we are updating it [legacy systems], we are back to it... we are now putting it into one of our plants.

Although the management reporting, accounting, and production systems were working pretty well, HPT was purchased and implemented to replace them. Hundreds of HPT consultants were brought onsite to implement HPT. Over time, it was found that HPT wasn't working as promised. Hence, the number of HPT consultants was drastically reduced and Vicro is actually moving back to their legacy systems and upgrading them. That is, they are trying to phase out HPT.

One major problem facing Vicro Communications over the past few years has been change of leadership. The current CEO is the third one hired in the past few years. He was therefore confronted with the HPT problems when he assumed office. He had two choices; he could continue to support HPT or he could phase it out. Considering the lack of effectiveness even with massive amounts of budgeted resources, his choice to phase it out was not unexpected by the organization.

[The CEO] would just assign someone to go [look at quality of processes]... what ended up happening is that 70%- 75% of our company is our forms division ... the HPT team ... dominated... our forms division... we ... got told, these are the practices you will use... they never did address our issues and the differences from our division vs. the other divisions... [after failure of... the stop got put on and it got stopped and we went back to our home-grown systems ... accounts payable[is] ... pretty much the sameprocess in all divisions, but other components ... manufacturing, our sales force are different... so much is different once you start looking down into the different divisions, down to those finite levels, it never got that far.

The CEO never looked at the state of the existing processes. There was never an assessment made concerning which processes were working well and which were not. Further, there was never any analysis of processes across divisions. That is, there was never any concern for differences in processing from one division to the next. Generic processes like accounts payable are pretty much the same, but most processes are very different.

The new CEO ... who came in December [2000] - his goal was $100 million in savings [and cost reductions] this year ... when you consider that we spent $280 [million] ... on HPT over about a three-year period... [we could have already met the goal in savings]... the CEO at the time [prior CEO] ... threw a bunch of money into HPT ... halfway through the HPT project, he was sent packing. And they brought in a new CEO. He was there for less than a year, but he just kept dumping money into HPT as if it were still the answer... and now., he's gone and they sent the second CEO packing and brought in their own guy - who is now slashing and cutting and chopping [with no regard for process quality].

The CEO who originally bought in HPT was fired because the software was draining money from the organization with no visible results. The next CEO was an advocate of HPT and promised that results would be forthcoming soon. However, he was fired in less than a year. The most recent CEO has embarked on a cost-cutting strategy. He doesn't seem to be concerned with process quality, that is, the cost cutting is 10% across-the-board regardless of productivity. Both formal and informal interviews revealed that this has done little to improve overall performance, but has drastically decreased employee morale.

Enterprise Integration

This theme relates to the efforts at Vicro Communications to promote enterprise information sharing, standardization of processes, increased efficiencies, and process improvement. That is, how is the environment being changed to promote these efforts?

HPT to me is a technology solution to a business problem rather than a business solution to a business problem... [The top management] solution was, lets throw a bunch of money into IT- that'll solve it. [To handle integration with so many home-grown systems] you need to pass through work ... the only thing we have is at the month-end close, we just feed up the final numbers... the only integration between divisions is accounting - we just roll the numbers up at the month end and quarter ends and year ends ... the idea was initially we need to have more integration ... if we can have everyone in a centralized shared service of purchasing ... we can have more purchasing power [and more information sharing].

HPT was brought into Vicro to facilitate enterprise integration. Top management however failed to grasp the essence of the problem. HPT is a technology solution that may be appropriate for some organizations, but it is not flexible enough to allow customization. Further, business processes should be engineered based on business objectives prior or at least in conjunction with IT implementation. It appears that HPT did nothing to facilitate enterprise integration. It actually worsened the situation because it drained $280 million dollars in cash from the organization that could have been put to better use.

The company was having legitimate problems. The forms division just wasn't profitable and it was a huge chunk of our business and we just didn't keep up with the computer age ... People just don't need pads of forms anymore to write sales and pricing... so when the business was going bad, their [top management] solution wasn't [to] reevaluate what we are doing with our forms division, it [was] lets throw a bunch of money [at the problem].

Vicro Communications produces forms for a variety of organizations. However, the organization failed to realize that `paper and pencil' forms would eventually be replaced by computer or web based forms. When profit margins for the forms division began plummeting, the solution was to invest in HPT rather than looking at rethinking the business.

As far as integration between divisions like HPT was going to give us, I would say that is completely dead. I think we'll just keep rolling up division number to get the final numbers and go from there.

Ron' division has effectively abandoned HPT and gone back to the legacy systems they used before the technology was adopted. It appears that HPT did absolutely nothing to increase enterprise integration.

Resistance to Change

This theme relates to internal resistance to change brought on by the HPT process reengineering initiative. That is, how are people reacting to the implementation of HPT as a process improvement tool?

Our biggest problem in our division [is that]... we have all of these little plants [that] ... have been allowed to do a lot of things for themselves ... So now we try to bring a system in [HPT] and we're forcing them to change some process - if we use Logan [and] we have decided that they are doing it best and try to tell the plants in Chicago and out in Maryland and Connecticut that they need to do it this way, huge resistance [occurs] and the hardest thing in our group [Logan, UT plant] is [that] we haven't had the support at the top.

HPT was forced upon all divisions without input from workers. Further, best practices are defined from a plant that is doing well, like Logan, UT. Other divisions are then told to use these `so-called' best practices, but no real support is given from top management to enforce them. Resistance to change is therefore very strong because there is no real punishment for failing to adhere to the best practices and there is no employee involvement in the effort to obtain buy-in.

No one's had the balls to tell them [other divisions] that this is how you are going to do it. They [other divisions] can stall for months and not implement it. We will get a system implemented and they [other divisions] will kind of halfway use it because no one has said this is how it is, it is not optional ... It has been very frustrating from our standpoint even within the division

Actually, no one had the power to tell other divisions what to do. Top management endorsed HPT, but did not actively pursue implementation on an enterprise-wide basis.

[When each CEO] actually really did stress it [HPT ... there was the least amount of resistance. It was said, this is it, [and] it is coming in.

When one of the three CEOs was actively pontificating that HPT was going to be the standard, resistance was less profound. The problem was that each CEO would stress HPT for a short time and then get distracted by other business. Once the CEO pressure was off, resistance to change increased dramatically.

Sometimes our division [Logan] is kind of looked on as the maverick division, but no one comes down on it because it has also been very profitable ... It is still frustrating... because we will [build] a really nice system and one plant will use it because it's the greatest thing since sliced bread and the other plant-they might just keep doing their manual process or whatever they are doing because they have been given that leeway.

Highly effective processes can be either used or mirrored in other divisions with active top management support. We can see that in this case top management was not actively involved in identifying effective processes. They just bought into HPT with the hopes that it would solve all ofthe organization's problems. Hence, effective pockets of well-designed processes and systems in support of these processes could never really impact the entire enterprise.

Even if you do change [processes] ... with HPT it [is] hard for [people] to let go of their old processes ... [people] didn't want to let go of the old numbers from the old legacy system ... (people] had worked there for 18 years and the customer's account number was this. Well, that format didn't fit HPT,so there's a new number, so what was happening was that ... in some ofthe text fields in HPT they would still type in the old number, so that they could run analysis by the old number ... You're pretty stuck, we weren't able to use the same account numbers that the customers had had forever... it was very stressful to the people ... very stressful.

Long-time veterans of the company were used to using specific customer numbers for clients. HPT was so inflexible that it would not allow the existing numbers to be input in its databases. Resistance to change was thereby greatly increased because people had internalized these numbers and couldn't understand why they had to change them. The original effort was effectively doubled because people were forced to use HPT, but actually used the old legacy numbers for reporting purposes. Hence, HPT did not really add any value to the process.

[HPT] cost a lot of money, and I said, for our division, we have the world's most expensive AP [accounts payable] system ... for our division ... we went back to our home grown system.

The sarcasm here is obvious. From the $280 million dollars spent on HPT, Ron' division is only using it for accounts payable (AP) and this is only because they must show top management that they are using the product. It is well known throughout the organization about failure of HPT and this has done little to quell resistance to change. In fact, it appears the top management cares little for employee opinion about ongoing efforts.

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

This section describes current issues facing the organization. It also develops a useful set of factors that should be useful to other organizations facing similar problems.

Current Issues

The BPR effort did not produce significant performance improvements and HPT did not live up to vendor promises. From our discussions with Ron and informal interactions with other employees, it appears that the BPR effort was not well designed or planned by top management (we don't think that there was a plan). The CEO and the board seemed to embrace BPR as something that they had to do to keep competitive rather than as a holistic method to transform the organization. That is, BPR was fashionable rather than substantive.

Ron was akey player in the BPR effort, but was not able to convince the CEO ofthe scope required for successful transformation. Effective BPR requires people to understand the process and the role technology plays in the transformation effort. It also requires a lot of capital (which will make a big dent in the operating budget). In addition, it requires a participatory commitment from top management. Top management cannot delegate BPR. It must be actively involved in its planning, design, and deployment. In Vicro's case, BPR was delegated to people like Ron. Ron is a capable executive, but only has clout within his domain. He did not have the tremendous political clout required to change organizational processes and battle resistance to change on an enterprise basis. The only parties with enough power to implement real enterprise-wide change are top managers.

In terms of the enterprise software, Ron was never consulted about the investment in HPT nor was he ever a part of the organization-wide plan to implement the software. This was counterproductive considering that Ron is responsible for many of the enterprise systems in his area. Top management trusted the software vendor to plan and implement HPT to improve performance (even though the vendor has no experience or understanding of the Vicro business model). Ron knew that this plan was flawed, but was not consulted. Moreover, many other key people at the process level were left out of the software decision. By not involving employees at all levels of the organization, resistance to change is bound to increase. At Vicro, people resisted HPT because they didn't understand its complexities and they were never consulted for their opinions about how existing processes and systems work. Hence, there was a mismatch between what the existing processes are really doing and what the encapsulated processes (best practices) within the software itself do.

HPT has a set of business processes built into the logic of the enterprise system it touts. The vendor calls these processes `best practices'. There were never any discussions (at any level within the organization) with the vendors to see if its `best practices' fit with what Vicro really wanted to accomplish. As such, HPT attempted to force its `best practices' onto the Vicro business processes it was supposed to support. Since Vicro could not practically change its customized business processes to fit HPT, performance wasn't improved and it had to resort to using its legacy systems to keep the business going. In the end, Vicro spent 280 million dollars on software that did not work and thereby didn't improve business performance. As a result, enterprise integration wasn't improved.

Currently, Vicro is only using HPT for accounts payable (AP). This means that Vicro has maybe the most expensive AP system in the world. This debacle has caused very few organizational changes except for a revolving set of CEOs (at least most of the blame was put in the right place). Since the budget for this software is approximately 10% of total revenue for year 2000, it may put Vicro's future viability in jeopardy. We got a sense from Ron that this might be the case. He (as well as many other Vicro employees) believes that they face a precarious future with the company as a result of the BPR/HPT failure.

The reasoning behind adopting HPT in the first place was to better integrate the enterprise in terms of information sharing, reporting, standardization, and effective processes (BPR). From the case we saw that HPT was a complete failure. However, from the themes we were able to garner a set of factors that can vary from one organization to the next. Hence, we believe that analyzing these factors can help other organizations better deal with enterprise BPR and system adoption success.

Contributions to BPR Literature

Further analysis of the data by classification theme enabled us to generate three "super themes"-immersion, fluidity, and top management support or mandate. One of the principles of phenomenology is to continue classification until it cannot go any further and simplify as much as possible. This process of simplification also establishes the basis for new theory. Although we do not have many themes, we wanted to see if the negotiated themes are actually part of a simpler set of even fewer themes. As such, we were able to synthesize even further down to only three themes. Technology usage and HPT adoption reveal that Vicro Communications is immersed in technology, that is, they depend on technology to do their work. Process improvement reveals that Vicro is attempting to become a more fluid organization, that is, they want information to flow freely so that it can be shared across seamless processes that effectively support business activities, and to delight their customers. CEO mandates reveal that top management was concerned with fluidity and immersion issues and wanted to do something about it. Although their choice of HPT appears to be misguided, they realized that change must be supported from the top. Resistance to change reveals that fluidity and CEO mandates are inextricably tied to how people perceive change. Process improvement is accomplished through people at the process level who do the work. They therefore need the resources and support of management to engineer and redesign processes.

In short, Vicro is immersed in technology because people need them do to their work, that is, technology is critical and important. Technology also enables people to comply to work demands. For instance, if an ad hoc report is required within two hours, the use of technology (databases, networks, computer terminals, and printers) allows people to comply with demands. Fluidity relates to responsiveness, effectiveness, knowledge sharing, and knowledge capture. The objective of process improvement is to improve responsiveness to customers by designing and redesigning effective processes. To improve responsiveness to customers processes must enable effective knowledge sharing and capture, reduce unnecessary costs, and save time. In addition, enterprise systems must work in alignment with business processes. Database technology, networks, software, operating systems, and desktops are the main technology components in abusiness. Each ofthese components need to be streamlined in a seamless manner, that is, desktops should be able to talk to databases through networks without concern for hardware, software, and operating system platforms.

Analysis ofthe Vicro case enabled the researchers to generate a set of themes and, from these themes, a set of "super themes". The BPR literature is thus enhanced because we now have evidence to support the importance of immersion, fluidity, and CEO mandate. Although the idea of CEO mandate has appeared in the literature, immersion and fluidity are new concepts at least with respect to IT-enabled BPR. Moreover, the BPR literature does not really consider the role of enterprise software in BPR (with few exceptions). Since enterprise software issues are more relevant today than in the past as many organizations buy-into HPT and other vendors, we believe that this case adds significantly to this area of research.

Summary

Vicro Communications made no attempt to analyze existing processes and systems to see if they were fluid. That is, they failed to obtain feedback and opinions from people along the process path and legacy systems experts. From the data, it was apparent that many people at Vicro were uncomfortable with HPT and BPR. Many of these same people tried to communicate to management what they thought was going wrong with planning and implementation, but were never listened to or asked for their opinions. We believe that this is the main reason for failure. Every organization has experts with legacy systems and business processes. Both systems and processes must be understood on an enterprise level if change is going to be successful. Hence, people that know the business and systems should be carefully consulted before enterprise change and software is undertaken. Vicro is immersed in technology, but fluidity is a major obstacle and probably the major reason for the failure of HPT. Business processes are not streamlined and efficient at this point so automating them with software will only speed up bad processes. Vicro went one step further. They didn't try to automate existing processes; they forced HPT processes onto a business that is too customized to client needs to work.

Through what we learned from this case study, we hope to shed light on what can happen when decision makers rely on outside vendor promises to improve performance without regard for their employees' knowledge and a comprehensive understanding of the existing state of their business processes. In the Vicro case, analysis of the data suggests that the software investment decision was paramount to the failure of the effort. Vendor promises were not kept and Vicro was stuck "holding the bag". In short, the reengineering effort failed miserably even after investing hundreds of millions of dollars in software implementation. As a result, performance was not improved and the software is being phased out.

References

FURTHER READING

References

Amabile, T.M. (1997). Motivating Creativity in Organizations: On Doing What You Love and Loving What You Do. California Management Review, 1, 39-58.

Ambrosini, V. & Bowman, C. (2001). Tacit Knowledge: Some Suggestions for Operationalization. Journal ofManagement Studies, 38,6,811-829.

Ballou, R.H. (1995). Reengineering at American Express: The Travel Services Group's Work in Process. Interfaces, 25, 3, 22-29.

Bartlett, C. A. & Ghoshal, S. (1994). Changing the Role of Top Management: Beyond Strategy to Purpose. Harvard Business Review, 72, 6, 79-88.

Beer, M., Eisenstat, R. A., & Spector, B. (1990). Why Change Programs Don't Produce Change. Harvard Business Review, 68,6,158-166.

References

Bergey, J., Smith, D., Tiley, S., Weiderman, N., & Woods, S. (1999). Why Reengineering Projects Fail. Carnegie Mellon Software Engineering Institute-Product Line Practice Initiative, 1-30.

Guba, S., Kettinger, W. J., & Teng, J. T. C. (1993). Business Process Reengineering: Building a Comprehensive Methodology. Information Systems Management, Summer, 10,1322.

References

Khalil, O.E.M. (1997). Implications for the Role ofInformation Systems ina Business Process Reengineering Environment. Information Resources Management Journal, 10, 1,3643.

Kim, C. (1996). A Comprehensive Methodology for Business Process Reengineering. Journal of Computer Information Systems, Fall, 36, 53-57.

Nemeth, C. J. (1997). Managing Innovation: When Less is More. California Management Review, 40,1,59-74.

References

Orlikowski, W. J. &Hofman, J. D. (1997) Improvisational Model for Change Management: The Case of Groupware Technologies. Sloan Management Review, 38,2, 11-22.

Pfeffer, J. (1998). Seven Principles of Successful Organizations. California Management Review, 2,40,96-124.

References

REFERENCES

References

Bergey, J., Smith, D., Tiley, S., Weiderman, N., & Woods, S. (1999). Why Reengineering Projects Fail. Carnegie Mellon Software Engineering Institute-Product Line Practice Initiative, 1-30.

Broadbent, M., Weill, P., & St. Claire, D. (1999). The Implications of Information Technology Infrastructure for Business Process Redesign. MIS Quarterly, 23(2), 159-182. Clark, C.E., Cavanaugh, N.C., Brown, C.V., & Sambamurthy, V. (1997). Building Change

Readiness Capabilities in the IS Organization: Insights from the Bell Atlantic Experience. MIS Quarterly, 21(4),425-454.

Cooper, R. (2000). Information Technology Development Creativity: A Case Study of Attempted Radical Change. MIS Quarterly, 24(2), 245-276.

Cross, J., Earl, M. J., & Sampler, J. L. (1997). Transformation of the IT Function at British Petroleum. MIS Quarterly, 21(4), 401-423.

Davenport, T. H. (1993). Process Innovation: Reengineering Work Through Information Technology. Boston, MA: Harvard Business School Press.

Hammer, M. & Champy, J. (1993). Reengineering the Corporation. New York: Harper Collins Books.

References

Harkness, W.L., Kettinger, W.J., & Segars, A.H. (1996). Sustaining Process Improvement and Innovation in the Information Services Function: Lessons Learned at the Bose Corporation. MIS Quarterly, 20(3), 349-368.

Harrington, H. J. (1991). Business Process Improvement: The Breakthrough Strategy for Total Quality, Productivity, and Competitiveness. New York: McGraw-Hill. Kettinger, W.J., Teng, J.T.C., & Guha, S. (1997). Business Process Change: A Study of

Methodologies, Techniques, and Tools. MIS Quarterly, 21(1), 55-81.

Kotter, J.P. (1995). Leading Change: Why Transformation Efforts Fail. Harvard Business Review, March-April, 73,59-67.

Paper, D. (1998a). BPR: Creating the Conditions for Success. Long Range Planning, 31(3), 426-435.

Paper, D. (1998b). Identifying Critical Factors for Successful BPR: An Episode atB arne tt Bank. Failure & Lessons Learned in Information Technology Management, 2(3),107115.

Paper, D. (1999). The Enterprise Transformation Paradigm: The Case of Honeywell's Industrial Automation and Control Unit. Journal of Information Technology Cases and Applications, 1(1), 4-23.

AuthorAffiliation

David Paper

Utah State University, USA

AuthorAffiliation

Kenneth B. Tingey

Utah State University, USA

AuthorAffiliation

Wai Mok

University of Alabama in Huntsville, USA

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

David Paper is an associate professor at Utah State University in the Business Information Systems department, USA. He has several refereed publications appearing in journals such as Journal of Information Technology Cases and Applications, Communica

AuthorAffiliation

tions of the AIS, Long Range Planning, Creativity and Innovation, Accounting Management and Information Technologies, Journal of Managerial Issues, Business Process Management Journal, Journal of Computer Information Systems, Journal of Database Management and Information Strategy: The Executive's Journal. He has worked for Texas Instruments, DLS, Inc., and the Phoenix Small Business Administration. He has consulted with the Utah Department of Transportation and is currently consulting with the Space Dynamics Laboratory in Logan, Utah, USA. His teaching and research interests include process management, database management, e-commerce, business process reengineering, and organizational transformation.

AuthorAffiliation

Kenneth B. Tingey is a doctoral student at Utah State University in the Business Information Systems Department, USA. He has more than 25 years of experience in industry, working as a venture capital fund founder and general partner, entrepreneur, general and line manager, and executive staff assistant. He is founder, chairman, and CEO of OpenNet Corporation, an enterprise software developer. His academic credentials include a master's degree in Pacific International Affairs from the University of California, San Diego, a Master ofBusiness Administration from Brigham Young University, a Bachelor of Arts in Music Education from Utah State University, and a Baccalaureate Major in Accounting from Brigham Young University. His professional affiliations include Strategic Information Division of Ziff-Davis Publishing Company, the Ventana Growth Fund, and Sunrider International. In addition, he has conducted many business consulting and systems development projects on contract with direct selling companies, software development companies, and government contractors. Mr. Tingey has engaged in many enterprise-level systems development projects with special emphasis on requirements of supporting the mission of institutions by means of information processing models and information technology tools. Mr. Tingey is the author of Dual Control, a book on the need to support top-down policies and horizontal processes in a unified system environment.

AuthorAffiliation

Wai Yin Mok is an assistant professor of Information Systems at the University of Alabama in Huntsville, USA. From 1999 to 2001, he was an assistant professor of Information Systems at Utah State University. From 1996 to 1999, he was an assistant professor of Computer Science at the University of Akron in Ohio. He was an assistant lecturer of Computing at Hong Kong Polytechnic from October 1992 to August 1993. His papers appear in journals such as ACM Transactions on Database Systems, IEEE Transactions on Knowledge & Data Engineering, Journal of Database Management, and Data & Knowledge Engineering, and Information Processing Letters. He serves on the editorial review board of the Journal of Database Management. He received a BS, an MS, and a PhD in Computer Science from Brigham Young University in 1990,1992, and 1996 respectively.

Appendix

APPENDIX

Appendix

Vicro Financials

Subject: Business process reengineering; Studies; Enterprise resource planning; Software packages

Classification: 9130: Experimental/theoretical; 5240: Software & systems

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 45-62

Number of pages: 18

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: tables references

ProQuest document ID: 198659538

Document URL: http://search.proquest.com/docview/198659538?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 71 of 100

Implementing a data mining solution for an automobile insurance company: Reconciling theoretical benefits with practical considerations

Author: Yeo, Ai Cheo; Smith, Kate A

ProQuest document link

Abstract:

This case describes an insurance company investigation into the benefits of data mining for an anonymous Australian automobile insurance company. Although the investigation was able to demonstrate quantitative benefits of adopting a data mining approach, there are many practical issues that need to be resolved before the data mining approach can be implemented. This case provides insights into the decision-making process that is involved in exploring emerging technologies. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

The insurance company in this case study operates in a highly competitive environment. In recent years it has explored data mining as a means of extracting valuable information from its huge databases in order to improve decision making and capitalise on the investment in business data. This case study describes an investigation into the benefits of data mining for an anonymous Australian automobile insurance company.1 Although the investigation was able to demonstrate quantitative benefits of adopting a data mining approach, there are many practical issues that need to be resolved before the data mining approach can be implemented.

BACKGROUND

Melbourne Automobile Insurers (MAI) is a leading car insurer in Australia. It was established in the early 1970s. Today it has more than 40 branches and has nearly two million policy holders with an underwriting profit of over $50 million.

MAI, like all insurance companies, operates in a highly competitive environment. In recent years, there has been a proliferation of non-traditional retailers of car insurance that has caused great concern for MAI. Banks and finance companies are now joined by manufacturers and distributors of cars in the marketing of car insurance. Many of MAI's competitors have been intent on maintaining their market share and have kept premium rises to a minimum, thereby discouraging their policy holders from shopping around for a better price. The competitive environment extends beyond premium pricing issues to include a range of value-added products and incentives such as "liftetime rating 1" and discounts on multiple policies.

The Australian general insurance market went through a turbulent year in 2000. General business issues such as Y2K, the implementation of a new tax system, including the introduction of a goods and services tax, and corporate law reform program (CLERP) consumed a great deal of non-productive time and resources.

SETTING THE STAGE

In 1999, MAI established a SAS data warehouse. Periodically, data was extracted from their operational system and deposited into the data warehouse. The variables extracted included:

Policy holders' characteristics such as age, gender

Vehicle characteristics such as age, category, area in which vehicle was garaged

Policy details such as sum insured, premium, rating, number ofyears policy held, excess

The Information System Department is responsible for maintaining the data warehouse. The Business Analysis Department extract data from the data warehouse for periodic reporting and as well as statistical analysis. The statistical analysis is done using Excel spreadsheets and on-line analytical processing (OLAP).

MAI realised that their current method of premium pricing has its limitations. With increased competition, MAI knew that they needed better tools to analyse data in their data warehouse to gain competitive advantage. They hoped to obtain a greater leverage on their investment in the data warehouse.

In the meantime, Jack Pragg, the account manager of SAS, had been trying to convince MAI that the next logical step to take is to embark on data mining and that the SAS data mining suite Enterprise Miner was the most appropriate tool for them. According to SAS "the Enterprise Miner is the first and only data mining solution that addresses the entire data mining process-all through an intuitive point-and-click graphical user interface (GUI). Combined with SAS data warehousing and OLAP technologies, it creates a synergistic, endto-end solution that addresses the full spectrum of knowledge discovery."

MAI did not have data mining expertise and wanted an independent opinion before they invested in the SAS Enterprise Miner. The CEO of MAI, Ron Taylor, approached his former university lecturer, Professor Rob Willis, for help. Rob was at the time the Head of School of Business Systems at Monash University. Monash University has a Data Mining Group Research Group headed by Dr. Kate Smith. The aims of the group are to provide advanced research and training in data mining for business, government and industry.

Rob together with Kate conducted a proof-of-concept study to determine whether there was scope for data mining. In determining the optimal pricing of policies there was a need to find a balance between profitability and growth and retention. The study looked at the sub-problems of customer retention classification and claim cost modelling. A neural network was developed to predict the likelihood ofa policy being renewed or terminated and clustering was able to identify groups with high cost ratios. The initial study demonstrated the potential of data mining.

The case that follows describes the subsequent three-year project: its aims, outcomes, and the implementation issues currently facing the organization. The main players in the case, and their respective roles, are summarised in Table 1.

CASE DESCRIPTION

MAI decided to engage Monash University in a three-year extended study which aimed to produce quantitative evidence of the benefits of data mining. Kate had a prospective PhD student, Angie Young, who was interested in data mining and was looking for sponsorship. MAI agreed to provide a scholarship for Angie to carry out the data mining research at MAI under the supervision of Kate.

Mark Brown, the Business Analysis manager, was in charge of co-ordinating the data mining project. He had worked in the company for more than twenty years and he knew the business very well. He was also familiar with the data and had knowledge of the processes behind the data collection. He was able to determine useful questions for analysis and select potentially relevant data to answer these questions.

MAI is driven by two main concerns: the need to return a profit to their shareholders and investors, and the need to achieve market growth and retain a certain level of market share. These two goals are seen as imperatives to success, but are often conflicting. Premiums play a critical role in enabling MAI to find a balance between these two goals. The challenge is to set premiums so that expected claims are covered and a certain profitability is achieved, yet not to set premiums so high that market share is jeopardised as consumers exercise their right to choose their insurer. In other words, MAI has to balance profitability and market share when setting premiums. This involves combining the results of three main tasks: risk classification, prediction of claim cost and price sensitivity analysis (see Figure 1). The initial study showed that data mining could be of benefit to premium setting, but the three-year extended study needed to show the quantitative benefits of the approach.

In the automobile insurance industry, companies adopt "class ratings" to determine premiums. Policy holders are assigned to various risk groups based on factors which are considered predictors of claim cost and premiums are charged based on the risk group to which they belong. An insurance company has to discriminate between good and bad risks so that they can engage in selective marketing, otherwise they may end up losing good customers due to uncompetitive premiums that are inadequate to compensate for the risks of customers of dubious quality. "Bad risks drive out good risks," when the same premium is charged (van fielder, 1982). Another reason for discriminating between good and bad risks is so that premiums can be set equitably. The premium should be fair in the sense that each policy holder, or group of policy holders, should be charged a rate which reflects the policy holder's expectation of loss (Athearn, 1969; Denenberg, 1974).

Having classified policy holders into various risk groups, an insurance company has to decide on an appropriate method for predicting claim costs within each group. Currently MAI uses a point system. Each rating factor is scaled such that the higher the risk, the higher the points. For each risk factor, the policy holder will be assigned points. These points are aggregated for all factors and premium is charged accordingly. The higher the aggregated points, the higher the premium. The points system has some limitations however, and these will be illustrated with an example. For simplicity, we assume that points are assigned to policy holders based on only two factors: the policy holder's age and vehicle age (see Table 2). The aggregated points for the various risk groups are shown in Table 3. Continuing the illustrative example, Table 4 shows an example ofwhat the cost ratio (claim cost/premium) matrix may look like for the various risk groups (claim cost and premium information have been intentionally omitted for brevity).

Suppose the company is not happy with the cost ratio of 94% (policy holder age group D and vehicle age group E) and would like to increase the premium to cover the high claim cost of the risk group. Since the premium is calculated based on points, the company would have to either increase the points of policy holder age group D or vehicle age group E. However, this would this would increase the points for other cells in the row or column even though the company may be satisfied with their cost ratio. Ideally, premium should be charged based on a reflection of actual risk. We could change the points for that particular cell in isolation, but if many variables are considered this point system becomes very large and complicated

In determining optimal premiums, MAI has to be mindful of the effect of changes in premiums on retention rates. In a competitive environment, setting the premium at too high a level can lead to a loss in market share. The broad framework shown in Figure 1 was used in the initial study to guide the data mining tasks, and now became the basis of the three-year investigation.

A business analyst, Sophie Green, was recruited to carry out data mining. Sophie's background was in statistics and she was not familiar with data mining tools. Although she attended an introductory course in data mining run by Monash University shortly after she joined MAI, she found it difficult to use the Enterprise Miner. She did not know which tools were appropriate for analysis. She found herself going back to statistical analysis she was familiar with using an Excel spreadsheet.

Angie was not familiar with many of the terms of the insurance industry. She had to learn about the business before she could begin any data mining. She spent a substantial amount of time understanding the business. Mark was a great help in this respect. She also required the help of Mark to interpret intermediate results of the analysis. At times they found that the results indicated that there were problems with the data used for analysis and it was back to the drawing board.

Charles Long, a system analyst, was asked to extract data sets from the data warehouse. He knew what data was available, exactly where the data could be found and how different sources could be combined. Charles extracted two data sets (training and test sets) consisting of 29 variables and 12 months of comprehensive motor insurance policies of one of the Australian states, New South Wales. The training set consisted of 146,326 policies with due dates from 1 January to 31 December 1998 while the test set consisted of 186,658 policies with due dates from 1 July 1998 to 30 June 1999. Restricted by the availability of data at the time of collection, the period of overlap was to enable comparison of exposure and retention rates over a one-year period and to ensure that sample sizes are sufficiently large. Forty percent of the policies in the test set were new policies. The training set was used to train the models while the test set was used to evaluate the results.

Charles had to convert some of the variables into a format required for data mining. For example, age of policy holders and vehicles were computed based on date of birth and year of manufacture respectively. While Angie was obtaining some descriptive statistics of the data sets to familiarise herself with the data, she discovered some errors. For example, a few of the policy holders had an age of 999. She removed records with errors from the data sets. She also noticed that there were several types of excess and she aggregated the various amounts.

Nine months after the project began, Sophie resigned. Andrew Boyd was recruited to take her place but also resigned after a month. Angie found herself carrying out the project on her own. Although it was agreed that Angie was to make monthly presentations to the management of MAI on the progress of her research, it turned out that during her three years she only managed four presentations. It was difficult for the MAI management team (some based in Melbourne and others in Sydney) to find a common time slot for the presentations.

Angie met with Kate weekly to report on the progress of her research. With the help of Kate she was able to decide which data mining algorithm or tool was most suited to address the various research questions and interpret the results. At the end ofher three-year research at MAI, Angie proposed a detailed data mining framework (see Figure 2) to determine the premiums to charge automobile insurance policy holders in order to arrive at an optimal portfolio.

The framework, which is a holistic approach, consists of three main components:

The first component involves identifying risk classifications and predicting claim costs using clustering. The total premiums charged mustbe sufficient to coverall claims made against the policies and return a desired level of profit.

The second component involves price sensitivity analysis using neural networks. Premiums cannot be set at too high a level as customers may terminate their policies thus affecting market share.

The third component combines the results of the first two components to provide information on the impact of premiums on profitability and market share. The optimal mix of premiums to achieve a pre-specified termination rate while maximising profit is determined by integer programming.

The first component ofthe data mining framework involves identifying risk classifications and predicting claim costs. In designing a risk classification structure, insurance companies attempt to maximise homogeneity within each risk group and heterogeneity between the risk groups. This can be achieved through clustering. The k-means clustering model was used to classify polices. The k-means clustering model performs disjoint cluster analysis on the basis of Euclidean distances computed from variables and seeds that are generated and updated by k-means algorithm (Anderberg, 1973; MacQueen, 1967). Least squares is the clustering criterion used to measure the distance between data observations and seeds. Using the least squares clustering criterion, the sum of the squared distances of observations to the cluster means is minimised. Thirteen variables were used for clustering. They were:

Policy holder's age

Policy holder's gender

Area in which the vehicle was garaged

Rating of policy holder

Years on current rating

Years on rating one

Number of years policy held

Category of vehicle

Sum insured

Total excess

Vehicle use

Vehicle age

Whether or not the vehicle is under finance

Having classified the policy holders into risk groups, the price sensitivity within each cluster was examined; the second component ofthe data mining framework. Neural networks were trained to classify policy holders into those who are likely to terminate their policies and those who are likely to renew. Neural networks are ideal tools for solving this problem due to their proven ability to learn to distinguish between classes, and to generalise their learning to unseen data (Bigus, 1996; Han& Kamber, 2001; Smith, 1999). A multilayered feedforward neural network was constructed for each of the clusters with 25 inputs, 20 hidden neurons and one output neuron (whether the policy holder renews or terminates to contract). The inputs consist of the thirteen variables used for risk classification plus the following premium and sum insured variables:

"old" premium (premium paid in the previous period)

"new" premium (premium indicated in renewal notice)

"old" sum insured (sum insured in the previous period) which was also included as input in the clustering model

"new" sum insured (sum insured indicated in renewal notice)

change in premium ("new" premium-"old" premium)

change in sum insured ("new" sum insured-"old" sum insured)

percentage change in premium

percentage change in sum insured

ratio of "old" premium to "old" sum insured

ratio of "new" premium to "new" sum insured

whether there is a change in rating

whether there is a change in postcode

whether there is a change in vehicle

Sensitivity analysis was then performed on the neural networks to determine the effect of premium changes on termination rate of each cluster. Separate data sets were created from each cluster with all variables remaining unchanged except for new premium and related variables. These data sets were scored against the trained neural networks to determine the predicted termination rates under variations of premium.

The third component of the data mining framework combines the results of the first two components to provide information on the impact of premiums on profitability and market share. The problem of determining optimal premium is akin to portfolio optimisation where an investor strives to find a balance between risk and return across their portfolio of investments (Markowitz, 1952). In portfolio theory, an asset has a given rate of return and risk. In the insurance optimisation problem, the termination rate and the profit earned from each cluster depend on the premium that is charged. Integer programming was proposed to determine the premium to charge for each cluster to maximise total profit for a given overall termination rate. The termination rates of individual clusters may vary to maximise the profit but the overall termination rate for the portfolio will be constrained by a user-defined parameter (Yeo et al., 2002)

The optimisation problem was solved for varying termination rates. The results are shown in Figure 3. The curve is similar to the efficient frontier of portfolio optimisation. It is a smooth non-decreasing curve that gives the best possible trade-off between profit and termination rate. If MAI selects an acceptable termination rate, the model will then determine a portfolio (mix of premiums to charge various risk groups) that maximizes profit. If MAI were to maintain its current termination rate of 11%, profits could be increased by changing the mix of premiums.

Thus Angie was able to provide MAI with clear evidence of the quantitative benefits of adopting a data mining approach to premium pricing.

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANISATION

MAI were quite excited about the outcome of Angie's research. The MAI management was in the process of reviewing their current point system of premium pricing and they agreed that it needed to be revamped. Angie's results had shown that strong quantitative benefits were theoretically possible if the proposed data mining solution was adopted.

However there were several issues that needed to be resolved before MAI could begin to implement the data mining approach. Firstly the approach needs to be validated; for the various Australian states. The research was based on only one of the Australian states and there were differences in the premium pricing for the various states. Should the approach be validated using real cases or historical data? Also, the data mining framework does not model the effect of competition. Can the approach be implemented if it has only considered the dynamics of MAI in isolation from their competitors? How can competition be factored into the framework? If it is mathematically too difficult to consider the effect of competition, how should MAI proceed?

MAI do not have any data mining expertise and none of the MAI staff were very involved in the Angie's research project. It is therefore difficult to transfer the skills and knowledge acquired during the project to MAI staff to carry out the validation and implementation. MAI realise that data mining is more than just acquiring the software. Data mining expertise is required to decide which algorithm is most suited for a problem and to interpret the results. Should they recruit people with the data mining skills or should they train the current business analysts to do future data mining work?

Implementing the proposed data mining framework will also require significant business process re-engineering. How will staff react to the changes? How can resistance to change be managed? How are they going to integrate data mining into the existing information system infrastructures?

Since the data mining approach is "modular", the pricing manager, Ryan Lee, suggested implementing the data mining approach in phases. They could use the MAI's existing risk groups to replace the clustering stage of component one, and use neural networks to model the price sensitivity ofthese risk groups. If the neural networks proved to be successful, they could then look at implementing the integerprograming for determining the optimal premium to charge for each risk group. The final phase would be to look at implementing the clustering method of risk classification.

Clearly there are many practical considerations that MAI need to resolve before the proposed data mining approach can be adopted. Some of these are related to personnel and change management, while others are more technological considerations. Until these issues have been resolved, the project has only shown the theoretical benefits that could be obtained.

Footnote

ENDNOTE

Footnote

The name of the company and the names of its employees have been changed to protect their anonymity.

References

REFERENCES

References

Anderberg, M. (1973). Cluster analysis for applications. Academic Press.

Athearn, J. L. (1969). Risk and Insurance (2nd ed.). New York: Appleton-Century-Crafts, Educational Division, Meredith Corporation.

Bigus, J. P. (1996). Data mining with neural networks : solving business problems-from application development to decision support. New York: McGraw-Hill.

Denenberg, H. S. (1974). Riskand insurance (2nd ed.). Englewood Cliffs, NJ: Prentice-Hall.

Han, J. & Kamber, M. (2001). Data mining: Concepts and techniques. Morgan Kaufmann Publishers.

References

MacQueen, J. (1967). Some methods for classification and analysis of multivariate observations. Paper presented at the Proceedings of the 5th Berkeley Symposium on Mathematical Statistics and Probability.

Markowitz, H. (1952). Portfolio selection. Journal ofFinance, 7,77-91.

Smith, K. A. (1999). Introduction to neural networks and data mining for business applications. Melbourne: Eruditions Publishing.

van Helder, H. (1982). Planning and control in insurance. European Journal of Operational Research, 9(2),105-113.

Yeo, A., Smith, K., Willis, R., & Brooks, M. (Accepted for publication). A Mathematical Programming Approach to Optimise Insurance Premium Pricing Within a Data Mining Framework. Journal of the Operational Research Society.

AuthorAffiliation

Ai Cheo Yeo

Monash University, Australia

AuthorAffiliation

Kate A. Smith

Monash University, Australia

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Ai Cheo Yeo became a Fellow Member of The Association of Chartered Certified Accountants in 1990. She obtained her Master of Business Systems in 1998. She has worked

AuthorAffiliation

as an auditor in the Singapore Auditor-General's Office, a bank and an oil company. She was also a lecturer with the Business Administration Department of the Singapore Polytechnic. Ai Cheo is currently a lecturer with the School of Business Systems, Monash University, Australia. She has recently completed her PhD focusing on Data Mining in the Automobile Insurance Industry. She has published several refereed journal papers and book chapters on this topic.

AuthorAffiliation

Kate A. Smith is an associate professor in the School of Business Systems, Monash University, Australia, where she also fulfills the roles of deputy head, director of research, and director of the Data Mining Research Group. She holds a BSc(Hons) in Mathematics and a PhD in Electrical Engineering, both from the University of Melbourne, Australia. Kate has published two books on neural networks in business, and more than 100 journal and international conference papers in the areas of neural networks, combinatorial optimization, and data mining. She is a member of the organizing committee for several international data mining and neural network conferences, and regularly acts as a consultant to industry in these areas.

Subject: Studies; Automobile insurance; Data mining; Information technology; Advantages

Location: Australia

Classification: 9130: Experimental/theoretical; 5220: Information technology management; 8220: Property & casualty insurance; 9179: Asia & the Pacific

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 63-73

Number of pages: 11

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references graphs tables

ProQuest document ID: 198721487

Document URL: http://search.proquest.com/docview/198721487?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 72 of 100

Heineken USA: Reengineering distribution with HOPS

Author: Gyeung-min, Kim; Price, John

ProQuest document link

Abstract:

This case describes Heineken USA's attempt to be more responsive to market demand fluctuation. Heineken USA launched its new internet-based system called HOPS (Heineken Operational Planning System) to allow the parent company to produce the beer closer to the time when they need to deliver it, so the customer receives a fresher product. The new system enables Heineken USA to achieve 50% reduction in the lead-time from order to delivery and 10% increase in sales. This case discusses how IS can dramatically improve customer relationships and cut costs. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

To facilitate the parent company's push to gain market share, Heineken USA needed to be more responsive to market demand fluctuation. Because ofthe long lead-time between order and delivery, they found that responding to marketplace changes in a timely fashion was becoming increasingly difficult. In the meantime, major competitors such as Anheuser Busch were responding to consumer demands for fresher products by providing freshness label dating. Heineken USA launched its new Internet based system called Heineken Operational Planning System (HOPS) to allow the parent company to produce the beer closer to the time when they need to deliver it, so the customer receives a fresher product. The new system enables Heineken USA to achieve 50% reduction in the lead-time from order to delivery and 10% increase in sales.

BACKGROUND

The brewery that would later become Heineken N. V. was founded in 1592 in Amsterdam, The Netherlands. Gerard Adriaan Heineken produced the first beer under the Heineken brand name in 1863. The company grew steadily and in 1931 they embarked upon their first international operation, a joint venture with Malaysian Breweries Limited in Singapore. That year also saw the first Heineken exported to the United States. Heineken N. V. is currently the world's second largest brewer, trailing only U.S. based Anheuser-Busch. The company has ownership interests in more than 110 breweries and its product is available in over 170 countries worldwide. The European market, where Heineken is the leading brand, accounts for more than two-thirds of total sales. Heineken was the leading imported beer in the United States until 1998 when it lost that status to Grupo Modelo's Corona.

Heineken USA began operations in January 1995 as a subsidiary of Heineken N.V. In the past, Heineken was imported to the United States through private distributors under licensing agreement. When Heineken introduced its beer to the American market, there were no more than 30 import brands present. However, by the eighties, this number has increased to more than 300. Fierce competition from the imported segment contributed to the decline in Heineken sales. Heineken N. V. bought back the distribution rights and established a wholly owned subsidiary in White Plains, N.Y. With the establishment of the subsidiary, the parent company was planning a new market push in the United States (Roberts, 1999).

New York headquarters houses executive administration, finance, operations, sales and marketing personnel, and the data center. The data center is responsible for running the dayto-day operations of the U.S. business. Heineken USA has offices in Los Angeles and Atlanta as well. Since brand's European heritage is of essential importance when it comes to the positioning of the Heineken brand in the U. S, all U.S. Heineken beers are brewed and bottled in The Netherlands and shipped via sea to various demand points in the U.S. When distributors place orders, the shipment leaves the closest demand point and is quickly trucked to the distributor. Distributors then deliver the beer to its final destination at restaurants, bars and stores^sup 2^ (see Exhibit 1 for Beer Supply Chain).

SETTING THE STAGE

In every supply chain, demand forecasting drives other supply chain decisions such as inventory, production scheduling, and material requirements. Demand is forecasted based on order history of the immediate customers in the supply chain. When downstream member places an order, the upstream member processes that information as a signal about future product demand. Thereby the upstream member readjusts its demand forecasts and place orders to its supplier (Lee et al., 1997a; 1997b). As planning time (i.e., time taken for initial forecast and forecast adjustment) lengthens, sales forecast that guide the order no longer reflects current market condition (Stalk, 1988). The consequence of not being able to reflect market condition could be either excessive inventory or poor customer service due to unavailable products. Collecting demand data in the most effective and economical method possible and sharing that information with supply chain partners are critical for supply chain management (Smith & Wintermyer, 2000).

Long lead-time from order to delivery prohibits companies from being flexible and adapting quickly to market demand fluctuation. Innovative companies in different industries improve their supply chain performance by reducing the lead-time from order to delivery. As businesses recognize the importance ofthe supply chain performance, the focus on business process reengineering is extended to the inter-business process reengineering (IBPR). Also called as business network redesign (Venkatraman, 1994), IBPR represents the redesign of the nature of exchange among supply chain partners through effective deployment of IT capabilities.

As recently as 1996, distributors and sales representatives from Heineken USA would meet together to plan out orders three months ahead of delivery. It was a daunting task for them to predict the factors that would affect the product sales such as weather, special promotions, and local demand fluctuations in advance. This time consuming effort took up to three days per month to accomplish. Once an order was agreed upon, the district sales managers would fax the orders to Heineken USA headquarters, which in turn would send them to the brewery in Netherlands. Lead-time from order to delivery averaged 10 to 12 weeks (Weston, 1997), which is unacceptable for a company looking to become more flexible and adapt more quickly to market demand fluctuations (see Exhibit 2 for Old Distribution Process).

CASE DESCRIPTION

The Push for a New Business Model

To facilitate the parent company's move to increase market share in the United States, Management at Heineken USA knew they had to develop a new way of doing business. They needed to find a way to reduce the lead-time between order and delivery to their distributors. The current process was very labor intensive and involved almost no central planning. Orders would arrive at all different times, which made it difficult to coordinate brewery production, raw materials purchase, shipment and delivery, especially when the production facility was located 3,500 miles away.

With the new marketing push, better data on product consumption and more sophisticated data analysis would be required. As it stood, a heat wave could deplete a distributors stock before a replacement order could arrive. Alternately, new local competition such as microbreweries, which in certain parts of the country were increasing at a very rapid pace, could slow demand, leaving distributors with excess product on their hands. In short, Heineken USA needed a system that would allow them to forecast, process and deliver orders much quicker than they currently were capable of. And, because of Heineken's relatively small market share in the U.S., it had to be inexpensive for the distributors. Management at Heineken USA soon realized that the Internet would be the key to the solution.

New E-Business Model

The goal of Heineken USA's new business model was to reduce the time between when a distributor places an order and when it is delivered. A quicker, more efficient way to communicate with distributors and improve planning within Heineken USA was needed. Because of the long lead-time between order and delivery, they found that responding to marketplace changes in a timely fashion was becoming increasingly difficult. Reducing inventory levels, eliminating shortages and putting a fresher product on the store shelves and in the bars were the priorities for newly formed Heineken USA. Major competitors such as Anheuser Busch were responding to consumer demands for fresher products by providing freshness label dating. Heineken USA launched its new Internet based system to allow the parent company to produce the beer closer to the time when they need to deliver it, so the customer receives a fresher product. The company viewed its decision as a means of strategically changing the nature of the processes between themselves and their trading partners.

Heineken USA turned to new technology as the core component of its new business model. An Internet based ordering, planning, and forecasting system dubbed HOPS (Heineken Operational Planning System) was installed in late 1996. By the end of 1998, all 450 Heineken distributors were on line. HOPS generates order and replenishment recommendations for individual Heineken distributors based on criteria such as past sales performance, seasonal trends and geography. With this system, Heineken distributors access on a monthly basis the HOPS Web site using a standard browser and Internet connection. Once they enter their ID and password, they can review their sales forecast, modify their order if desired, and submit their order by pressing a button. The approved forecast is processed by the Replenishment Planning module and calculates the distributors' inventory needs. A demand forecast can be created for the individual distributor on that distributor's personalized Web site. When a distributor has finalized an order, the system creates an electronic purchase order. The software captures the order and makes the information immediately available to Heineken officials for analysis. And Heineken officials can use the software package to plan brewing and delivery schedules. Order submissions are available in real time at the Heineken brewery in Europe, which can, in turn, adjust its brewing and shipment schedules. The distributors can use the browsers to track their beer orders from a Web site at Heineken headquarters. In addition, the HOPS system can notify distributors of promotional events, new products or production bottlenecks.

Technological Infrastructure

HOPS, Heineken USA's Web based extranet system was developed by American Software Inc. Logility Inc., spun off by American Software in January 1997, now markets the software. Heineken USA did not have any EDI links in place when it began looking for technology to support its new e-business model. Heineken found that existing EDI technology just was not interactive enough to do what they wanted to do. Besides, when Heineken USA began operations, they found that the private company from which they had reacquired their US importing rights had few computer resources. Thus, asking distributors to install expensive EDI technology was not an option. Heineken, a company that at the time had only a 2% share of the U.S. beer market, simply did not have the leverage to require distributors to do so. Most ofthe distributors work mainly with the major domestic brewers, not Heineken. As a result, Heineken USA instead decided to develop a Web-based system built around supply-chain planning software. HOPS was the first example ofa new kind of software called Collaborative Planning, Forecasting and Replenishment (CPFR) (Carlos, 1997). This type of software allows business partners share sales data and forecast information. The software also employs an optional Internet component called Resource Chain Voyager, which enables Heineken to deliver customized forecasting data to distributors through individual Web pages. A key feature of this program is that distributors need only Netscape Navigator to access the program. Heineken need not provide its distributors with proprietary software, equipment, or support, and it does not incur the high communications cost of a direct line from the distributor to Heineken. Voyager also provides a calendar so Heineken can notify distributors of events. E-mail can also be utilized to send out notices of problems, new products, or newsletters. HOPS uses an Oracle7 database, Secure Sockets Layer 2.0, runs on Windows NT or Unix, and supports all Windows applications.

Benefits

Since HOPS was introduced, lead-time on order delivery has been cut from 10 to 12 weeks to an average of four to six weeks (see Exhibit 3 for New Distribution Process). Inventory has been reduced from 45 to 30 days and sales have soared over the years, with more than 60 million cases shipped to the U.S. per year (see Exhibit 4 for Benefits from HOPS). Due to its accelerated growth, Heineken needed to expand its New York headquarters facility. The expansion would include physical facility as well as network cabling infrastructure to accommodate the future growth of the company.

An improved relation with distributors has also been a major benefit realized by Heineken. The new order process also allows Heineken to eliminate the district management duties of its sales staff. Staff will spend less time on ordering issues and more time working with distributors to sell beer. The sales force is actually increased without hiring an additional person. Human error in order taking has also been eliminated as orders are now received electronically instead of via telephone or fax. As a result, three data entry positions have been eliminated.

Another benefit to the system is better inventory utilization. The collaborative process is self-regulating-giving Heineken USA management better information about sensitive changes in the market. This enables Heineken to achieve more accurate planning throughout the entire material flow process. HOPS is a unique supply chain planning system because it allows faster and easier collaboration by leveraging the Internet as a communications medium.

Aside from the elimination of three data entry positions mentioned previously, Heineken USA's new business model appears to have had very little impact on the number of employees. The new model will allow employees to learn about new technology and encourage them to think creatively about new ways to do business. Heineken's new business model is not only a technological challenge but also a challenge of finding an innovative way to do business. New technologies require new organizational approaches, and have a large and durable impact on the strategies of the organization.

Gross sales for 1998 topped US$ 7.3 billion,. Net income figures were even more impressive at US$ 522 million, a 39% increase from 1997. Heineken's total revenues for fiscal year 1998 were over US$7.3 billion, a 10.4% increase from 1997. Total net income was $522.2 million with a net profit margin (see Exhibit 5 for Net Profit of Heineken from 1997 to 2000). For its part, Heineken USA has seen sales increase by 10% since the introduction of HOPS. The CPFR suite on which HOPS is based was priced at approximately $400,000 from American Software Inc. in 1996. Resource Chain Voyager, the Internet component ofthe Supply Chain Planning suite was priced at $50,000 for an unlimited number of Internet users. While the total cost of the HOPS is unknown, it paid for itself three or four time over in the first two years of operation according to Thomas Bongiovanni, Heineken USA's Director of Operations Planning.

This Web-based system provides an easy and cost-saving way to link suppliers and customers. Even non-experienced personnel can operate the system very easily. One of the most important advantages is that HOPS easily integrates into the distributors existing business operation. The only equipment required is a PC and access to a Web browser. From the perspective of the distributor, this system creates a synchronous conversation where the customers and their suppliers are looking at the same data at the same time.

Distributors as well as Heineken benefit from the reduction in procurement costs, smaller inventory, and shorter cycle times. Distributors now are less anxious about running low on inventory during a heat wave or having excess inventory due to the opening of a new local microbrewery. Order planning time has been cut from three days per month to 45 minutes. Distributors are also able to track their orders via their web page and get a much more accurate forecast of their order's arrival date.

HOPS proved to be an innovative, industry-changing solution that has other beverage distributors scrambling to catch up. In fact, Heineken USA was chosen as the 1999 winner of the Voluntary Interindustry Commerce Standards (VICS) Best in Logistics Award. Retail Systems Alert Group, a leading provider ofbusiness intelligence for the retail, e-commerce, and supply-chain industries, organizes the VICS awards.

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

All communications between Heineken USA and its distributors via HOPS are encrypted with Secure Sockets Layer 2.0 software (Carlos, 1997). Distributors access to the WebSite Professional Web server is controlled by a password that is issued by Heineken USA. However, security is a major concern both for Heineken USA and its distributors. Concerns about confidentiality are a hindrance to both business-to-business and business to consumer Internet commerce.

Heineken USA further enhances efficiencies in its distribution process by using Remote Location Filing Program. Heineken USA imports its product from the Netherlands and delivers the beer to approximately 425 distributors across the U.S. Getting the product through Customs at the port of entry was a process that Heineken needed to streamline in keeping with the introduction and success of HOPS. The Remote Location Filing Program allows import customs entries to be filed electronically from a single location. In the case of Heineken, beer is imported through 11 ports. Customs paperwork is sent electronically to BDP International, which files the entries electronically with the appropriate customs authorities using the Remote Filing Location Program. BDP International from Philadelphia handles approximately 75% of the company's customs entries. Heineken has realized several benefits from this system. The average time to process a paperless customs entry is only one to two hours. Through the first half of 1999 an average of 666 entries per month were processed. The Remote Location Filing Program creates uniform filing in each port of entry, enhancing the streamlining effect of the process. This can have serious implications when a single violation can cost $10,000. In addition, distributors are kept better informed about the status of their order. Use of the Remote Location Filing Program has helped to enable Heineken to reduce the number of ocean carriers used from fourteen to four and the number of customs brokers from 50 to two.

Today, Heineken USA faces greater challenges than ever. Its web-based supply chain edge is gradually eroding, as their competitors easily adopt the relatively inexpensive web solution. Heineken USA is looking to further enhance efficiencies in its distribution network. The company has recently signed an agreement with Miller Brewing Company through which Miller will act as a consultant to Heineken on distribution capabilities, data analysis, and logistics. Currently, 60% of Heineken's product in the U.S. is distributed through Miller, although there is no agreement among the two that Heineken must use Miller distributors. There is a growing appreciation of quality over quantity, bringing an increase in expenditure on premium products that include Heineken. This is evidenced by the fact that slow growth in per capita consumption is outweighed by the continual rise in per capita expenditure (see Exhibit 6 and Exhibit 7). However, challenges for the future include regaining and retaining the position of number one imported beer in the U.S., which it recently lost to Grupo Modelo.

Footnote

ENDNOTES

Footnote

Some parts of this section have been adapted from company history section at www.heineken.com.

This section has been adapted from collaborative commerce success stories at www.logility.com.

Footnote

Source: WWW.Heineken.com

Source: WWW. Euromonitor.com

References

REFERENCES

References

Carlos, J. (1997). Heineken's HOPS Software keeps a-head on inventory. PC Week, 14 (2).

Lee, H., Padmanabhan, V., & Whang, S. (1997a, Spring). The Bullwhip Effect in Supply Chains. Sloan Management Review, 93-102.

Lee, H., Padmanabhan, V., & Whang, S. (1997b, April). Information Distortion in a Supply Chain: The Bullwhip Effect. Management Science, 43(4), 546-558.

Roberts, B. (1999). A Better Tap for Importing Beer. Internet World, December 1.

Smith, M. & Wintermyer, P. (2000). Distribution Supply Chain Management. Connector Specifier, May 24, available form http://www.csmag.com.

Stalk, G. (1988, July/August). Time-The Next Source of Competitive Advantage. Harvard Business Review, 41-51.

Venkatraman, N. (1994, Winter). IT-Enabled Business Transformation: From Automation to Business Scope Redefinition. Sloan Management Review, 73-87.

Weston, R. (1997). Heineken Taps Online Ordering. Computerworld, 31(9),69-73.

AuthorAffiliation

Gyeung-min Kim

Ewha Womans University, Korea

AuthorAffiliation

John Price

Portland State University, USA

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Gyeung-min Kim is currently an assistant professor of Management Information Systems at Ewha Womans University in Seoul, Korea. She received her MS and PhD degrees from Texas Tech University. She earned her BS degree from Ewha Womans University in Korea. Her research interests include IT-enabled process innovation andBusiness Process Outsourcing. Her publications have appeared in the Journal of Organizational Computing and Electronic Commerce, Journal of Systems and Software Journal of End-user Computing, and Cycle Time Research among others.

AuthorAffiliation

John Price received an MSdegree in International Management from Portland State University. He earned his BA in Business Administration and Spanish from Southern Oregon State University.

Subject: Studies; Production planning; Business process reengineering; Just in time; Information technology

Location: United States, US

Company / organization: Name: Heineken USA; NAICS: 424810

Classification: 9130: Experimental/theoretical; 9190: United States; 5310: Production planning & control; 5220: Information technology management

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 88-97

Number of pages: 10

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198653033

Document URL: http://search.proquest.com/docview/198653033?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 73 of 100

A dream project turns nightmare: How flawless software never got implemented

Author: Vital, Roy; Aubert, Benoit A

ProQuest document link

Abstract:

This case details the experience of Integra, a large Canadian life insurance institution, and its partner Intex Consulting, the Canadian subsidiary of a large international IS integration firm, in the launch of their Banking and Loan Insurance Software System development project. After 1.3 million dollars of investment from each partner and 12 months of intensive efforts, the project came to an abrupt stop. Specifically, this case looks at the ramifications of introducing a new and unproven IS product and how to avoid and recover from an IS project failure. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

It was in 1996 that Integra^sup 1^, a large Canadian life insurance institution, launched its Banking andLoan Insurance Software System (BLISS) development project with the aim of gaining access to the loan insurance market in small Credit Unions (CUs) across Canada. The company was ready to provide the system free ofcharge to the Credit Unions on the provision that they commercialize exclusively Integra's loan insurance products. To achieve this goal, Integra entered into a partnership with Intex Consulting, the Canadian subsidiary of a large international information system (IS) integration firm who wanted to gain a foothold in the Canadian banking business. After 1.3 million dollars of investment from each partner and twelve months of intensive efforts, the project came to an abrupt stop. The lessons learned in this case study include: (1) the importance of understanding requirements beyond microlevel user needs, (2) the need to get the enlightened involvement of each interested party in a large complex project, (3) the importance of appraising the specific contribution of each partner in a strategic alliance, and (4) the obstacles faced when entering an unfamiliar market with a new, unproven IS product.

BACKGROUND

The Integra Financial Corporation is a holding company active through its subsidiaries in life insurance, general insurance, trust services, securities brokerage as well as asset and portfolio management. Operating mainly in the province of Quebec (Canada), Integra manages assets in the order of eight billion dollars and a work force of more than 2,200 permanent employees. Integra's life operations rank among the seven largest in Canada in terms of written premiums^sup 2^.

One of Integra's most successful products (its `cash cow' in the words of the CEO) is its Loan and Mortgage Insurance Plan, developed in the early 1980s. With more than two million insured loans, this program is one of the largest group insurance plan of its kind in Canada. Commercialized exclusively through financial institutions in the province of Quebec, this product is totally integrated with the banking systems of the participating institutions. Thus, when a loan application is accepted at one of these institutions, the loan officer can offer his client, on the spot, an insurance policy to cover his or her loan. In return, the participating institution receives a percentage of the premium for its efforts.

This capability is available because the banking systems of the institutions are electronically linked to Integra's insurance management systems. These systems automatically determine the risk exposure of the loan and establish the premium to charge for the insurance coverage. Rates are calculated as a function ofthe balance due on the loan. In other words, the premium declines with each installment applied to the loan. Thus, the client pays an equitable premium for the real financial risk that his loan represents. For example, if the agreed rate of interest charged on the loan is 6.23%, and the life insurance premium is set at 0.07% of the loan, then the actual combined rate will be 6.3% of the outstanding debt. Based on a broad experience in the loan insurance market and a huge database accumulating data since 1984, Integra's actuaries have been able to develop a very proficient risk evaluation algorithm. This algorithm enables the institution to offer an insurance product with practically no exclusions (no more than 1% of all cases are excluded) applying to any particular field of work or the practice of dangerous sports, thus greatly simplifying the administration and lowering the operating costs of the product. Few, if any, of its competitors had attained this level of sophistication.

According to Integra's management, these hard to replicate characteristics gave the firm a persistent competitive advantage over other loan insurance offerings since, as of late 1996, the competition could only offer fixed (and much higher) rates based on the total amount of the loan and had to charge termination penalties when their clients reimbursed their loans ahead of time.

SETTING THE STAGE

While Integra's Loan and Mortgage Insurance product proved to be a huge success in the province of Quebec, the company faced major impediments in its quest to commercialize its leading product in the rest of Canada. One reason for this difficulty is that the Canadian banking sector is fragmented along two basic modes of organization. In the first mode, which comprises the majority of the large financial institutions, banks operate under a federal charter. This charter gives the participating institution the right to operate anywhere in Canada, whereas a provincial charter grants access only to the provincial territory. On the other hand, most of the small institutions, including the credit unions, operate under provincial jurisdictions. Historically, and for cultural and political reasons, those small financial institutions have tended to structure themselves into very divergent configurations within each province, and the banking infrastructure of each sector differs somewhat. Whereas in the province of Quebec, the credit unions tend to be tightly integrated into large federations and use standardized central banking systems, their counterpart in the other Canadian provinces make do with a bewildering array of banking systems operated at the local or regional levels. As for loan insurance, the CanCoop Life Group, which markets a portfolio of insurance and other non-financial services to Canadian financial co-operatives, Credit Unions and their members, cover most of the loan insurance needs of the Credit Unions. A consortium of companies, including the Credit Union Centrals from each region, a private Canadian insurance company, and one US insurance syndicate, own the CanCoop Group. Thus, because of the diversity of the market in the rest of Canada and the very tightly integrated nature of its own systems in the Quebec market, Integra lacked the means to link the banking systems of those institutions to its loan insurance systems. The company was thus effectively locked out from the loan insurance business in the Canadian market outside the Province of Quebec.

Meanwhile, Intex Consulting, which had developed a widely acknowledged expertise in the US banking industry as an integrator and system developer, had been looking for an efficient channel to penetrate the Canadian banking sector. Informal contacts between Integra's IT executives and Intex Consulting representatives at an IS/IT convention in Las Vegas in December 1995 opened the door for a possible cooperation between the two firms. Indeed, Michael Bricino, Integra's CIO and Carl Gagnon, a senior project manager, came back from that meeting convinced that Integra had the opportunity for a breakthrough on the Canadian market, provided it could join forces with a competent and resourceful IT partner. Upon their return to Integra, the two IT managers made a forceful presentation to the First Vice President for Product Development. In essence, their argument was that" We have agood product, we have the best product! Everybody in the Province of Quebec buys it, the Credit Unions will buy it and the consumers will buy it."^sup 3^ They believed the loan insurance industry was clearly waiting for such a solution, and that the profitability ofthe project would far exceed any other project that the organization had ever undertaken.

The First Vice President for Product Development promptly assembled an advisory committee^sup 4^ for the project. Apart from the first V.P. for Product Development, this committee was composed of the President, the First V.P. for Finance, the V.P. for Actuarial and Corporate Services, and the CIO.

The pressing issue, according to Bricino, was the development of an appropriate technology solution to interface Integra's loan insurance systems with its prospective clients' banking and loan systems. If the company could effectively develop a compatible solution, then the CUs would most certainly jump on the occasion and join Integra. In fact, as stated in a white paper circulated within the organization at that time, Integra envisioned itself in the role of a commercial software developer. "In the same manner as a producer of high volume commercial software, [with the BLISS project], Integra will become a supplier of a software package specializing in the management and the support of insurance products in Canada and even in all of North America. " The ultimate goal was to provide for the insurance needs of the more than 1,200 Credit Unions and other cooperative institutions throughout Canada. Here was an opportunity to easily double Integra's market share in the loan insurance market.

For Donald Lapierre, Integra's president, this strategic opportunity proved to be irresistible and the committee enthusiastically bought into the project. For the members of the new committee, collaborating with Intex Consulting in the venture appeared to be the obvious thing to do, given the complementary nature of each firm's respective competencies, and their convergent business interests. On the one hand, Integra brought to the table a long and very successful experience in the loan insurance business. Furthermore, it had a winning product to commercialize. Conversely, Intex Consulting had a proven loan system to offer and brought along impeccable credentials as an information systems integrator.

CASE DESCRIPTION

On February 20,1996, Integra signed a partnership agreement with Intex Consulting for the development and implementation of the Banking and Loan Insurance Software System (BLISS). According to this agreement, Intex would assume the development of the loan system and interface it with both the Integra's insurance systems and the Credit Unions' banking systems in a client-server configuration. Furthermore, Intex would have the responsibility to implement the new system in each participating Credit Unions and offer technical support thereafter both at the Credit Union level and at Integra's level. For its part, Integra would assume responsibility for developing the client-side loan insurance module (InsurCalc) which would be integrated into Intex's loan system. Integra also had the responsibility to assemble a User Group composed ofCredit Unions' representatives and functional managers from Integra. In forming this group, managers from Integra felt confident that they could avoid misspecifying the system. User participation has been advocated for in the IS literature for a long time (Tait & Vessy, 1988). Finally, the company had the responsibility of testing both the loan and the insurance modules of the application, find suitable pilot sites, and commercialize the new system in Canada. The business flow diagram depicted in Figure 1 puts into perspective the general architecture of the proposed system.

Once implemented in a Credit Union, the system would permit the origination or the renewal of a loan in the banking system of the institution. Simultaneously, the system would initiate the process of risk evaluation and insurance costing for that particular loan by automatically assessing the client's financial background through the link with the Credit Bureau, and validating the transaction through the Personal Property Securities Register Service (PPSR). Finally, with the client's consent and under certain actuarial considerations, the system would compute the premium to be charged for this particular insurance coverage, which would then be incorporated in the monthly reimbursement calculations of the loan. In short, the BLISS system would offer the Credit Unions the same functionalities as those already available to the Quebec institutions and which proved to be such a commercial success.

Roles and Responsibilities of Each Partner

With an annual IT operating budget of nearly eight million dollars, Integra's IT function has ample experience with IS project management. Over the years, IT management had put into place rigorous project management techniques, which contributed to the successful realization of large and complex IS projects. The company was also confident that Intex Consulting possessed the know how to effectively develop and implement the new system in the Credit Unions branches. A Steering Committee, composed of a very select group of senior executives, was assembled (see Appendix II for an overview ofthe project organization chart). Because of the high strategic potential of the project, it was felt that the venture had to be managed under very stringent security controls. Thus, apart from the project personnel and a few senior executives, only a handful ofpeople at Integra knew in any detail the content and the scope of the project. For these same "obvious" reasons, it was decided that project planning could be put on a fast-track mode, thus bypassing the standard risk management and feasibility studies and the political and economic impact studies of the new system for the prospective clients. That decision would eventually prove to be ill-advised, as later events would clearly demonstrates.

For its part, Intex Consulting focused almost exclusively on the technical aspects ofthe project, relying on Integra's experience and know-how in the loan insurance market for the application design and functionality specifications. The partners laid out everything to ensure the prompt development of an adequate solution: assigning a high priority status to the project; doing a thorough assessment of the integration requirements for the insurance, loan and banking systems; insuring a tight coordination of the project by a coordination committee composed of the project director (Carl Gagnon), the business project leader (Stephanie Lemaire), the development team leader (Judith Tremblay), and Intex Consulting's project manager (Tom Delany)6. The development effort was subdivided between two teams. The first one, headed by Integra's Judith Tremblay, worked on the loan insurance module to be integrated into Intex' loan systems and on diverse interface modules to link up the BLISS system and Integra's back-office insurance systems.

IT managers felt that they were clearly aligned with the organization business strategy and that they had the indefectible support of higher management. They also had a partner with exceptional technical abilities. Even while acknowledging that the project could present a certain level of risk, they assumed they were in what many would consider an ideal situation for successful project development.

The Development group worked in close cooperation with the Business group. Their task consisted mainly in circumscribing the detailed business requirements for the client side of the insurance module. The definition of the interfaces with outside agencies, such as the Personal Property Securities Register (PPSR), and with Integra's own internal business systems and data repositories also required extensive efforts. The second team, staffed with Intex's personnel, worked on the adaptation the Canadian Credit Unions' context of the loan and banking systems developed for the US market. Due to the wide variety of circumstances amongst the prospective institutions, the new system had to be flexible, bilingual, modular, and capable of running on multiple platforms such as OS2, Unix, and Windows NT (see Appendix I for a more detailed description ofthe diverse mix of platforms encountered in the project).

To limit the possibility of competitive intelligence leaks, both partners opted to deal with the implementation details of the project later on, when the preliminary tests would be completed and the application would be ready for deployment. To that end, the project plan called for the formation ofa User Group composed of seven representatives from local Credit Unions branches across Canada. The main responsibilities of this group was to participate in the needs and processes revisions, produce the basic business documents, give feedback on functionalities, screens, forms and reports, validate Integra's added-value components and participate in the BLISS integration tests.

At the technological level, the targeted institutions were using a rather disparate IT technological infrastructure. The hardware and the applications varied from region to region, from group to group, and often even within a particular institution (see Appendix III). Opportunity studies carried out by Integra revealed that those institutions used at least ten different technological platforms. In this context, the BLISS project, as conceived originally, consisted in developing a software solution that could be implemented at those institutions with a minimum of personalization while aiming to support the widest variety of existing IT already in place. The total development cost ofthe project topped 2.5 million dollars. Half of this amount (1.3 million dollars) came from Intex Consulting and the other half came from Integra in the form of wages for Integra's personnel (15 managerial staff, 1 1/2 years). The project officially started in January 1996 and ended one year later, in March 1997.

Roles and Responsibilities of Each Partner in the Implementation Phase

With regard to the eventual deployment and exploitation of the new system, as explained by Integra's CIO, both partners signed an agreement delimiting each other responsibilities and participation in the future benefits from the project. Under the terms of this contract, Intex Consulting obtained the exclusive rights to commercialize the new system in the US market. It also had the rights to commercialize it in the Canadian market, but only when authorized by Integra on a client-by-client basis. In both cases, Integra would be entitled to royalties on each sale.

"We signed an agreement of joint ownership on the software. Roughly speaking, in the end, we kept the ownership of the system. If for some reason, we decided to give it to a financial institution that bought our products, we could give it for free. Actually, this is what we wanted from the start. If they [Intex Consulting] found to sell the software outside of our territory [in the US], there were also contractual clauses which bind us and which applied They could approach a customer on their own and sell the software: they were joint owners. That could create enticements for our insurance products in communities outside of our reach."

Unfolding of the Project

In late December 1995, senior management approved the formation of the Steering Committee and allocated the necessary funds to launch the project. Carl Gagnon immediately set out for the task of assembling the Coordination Committee. He was given license in choosing the best internal resources available in the persons of Stephanie Lemaire as the business project leader and Judith Tremblay as head of the internal development team. Both managers had extensive experience with Integra's business processes and their supporting information systems and had participated in several highly successful IS projects before.

The project was subdivided into 10 main tasks (Table 2), and the roles and responsibilities for each one of them were apportioned to the concerned parties. One of the first tasks of the project team was to assess the needs and processes revision mandated by the project. The first few weeks were thus spent analyzing the implications of extracting the relevant functionalities of the existing loan insurance module and adapting them to the BLISS context.

Efforts were also spent in the creation of a User Group composed of CU's representatives that would participate in the project. In all, seven CU from New-Brunswick (1), Ontario (1), Manitoba (1), Saskatchewan (2) and British-Columbia (2) accepted to collaborate. Their contribution essentially consisted in individual working sessions at the respondent's premises with representatives of the development team. During those sessions, the development team attempted to assess the functional specifications of the future system from the point of view of each participating institution. By the end of February 1996, a preliminary list of work requirements was compiled and presented to the Steering Committee for approval. These were approved within the following two weeks, allowing the team to start work on a first version of the prototype. In rapid succession, Integra's development team was able to deliver a Prototype Level I, and on May 3, the basic functionalities of the InsurCalc module that would eventually be incorporated in the banking module developed by the Intex team.

Meanwhile, work on the completion of the needs and process revision task proceeded rather haltingly. For one thing, it was found that interfacing Integra's file systems was a greater challenge than anticipated. There were actually more than 80 different legacy file systems (hosted on MVS and VSE/ESA platforms) to integrate in the new BLISS system. At least 15 of these systems were in service since the 1980s and were slated for major revisions in light ofthe Year 2000 deadline. Further complicating the process, the Business Project Team insisted in adding what they termed `value-added components' on top of all the standard utilities already implemented in the existing insurance system. From their point of view, the new system imperatively had to offer sophisticated customization and auditing tools, a flexible report generator, and a complete on-line help file in order to favorably reflect Integra's high standards of excellence and quality. All these requirements had to fit in a system small enough and efficient enough to operate in a microcomputer based client-server configuration suitable for the smaller CUs.

On the Credit Union side ofthe project, the collaboration with the CU's representatives did not unfold exactly as planned either. According to the original plans, each CU was to assign a loan officer for the project duration (approximately a 55 person-days effort for needs and process revision and a 70-90 person-days effort for tests and implementation). Of the seven original CUs who had participated in the first round of meetings in February 1996, only three remained more or less active by the end of June 1996. Even with such a reduced input, the development teams nonetheless managed to complete the requirements and process revision report, which was presented to the Coordination Committee in time for their bimonthly meeting on July 10, 1996.

Carl Gagnon ascribed the lack of CU's participation to the fact that he had had little time to spare to cultivate his contacts with the participating CUs. As he explained to the Steering Committee, most of his efforts were now devoted to coordinate the development teams from each company, and to resolve numerous technical and organizational problems stemming from the fusion of two complex systems developed in very different organizational and business contexts. He felt that the business requirements were now clearly circumscribed, and that only the technical issues were left to resolve. Therefore, the reduced participation of the User Group was not to be perceived as a major problem.

Moreover, Gagnon confided that he felt slightly overwhelmed by the task at hand. He suggested that his time could be better spent at the helm of the project rather than being dispersed as both the project director and the head of the Coordination Committee. The committee members acquiesced to his request and nominated the newly designated V.P. for Product Development, Jim Cochran, to take charge ofthe Coordination Committee, upon his return from the Summer vacations in mid-August.

Cochran was a new player in the project: up to that point, he had not been directly involved in the project.

"The BLISS system, when I inherited the project in August 1996, was already on hand and it had been... Its development program, the contracts with Intex had been negotiated and signed before I arrived at the vice-presidency.. My predecessor and the management teams in place before that had been absolutely convinced that, in order to sell the loan-insurance product in the Credit Unions network in Canada, it was imperative to develop this information system tool, that the two were inseparable."

Cochran had a long experience in dealing with financial institutions outside the Province of Quebec, having been in charge of the commercialization for Integra of various travel insurance products across Canada. He felt quite comfortable in his new role as an intermediary between Integra and the prospective pool of clients for the new BLISS system. The first clear sign that something was seriously amiss with the project materialized when, in September 1996, the marketing team returned from afield trip empty-handed. Although the Credit Unions' managers generally expressed a genuine interest in the new system, they seemed somewhat reluctant to commit themselves in any meaningful way to the project. This initial disquieting perception crystallized when, a few weeks later, at the end of the development phase, the project managers tried to enlist pilot sites to field-test the new system. As reported by Jim Cochran, the project seemed to hit a brick wall: "How many do you think that I[have] sold? I have... even when we offered them the system for free, not a single one wanted to become a test site, not even those that had participated in the User Group. They didn't want any part of it!"

Integra's management speedily setup a crisis management group whose primary task was to find what had happened and what corrective actions could be undertaken, if any, to bring the project to completion. Jim Cochran was designated to lead this effort. As explained by Cochran, the first order of the day for the task group was to go back to the Credit Unions and investigate why they had apparently changed their mind on the project.

"From then on, I decided we should go up the chain [of the Credit Unions]. I found resistance at the Credit Union level, with all the excuses that came with it. I went up to the regional level, and I still had resistance, but with better excuses. I went all the way up to the National Central where I was squarely laughed at. The CanCoop representative said to me: `Put an ax on this project! Do you want to destroy us? You are asking the Credit Unions to autodestruct themselves. It is plain nonsense!"

To their astonishment, the Coordination Committee members learned that these high level executives had never been consulted by the project management group and therefore, had not had any input on the project. The requirements analysis had been conducted exclusively at the Credit Union level without ever taking into consideration the larger business context ofthese institutions and their affiliation to regional centrals. Typically, Carl Gagnon and another member of the coordination committee (either Stephanie Lemaire or Judith Tremblay) would meet with some junior executive or a loan officer of the Credit Union branch to discuss the technical aspects of the proposed system. While the requirements were technically sound and the system design filled the specific needs of the branches, surprises were to be expected when considering the larger institutional picture. At no point in the analysis process did it occur to the project sponsors that both the individual Credit Unions and their Centrals had financial stakes in the CanCoop Group and that a switch to Integra's products might pose some problems.

As was later discovered by Cochran's team, each Credit Union, each Regional Central and the National Central owned a significant part of this insurance firm, and therefore had good reasons to keep doing business with it. "The problem was that we were asking potential clients to turn their back on a product with which they were comfortable, which generated important incomes for them, which contributed to the development of their insurance company, which generated profits for their provincial Central, which provided them with services, and which generated income for their National Central." Understandably, the Credit Unions Centrals managers were not very enthusiastic about the idea of having "outsiders" trampling on what they considered as their own territorial business relationships with the Credit Unions.

In hindsight, the task group realized the even if the new system had been offered free of charge, its installation still mandated relatively major investments in network infrastructures and computer equipment for the small Credit Unions, ranging from 100 thousand dollars to more than one million dollars per site. More fundamentally, the Centrals would have considered as treasonous the active participation of any of their institutions in the project. In fact, the adhesion of the Credit Unions to the BLISS project would have meant a gradual weakening ofthe financial position oftheir respective Centrals, since a significant part oftheir financing came from the profits generated by their participation in the CanCoop. Project planning totally overlooked this aspect and it came as a complete surprise to the project managers.

At the end of the fact-finding mission, in January 1997, Jim Cochran knew the Credit Unions would never implement the BLISS system in its present form. "My boss Donald Lapierre could very well see for himself that this project had been sold quite efficiently by the IT people to Marketing. He could also see that senior management hadn't had a clear grasp of the scope of the project, and more importantly, that the whole thing had never been validated by the potential market." Integra's management discreetly shelved the project, and negotiated an acceptable settlement with Intex Consulting to put an end to the development effort. Internally, obviously, it was necessary to emerge from the project in an elegant way to avoid the appearance of harassing the intermediate managers who had taken part in that decision.

CURRENT CHALLENGES FACING THE ORGANIZATION

One of the most damaging consequence resulting from this painful episode was the psychological impact on managers regarding future IS development. As reported by Cochran, some of the managers were positively terrorized at the idea of launching large innovative IS projects. "Because, when word passed that the BLISS project was a failure and heads began rolling (even if done discreetly), what was the motivation for a senior manager to venture into a project with a high technological risk? They shut their eyes and put 'X' on it. They said: 'I would rather find another solution, which of course was not in the best long-term interests of Integra". Eventually, Integra would have to find an acceptable conclusion for this situation and regain confidence in its capability to integrate in an efficient manner promising IT tools to its strategic business plans. On the positive side, the incident prompted the formation of a task committee headed by Cochran, whose objective was the reassessment of the decision process for systems procurement at Integra. As explained by Cochran, the procurement process was found to be ill defined and failed to assign clear responsibilities.

"How were we trapped in this mess in the first place and why did it catch everyone off-guard? Iwo would say that... the pain is still rather fresh and we pay a little more attention. However, I am not convinced that the lessons are anchored in our [procurement] processes. As long as those who suffered do not make the same errors twice... But eventually, there will be a rotation of managers. For those who will take over and who will not have lived through BLISS, there are no guarantees that they will not repeat the same errors. We do have to find a mechanism to anchor these lessons in our decision processes."

Thus, in the early months of 1997, Integra's management was assessing the situation and trying to find an appropriate course of action.

Jim Cochran, V.P. for Product Development, was still trying to figure out a way to gain access to the Canadian market. He was convinced that Integra's loan insurance product was better than the competition's, that the system supporting it was sound and reliable, and that somehow, there had to be a way to overcome the obstacles at hand. How could the millions of dollars that had already been spent on the project be salvaged?

Michael Bricino, the CIO, had adifferent preoccupation. For him, the IT department had to learn from this experience. What had gone wrong? He had recently read about failed software projects (Glass, 1997; Lyytinen & Hirschheim, 1987) and he was wondering where his project would fit. The system was technically adequate, but somehow it failed to respond to the intended users' goals. The lessons from this project had to be drawn so that the mistakes would not be repeated. It would be too costly for the firm, and much too damaging for the reputation of the IT organization. Meanwhile, he had the disagreeable feeling that his career at Integra was somewhat compromised.

On the other side of the building, the First VP Finance was tapping her fingers on her desk. Clearly, a significant risk had been taken and the company had miscalculated the odds. On the one hand, she felt the need to provide better risk assessment for IT projects to prevent the firm from entering into such costly misadventures. On the other hand, she was worried about the potential damaging effect of the project on the managers' attitude toward risk. If the outcome was that managers, in the future, would avoid all risky projects, the company would indubitably suffer. In her opinion, appropriate risk management did not mean systematic risk avoidance.

For his part, the CEO ofthe organization was perplexed. Clearly, this was a major deadend for such a key and promising project. As chairman ofthe board and chief executive officer of the company, he was accountable for the project to the board of directors and to the shareholders. Mr. Lapierre was trying to analyze the unfolding of the project and realized it was very difficult to assign clear responsibility for the outcome. Most players had followed rational routes. He also felt that the confidence of his management team had been bruised and that morale was severely lowered. What should be the next steps?

Footnote

ENDNOTES

Footnote

1 In order to maintain confidentiality, the name of the companies described in this case, as well as their geographical location and the names of the participants have been disguised.

2 For a more detailed financial description of the firm, see Appendix 1.

Footnote

3 This remark is very similar to the title of a paper written by, Markus and Keil (1994): "If We Build It, They Will come: Designing Information Systems That People Want to Use" which addresses key issues in IS development and system use.

4 As the project took form, this committee was later transformed into a more formal Steering Committee.

5 On this subject, see Ewusi-Mensah (1987) and Barki et al. (2001).

6 The Loan Insurance Manager for Canada joined the project coordination committee in the later stages of the development effort.

References

REFERENCES

References

Barki, H., Rivard, S., & Talbot J. (2001). An integrative contingency model of software project risk management. Journal ofManagement Information Systems, 17(4), 37-69.

Ewusi-Mensah, K. (1997, September) Critical issues in abandoned information systems development projects. Communications of the ACM, 40(9), 74-80.

Glass, R.L. (1997). Software Runaways: Lessons Learned from Massive Software Project Failures. NJ: Prentice Hall.

Lyytinen, K. & Hirschheim, R. (1987). Information systems failures -a survey and classification ofthe empirical literature. Oxford Surveys in Information Technology, (4),257-309.

Markus, L. & Keil, M. (1994, Summer). Ifwe build it, they will come: Designing information systems that people want to use. Sloan Management Review, 35(4), 11-25.

Tait, P. & Vessey, I. (1988). The effect of user involvement on system success: A contingency approach. MIS Quarterly, 12(1), 91-108.

AuthorAffiliation

Vital Roy

HEC Montreal, Canada

AuthorAffiliation

Benoit A. Aubert

HEC Montreal, Canada

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Vital Roy is an assistant professor at HEC Montreal, Canada. He received his BScA from the University of Quebec in Montreal, his MSc in Management from the University of Quebec in Chicoutimi and his PhD from HEC Montreal. His present research interests are in the following areas: information systems sourcing, organization of the information system function, and the socio-political dimension of information technologies.

AuthorAffiliation

Benoit A. Aubert is an associate professor at HEC Montreal, Canada, and Fellow at the CIRANO (Centerfor Interuniversity Research and Analysis on Organizations). His main research areas are outsourcing, risk management, and new organization forms. He is currently involved in the development of measures and software tools to support management of outsourcing risk and its integration with other corporate risks.

Subject: Studies; Project management; Software packages; Information systems; Problems

Location: Canada

Classification: 9172: Canada; 9130: Experimental/theoretical; 5240: Software & systems

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 98-111

Number of pages: 14

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references tables

ProQuest document ID: 198655716

Document URL: http://search.proquest.com/docview/198655716?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 74 of 100

Humanware issues in a government management information systems implementation

Author: Lippert, Susan K

ProQuest document link

Abstract:

This case describes the experience of a US Government Defense Agency, charged with the acquisition and procurement of weapons systems, that required a comprehensive Management Information System. Despite a large investment of time and money, the information system was designed and implemented without due considerations or management of the human side of systems development. The lack of human factors planning generated cost overruns, time delays, and ultimately, a partial failure of the system. This case addresses the behavioral, managerial, and organizational shortcomings of the MIS process, which ultimately led to a less than effective implementation. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

A United States Government Defense Agency charged with the acquisition and procurement of weapons systems required a comprehensive Management Information System (MIS). The Integrated Product and Process Management Information System (IPPMIS) was expected to integrate standard procurement functions through a hardware and software application. A defense contractor was 'hired' to design, develop, build, test and deploy an integrated acquisition project MIS, including career development and the management of personnel for program managers. The information system was designed and implemented without due consideration or management of the human side of systems development. The lack ofhuman factors generated cost overruns, time delays and ultimately a partial failure of the system. This case addresses the behavioral, managerial and organizational shortcomings of the MIS process, which ultimately led to a less than effective implementation.

BACKGROUND

The Naval Sea Systems Command

NAV SEA-the Naval Sea Systems Command-is hierarchically linked to the Executive Branch of the United States Government through the Department of Defense, Navy Department. NAVSEA manages 139 Acquisition Programs assigned to the Command's seven affiliated Program Executive Offices (PEOs) and various Headquarters elements. The Naval Sea Systems Command is the Navy Department's central activity for designing, engineering, integrating, building and procuring U.S. Naval ships and shipboard weapons and combat systems. The Command's responsibilities also include the maintenance, repair, modernization and conversion of in-service ships, their weapons and combat systems. Additionally, NAVSEA provides technical, industrial and logistical support for naval ships and ensures the proper design and development of the total ship, including contractor-- furnished shipboard systems.

NAVSEA is the largest of the five Navy Systems Commands. Its FY00 budget of approximately $14 billion accounts for approximately 16.5 percent of the Navy's total $84.9 billion FY00 budget. This budget places NAVSEA among the nation's top business enterprises when comparing the value of assets, number of employees and budget using Fortune Magazine criteria. While NAVSEA has approximately 900 officers and 1,300 enlisted personnel, the vast majority ofits employees are civilians. The Command's FY99 civilian end-- strength-45,821 employees in seven PEOs-manages a number of major acquisition programs for the Assistant Secretary of the Navy for Research, Development and Acquisition, ASN (RD&A). NAVSEA's major resources include its highly specialized professional employees and facilities. Whenever possible, NAVSEA relies on the private sector (defense contractors, Ang & Slaughter, 2001) for a wide range of products and support services including ship design and engineering, production of ships, weapons and other complex technological systems. NAVSEA manages these programs through an organizational structure including Program Management Offices (PMOs).

This case study focuses on the limited attention given to human factors in the implementation of an MIS within a Program Management Office (PMO GOV). PMO GOV is tasked with weapons systems development for sea warfare. A defense contracting organization-Prime Contractor (PC)-designed, developed, tested and implemented the management information system. This Integrated Product and Process Management Information System (IPPMIS) was developed under a U. S. Government contract ending in the late 1990s. Additional perspective on the Defense acquisition community and the Defense Acquisition policy are located in the appendix.

This case study is organized into eight major sections: background, setting the stage, case description, current challenges and problems, references, appendix, glossary of terms, and further readings.

History of the MIS Case

A defense contractor was solicited through the normal government Request For Proposal (RFP) process. The PMO, through a U.S. Government contracting agency initiated an RFP, seeking assistance with the development of an integrated weapons systems MIS to manage all stages of procurement from concept generation to deployment and follow-on support. After a routine bid cycle, the contract was awarded to Prime Contractor and the MIS development process was undertaken.

The Management Information System was initially expected to track, monitor and manage: (1) acquisition logistics; (2) configuration and data management; (3) personnel training and education; (4) integrated product and process development including systems prototyping; (5) manufacturing and production; (6) quality assurance; (7) reliability and maintainability; (8) risk management; (9) systems engineering; (10) software engineering; and, (11) test and evaluation, through an integrated software program. These major system elements were divided into a three-stage linear program: (1) pre-systems acquisition; (2) systems acquisition, including engineering, manufacturing, demonstration and production; and (3) finally sustainment. Concept development included requirements planning and needs assessment by end users (who in this case included operating forces of the United States Navy).

One part of the MIS was the requirement to monitor the development of career acquisition professionals within specific warfare and functional sub-specializations. The component of the MIS that managed career development was titled-IDP or Individual Development Plans. The exploration of the IDP module is used in this case to illustrate systems deficiencies.

Type of Business

The two 'players' include: PMO GOV and Prime Contractor. PMO GOV is a United States Government organizational group of the Executive Branch, Department of Defense, Navy Department. NAVSEA manages the development and deployment of specific weapons systems through a complex organizational structure. Figure 1 depicts the line of authority between the Secretary of the Navy and the Project Management Office's (PMO) functional lines. Prime Contractor specialized in software and hardware development and deployment. Prime Contractor provided project management support to assist in management of weapons systems development. The reporting relationships between Prime Contractor and PMO GOV are also depicted in Figure 1 below.

Products and Services Offered

PMO GOV delivers both products and services. Products include integrated hardware and software weapons systems. Services include the management of the acquisition and technical operation of weapons systems research and development, deployment and follow-- up support, to the operating forces of the U.S. Navy.

Prime Contractor develops, tests and deploys the MIS under review. Additionally, Prime Contractor provides project management and administrative support. Administrative support comes in the form of collaborative managerial assistance to PMO staff personnel for functional tasks and duties.

Management Structure

The PMO functions through a top-down management structure following the policies and procedures set forth within the Department of Defense and the Office of Personnel Management. The PMO reports to a Program Executive Officer, who further reports to an Assistant Secretary of the Navy. The Assistant Secretary of the Navy for Research, Development and Acquisition is functionally responsible to the Under Secretary of Defense for Acquisition, Technology, and Logistics.

Financial Status

PMO finding is provided through a five-tiered distribution process. Initially, funding requests are made through the Congressional budget allocation. Monies are then transferred through the Department of Defense Under Secretary for Acquisition, Technology, and Logistics, further distributed through the System Commands to the Program Executive Offices and finally to the specific Program Management Office. Projects are then developed to use the Congressional budget allocation in accordance with the U.S. Government's budget and execution processes and cycle. Financial resources are then segmented into operational resources needed to conduct the mission of the organization, and personnel resources including salary and benefits. PMO funding is provided by the U.S. Congress, under the annual federal budget Planning, Organization and Management process to the Department of Defense. Budget decisions are made by the U.S. Congress.

Overall funding levels for Defense Prime Contractor over the first five-year contract period, 1992-1996, are provided in Table 1. All financial data are approximate. Project funding levels provided to Prime Contractor over the contract period were $10.4 million.

Overall PMO budget allocation included administrative support of the PMO provided under contract by Defense Prime Contractor. Software development for program management, including the MIS development project, is included in the support contract. Funding allocation for the MIS development sub-task of this cost-plus-fixed-fee contract is shown in Table 2.

In order to afford sufficient numbers of technologically up-to-date systems, cost is a critical component of DoD system optimization. Cost should not simply be an outcome as has often been the case in the past. Thus, cost should become an independent rather than dependent variable in meeting the user's needs.

Strategic Planning

The PMO's strategic planning includes the assessment of operational forces needs. Weapons systems development includes a planning process that looks at current defense requirements, future scenario planning and the integration of new technologies. Needs assessment is done in partnership with the operating forces based on expected operations. Strategic planning for weapons systems development is frequently based in new technological advances in engineering and the applied sciences.

In this case, a strategic initiative to develop and deploy the Integrated Product and Process Management Information System (IPPMIS) for the PMO was undertaken due to rapidly developing technology and the need to improve the management of overall resources.

Organizational Culture

The weapons systems acquisition community is a homogenous professional group of individuals with different specializations (financial; quality control; engineering; manufacturing/production; project management; testing; and, general management) all focused on the procurement of offensive and defensive weapons systems. Most personnel are college educated with supplemental professional training and many of the senior individuals within the organization have graduate degrees. Since the organization supports the development of technology, the organizational culture tends toward early adoption and acceptance of new technological systems. Many of the personnel staffing Program Management Offices are senior government officials, immediately below Senior Executive Service (SES) levels.

Economic Climate

This case occurred during the mid-1990s when defense spending was under a constant state of stress from Congressional initiatives to reduce military spending. Excessive defense spending was a concern to the Congressional defense oversight committees during the period of this systems development. The political climate valued defense spending cuts particularly within Research and Development (R&D), as a function of an ever-decreasing public perception of threats to national security. Although defense cuts were encouraged, spending tax dollars on this IPPMIS was expected to eventually save resources. The overall economic climate was directed toward spending minimization on all defense related projects. This environment produced constant financial pressure.

SETTING THE STAGE

An Integrated Product and Process Management Information System (IPPMIS) was created for the Program Management Office (PMO). The IPPMIS was designed to integrate all products and functional processes in a master acquisition and procurement structure. Specifically, this integrated system was to manage engineering, scheduling, testing, funding, procurement, contractor resources, personnel quality control and system upgrades.

The IPPMIS was intended to keep pace with an ever-increasing defense threat, as perceived by the Congressional military planners, both in terms of complexity and sophistication. The IPPMIS was developed concurrently with a rapidly changing weapons systems acquisition culture.

The system was meant to manage the entire acquisition and procurement process through an automated configuration. The Prime Contractor was hired to build the IPPMIS within a multiyear congressionally approved budget allocation. The contractor designed and built the information system for the PMO. The IPPMIS followed a standard systems engineering process including the planning, analysis, design, development, testing and implementation phases.

Technology Utilization

A mainframe-based system attempted to integrate all the functions and deliver them to desktop terminals using any of three operating platforms-UNIX, Mac and Windows. Engineering specifications called for a secure non-Web based system. The system required frequent purposeful updates from forty-five acquisition professionals. Islands of information were prevalent and often marked territorial boundaries. Inputs were processed daily and status reports were available upon demand.

Prior to the IPPMIS, a simple desktop database existed into which individuals would arbitrarily upload data. A flat file format necessitated multiple input points resulting in redundant data and input errors. Data extraction was hampered by lack of file integration. Management tended to maintain independent operations with limited cross-functional communications. The belief that "information equals power" produced a resistance to sharing data. Control and management of data were limited resulting in poor security. An intended outcome of the new IPPMIS was to facilitate increased cross-functional communication, information sharing and improved management coordination.

Advancements

During the five-year period preceding the time frame ofthis case, (1987-1992), a number of significant technological advancements were implemented. The mainframe computer infrastructure was rapidly being converted into a client-server architecture. Networked desktop computers supporting a Windows operating platform became standard throughout the PMO. Functional applications were redesigned to run within the new operating environment. New structures materialized permitting real-time on and offline data processing and updating. Processing speeds were increasing exponentially. New management philosophies were being developed that recognized the value of integrated systems and personnel. Configuration management-the use of a specialized process applying accepted business practices during the early planning phases of product development-was an emerging innovative managerial process. New specializations of personnel in the acquisition profession were also growing.

Management Practices and Philosophies Prior to Project Initiation

Prior to the implementation of Acquisition Reform in 1990, typical management practices included task assignment through a functional hierarchy, with oversight/management through a vertical pipeline. Personnel were assigned projects that were then monitored and evaluated by supervisors, usually under a prioritization structure established by management. Personnel were selected based on their past performance and typically functional specialization was limited to engineering functions. Personnel were trained as required, oftentimes however, in areas that were not associated with their functional job responsibilities or their civil service career designation. Typically there were no coordinated or systematic plans for personnel development or linking between project tasks, expertise and training.

Knowledge and skills were based in general management and there were significant overlaps and incongruity between what personnel were trained to do and what they actually did. Management was evaluated based on arbitrary and sometimes error prone systems, leading to further mismatches in integrated systems development. Typically employees were not involved in project planning or decision-making and often times were not consulted in their career development. The role of managers was oversight. The role of employees was task performance. Stovepipe structures were the norm and cross-functional coordination or even consultations were rare.

CASE DESCRIPTION

Technology Concerns and Components

The Prime Contractor was tasked with the development of a software program designed to permit total integration of all functions of the acquisition process related to the PMO. The IPPMIS components and processes included as depicted in Table 3.

Of the system parts, a new and critical component of the IPPMIS was the use of a Professional Career Development subcomponent, titled Individual Development Plan or IDP. For purposes of this case study, only the Professional Career Development module was selected for illustration. The IDP was a professional development and training element, which permitted the organized distribution of resources to optimize technical development of acquisition personnel within their designated sub-specializations, and to provide the greatest connectivity between professional competencies and functional responsibilities. At the same time, the IDP incorporated an input mechanism to facilitate managerial scheduling of future employee training requirements and served as a budget allocation tool for personnel resources. The IDP was integrated into the IPPMIS through the matching of specific technical skills with project tasks and activities.

The IDP was a real-time integrated information system facilitating access to data and information from a variety of relational database files for use by all acquisition professionals. Input forms within the IDP included:

* Form A-Personal demographics, OPM grade, primary and subsidiary career field designations, job history, security clearance, and, the level of acquisition professional;

* Form B-Short term and long-term career goals;

* Form C-Developmental objectives and activities;

* Form D-Prior professional training both formal and informal education; and, Form E-Supervisory review and monitoring of the IDP.

The integrated system provided a means of measuring the degree of congruity between the organization's mission, needs and requirements and the IDPs. The IDP facilitated the assimilation of the PMO's mission with the planned individual staff development activities. The IDP was linked to the four component and ten process modules of the IPPMIS. An OPM approved training course catalog and the Defense Acquisition University (DAU) programs are examples of more than 30 catalogs and programs available through the IDP component. The catalogs and programs represent information islands existing within the database configuration. A supervisory review and approval form (Form E) is related to the mission accomplishment and to the career development resource allocation module. The aggregated IDP files were incorporated into the IPPMIS for the PMO, PEO and higher authorities.

The IPPMIS incorporated the acquisition reform concept of IPPD - Integrated Product and Process Development. The IPPD concept is normally implemented through Integrated Project Teams (IPTs) consisting of cross-functional members. IPPD is a systems engineering concept integrating sound business practices and common sense decision-making. The Department of Defense created the IPPD as an acquisition and logistics management program. This program integrated all activities from product concept through production and field support to simultaneously optimize the product and its manufacturing and sustainment processes. The goal ofIPPD is to meet cost and performance objectives for weapons systems acquisition (DAWIA, 1990). The IPPD evolved from concurrent engineering and is sometimes called Integrated Product Development (IPD).

Issue

Limited to no attention was given to the human system. Organizations must undergo profound changes in culture and processes to successfully implement IPPD. Activities focus on the customer and meeting the customer's needs. In DoD, the customer is the end user. Accurately understanding the various levels of users' needs and establishing realistic requirements early in the acquisition cycle is an important function of the systems development process. Trade-off analyses are made among design, performance, production, support, cost, and operational needs to optimize the system (product or service) over its life cycle. In the IPPMIS implementation case study, limited attention was paid to the concurrent design and application of humanware1.

The paradox presented in this problem is that the very foundation concept of IPPD was not followed in the design, development and implementation of the IPPMIS. At a deeper level, the part of the process that is the subject of the paper is the lack of attention paid to end user requirements, skills, and their predilection to accept change. The IPPMIS did not plan or account for the system-technological, the individual person, or the social organizational factors-the human triangle (Shouksmith, 1999) that makes up humanware.

People support what they help to create (Winslow, 1998, 1992) and in this case the end users were not involved in any phase of the Systems Development Lifecycle (SDLC) after requirements planning and prior to final system deployment. The PMO personnel who would ultimately be the end users took limited ownership (minimal support) for a system that was mandated by acquisition reform. Hence, there was limited contact between Prime Contractor and the PMO except for periodic required project audits. The government failed to recognize and support the human side of systems development and the contractor paid little or no attention to anything other than the hardware/software technical requirements. Neither the contractor nor the government recognized that this project reflected the essence of IPPD and hence the essence of acquisition reform. Even technology-oriented end users, such as those in this case, will not support something that they have little or no part creating, testing and deploying. Human factors are at least as important as the structure of the system. In a comparison of technical issues in system's development, humanware is more technically challenging than hardware or software.

Given the application of human factors issues and context of this less than optimal MIS design and implementation, what alternatives or options were available that might have resulted in a different outcome? How can humanware be built into the hardware and software to have a complete system?

There are numerous human factors that were overlooked in this implementation. Table 4 provides a partial list ofhuman factors that were missing, organized by the human systems triangle-system-technology, individual person, and social-organizational factors.

As an example of one of the system technology factors (system ergonomics), the IPPMIS was a sophisticated program consisting of numerous modules and interfaces spanning diverse weapons systems acquisition functions. The completed IPPMIS required technical knowledge, content knowledge, database manipulation skills, limited programming skills, high navigation interpretation, a high tolerance for ambiguity and individual work-- arounds to facilitate system utilization. Specific psychometric properties of display were given limited consideration during the IPPMIS design process. Examples of shortcomings in display and navigation (operation) in the IDP module include:

* Screen Design-each screen had a different layout as well as limited use of white space;

* Text Design-conventional text design principles were not followed for text layout, type sizes, spacing of text, colors, and use of section titles;

* Activity Sequencing-not organized consistent with end user data entry sequencing;

* Navigation bars-placed in the bottom left hand corner on the main screen and moved to different locations on subsequent screens;

* Icons-non-standard graphical icons were used on the navigation bars. Such icons did not include a tool tip or help option. Icon functionality was determined through a trial and error protocol;

* Keyboard shortcuts-many typical Windows based keyboard shortcuts such as Ctrl C to copy and Ctrl V to paste were not active;

* Function keys-were included but some function keys had dual functionality; e.g. the same icon was used both to edit a record and to save a record;

* Feedback messages-all feedback messages appeared in the top right hand comer of the screen and generally consisted of three to five words;

* Menu bars-used non-standard formats;

* Input buttons-input button names were labeled as Form A, Form B, Form C, Form D, and Form E. Nominal descriptions were disregarded; and,

* Report generation-required the user to remember from which part, Form A - Form E, the requested information was located.

Final system specifications included features that were non-intuitive, non-standard, not well-labeled or disregarded conventional design principles. When the end user was queried regarding utilization, the perceived lack of systems reliability was stated as one of the issues of concern. End users also reported difficulties in information access, results consolidation and report generation. Many of these psychometric shortcomings resulted in end user cognitive overload which further deteriorated an already resistant workforce to IPPMIS adoption.

All end users were contacted to participate in the system prototype, test, and evaluation. Approximately 10% of the user population (five employees) participated during the requirements generation, design and prototyping phases. End user attention toward understanding the various system elements during prototyping was lax and was directed toward completion of daily functional activities.

The user population identified prototyping as a `necessary evil' and a `waste of time.' Early prototyping results produced high failure rates. Although the Prime Contractor eventually remedied these initial failures, a underlying perception of technology distrust emerged (Lippert, 2001). The distrust was geared toward not only the developer, the Prime Contractor, but toward the information system itself. The various levels of limited trust (Adams & Sasse, 1999) generated increasing resistance to system use.

Technical problems were overcome through individual procedural work-arounds. These modifications enabled knowledgeable users the ability to 'work' the system while excluding less capable individuals from solving these technical issues.

The cultural norm was that professional development, including increasing familiarity with integrated technology, took a back seat to mission accomplishment. The Prime Contractor offered limited help desk support and virtually no system training.

Managerial and Organizational Concerns

Technical system integration was not a management concern. Development costs were limited. System development occurred inside ofan existing line item budget for administrative support, which posed a management problem. The Prime Contractor developed a unique system for the PMO and did not make use of Commercial Off-The-Shelf products (COTS). Several managers expressed a concern for a perceived loss of power through relinquishing their discretionary decision-making authority to the IPPMIS.

The IPPMIS failed during the operational implementation phase primarily because of a cognitive overload on the human system and personnel resistance to a complex integrated system. Specifically, the end users found the system to be complicated, difficult to navigate, and often-unreliable leading to adaptation and acceptance resistance. The IPPMIS was perceived as disempowering by its users. It is suspected that part of the system failure was a result of lack of system acceptance and use (Hilson, 2001). "The human element has become the critical determinate of IS success" (Martinsons & Chong, 1999).

Although the new system was designed to integrate the PMO cross-functional elements, many managers perceived the actual system configuration to reinforce stovepipe structures. The various functional system components were well integrated. However, locating and accessing the various components was often a challenge. Users overtly expressed resentment toward the system. Within small user groups, individuals discussed the waste of time and resources associated with the system procurement process. Management was not privy to some of these discussions. Senior individuals at the end of their careers were reluctant to learn and accept a new information system. The speed of implementation coupled with the complexity of the system overloaded the late career stage end users. These concerns and issues made it difficult for the Prime Contractor to implement the IPPMIS.

The Prime Contractor engineered the system with numerous proprietary components. The PMO was compelled to use the Prime Contractor for maintenance, upgrades and future enhancements.

Managers in the extended line of authority expressed a concern that the development costs exceeded the final system value. The perceived loss of employee productivity was problematic given the required human investment in time and energy necessary to learn and operate the new system. Limited training was available due to budget constraints and because the culture was one where individuals were expected to learn on their own.

Cultural Issues

PMO GOV, as an organizational entity, operated in a highly bureaucratic and politically charged environment under constant Congressional oversight. The organizational entity is an integration of military and civilian personnel. As typical with many government agencies, military personnel rotate in and out of their job positions on predetermined schedules. Civilian personnel rotated less frequently. There was an underlying sense of frustration within the civilian ranks that mission loyalty was stronger due to longer-term tenures within the organization.

Organizational Philosophies

Within government circles, there is a funding axiom of "use-it" or "loss-it." Budget allocations are used or returned to Congress at year's end. Defense contractors are often considered second-class citizens. There are multiple reviews throughout the contract life cycles by Congressional oversight groups including the U.S. General Accounting Office (GAO) and internal Department of Defense auditors. Internal acquisition personnel consider weapons systems development and acquisition one of the most important functions of the DoD.

CURRENT CHALLENGES AND PROBLEMS FACING THE ORGANIZATION

The systems development and implementation processes associated with this case spanned a ten-year period. Four years were spent in the initial development and implementation phases. The remaining six years were necessary to generate a fully functional product. The weapons systems acquisition development processes were sustained concurrently throughout the IPPMIS conversion process. Resistance to change remained a constant threat to this project. The system atrophied waiting on a reengineering evaluation in the last year of the contract. Business Process Reengineering (BPR) of the processes should have been considered (Broadbent, Weill & St. Clair, 1999; Roy, Roy & Bouchard, 1998; Tonnessen, 2000). That evaluation never occurred. The IPPMIS product was neglected.

The human factors that plagued this case included poor planning during all project phases. A lack of attention was given to the relationship between the end users (PMO) and the designers (Prime Contractor). Project planning did not accommodate periods of high transaction volume. Needs analysis focused on the technical hardware and software requirements. No consideration was given to the trust in the technology (Lippert, 2001). Ergonomics were minimally addressed. Project management ((Chatzoglou & Macaulay, 1997) and business planning were under-funded and project characteristics were not understood.

The personalities of the individuals involved, both government and contractor, were simply not considered. Expectations were discussed, but then promptly forgotten and feedback was light and limited. The result was that the end users had little enthusiasm to accept a new system. Users were resistant to training, education and development on the IPPMIS and therefore user satisfaction was seriously compromised. The notion of improved productivity was never accepted by users and the interests and intents of the stakeholders, both government and contractor were not explicated. In the end, the end users' attitudes about the entire project and concept were ignored.

The government continues to face numerous social-organizational issues. Politics continually inhibited efforts to improve the IPPMIS. User involvement remains reactive, with limited support and marginal proactivity, by any but the PMO representative for acquisition reform. The management of the PMO uses a `hand's off approach and therefore project planning and management is limited. The culture of the government, the defense industry and the individual contractor were all ignored. Management commitment was difficult to identify and cooperative environments to facilitate change were never explicitly addressed. There were no rewards or incentives for adoption of the IPPMIS and open communications were limited to system evaluation at final deployment. Government personnel distrusted the contractor and the contractor personnel distrusted the PMO. Changes, from the level of acquisition reform to database management of modules such as the IDP, were resisted. The contractor did not consider job design issues. The age and seniority of the end user workforce in retrospect were misjudged. Differential power through consumer/provider, user/developer was misunderstood. The final outcome of this lack of attention to the human factors was a less than fully functional system, at an unreasonably high cost, with marginal utility.

Sidebar

GLOSSARY OF TERMS

Sidebar

Commercial Off-The-Shelf Products (COTS)-pre-developed products, including software applications, available for purchase directly through vendors or commercial sources.

Defense Acquisition Work Improvement Act (DAWIA)-the formal institutionalization of acquisition reform policies, practices and procedures within the Department of Defense (DoD).

Individual Development Plan (IDP)-a database module of the IPPMIS focused on professional development and training.

Sidebar

Integrated Product and Process Development (IPPD)-a management program permitting the integration of all acquisition products, processes, functions, structures, configurations and systems.

Integrated Product and Process Management Information System (IPPMIS)-a MIS designed to integrate engineering, scheduling, testing, funding, procurement, contractor resources, personnel quality control and system upgrades in a master acquisition and procurement structure.

Sidebar

Integrated Project Team (IPT)-a cross-functional group of personnel assembled to execute a specific project.

Naval Sea Systems Command (NAVSEA)--is hierarchically linked to the Executive Branch of the United States Government through the Department of Defense, Navy Department.

Sidebar

Program Executive Office (PEO)-a small executive staff tasked with evaluation and management of operations for related Program Management Offices (PMOs).

Prime Contractor-a solicited defense contractor within the commercial sector hired to support the development of the IPPMIS.

Program Management Office (PMO)- responsible for either an offensive or defensive system that functionally discriminates, e.g. an air-to-air combat defense system, for identification of unfriendly aircraft and data feed-forward into a combat system for target acquisition and weapons deployment. The example PMO might function under a Program Executive Office for air combat systems. (The PMO GOV is the POM in this case.)

Request For Proposal (RFP)a formal proposal process used to solicit work through a bid, competition, evaluation, and award procedure.

Footnote

ENDNOTES

Footnote

1 The notion of humanware originated from a case study of the Ambrake Corporation (Gupta, Holladay, & Mahoney, 2000).

References

FURTHER READING

References

Acquisition 2005 Task Force. (2000, October). Final Report: Shaping The Civilian Acquisition Workforce ofThe Future (Prepared for the Under Secretary of Defense for Acquisition, Technology, and Logistics and the Under Secretary of Defense Personnel and Readiness). Washington, D.C.

Agarwal, R., Higgins, C., & Tanniru, M.R. (1991). Technology Diffusion in a Centralized MIS Environment: Experiences at Carrier. Information & Management, 20(1), 61-70.

Agarwal, R., Roberge, L., & Tanniru, M.R. (1994). MIS Planning: A Methodology for Systems Prioritization. Information & Management, 27(5), 261-275.

Allen, C.D. (1995). Succeeding as a Clandestine Change Agent. Communications of the ACM,38(5),81-87.

References

Bashein, B.J., Markus, M.L., & Riley, P. (1994, Spring). Preconditions for BPR Success: And How to Prevent Failures. Information Systems Management, 7-13.

Byers, C.R. & Blume, D. (1994). Tying Critical Success Factors to Systems Development. Information & Management, 26(1), 51-62.

Cerpa,N. & Verner, J.M. (1998). Case Study: The Effect ofIS Maturity on Information Systems Strategic Planning. Information & Management, 34(4), 199-208.

Davenport, T.H. (1993). Process Innovation: Reengineering Work Through Information Technology. Boston, MA: Harvard Press.

Davenport, T.H. & Short, J.E. (1990, Summer). The New Industrial Engineering: Information Technology and Business Process Redesign. Sloan Management Review, 11-27.

Fowler, D.N. & Nissen, M.E. (2001). Innovating the Federal Acquisition Process Through Intelligent Agents. Acquisition Review Quarterly, 8(3), 151-165.

Gill, J.H. (2001). Crisis in the Acquisition Workforce: Some Simple Solutions. Acquisition Review Quarterly, 8(2), 83-92.

References

Jefferson Solutions. (2000, May). 9909 Refined Packard Count (Key Acquisition and Technology Workforce Based on September 30,1999 DMDC Data). Washington, D.C.

Karahanna, E., Straub, D., & Chervany, N. (1999). Information Technology Adoption Across Time: A Cross Sectional Comparison of Pre-Adoption and Post-Adoption Beliefs. MIS Quarterly, 23(2),183-213.

Li, E.Y. & Chen, H.G. (2001). Output-Driven Information System Planning: A Case Study. Information & Management, 38(3),185-199.

Lucas, H.C. (1986).A Casebook for Management Infor?nation Systems. New York: McGrawHill.

References

Mandatory Procedures for Major Defense Acquisition Programs (MDAPS) and Major Automated Information System (MAIS)Acquisition Programs. (2001, June). (Prepared for the Under Secretary of Defense for Acquisition, Technology, and Logistics). Washington, D.C.

Mays, R.G.,Orzech, L.S.,Ciarfella, W.A.,&Phillips, R.W. (1985). PDM: A Requirements Methodology of Software Systems Enhancements. IBM Systems Journal, 24(2), 134150.

References

Nissen, M.E. (1998). Redesigning Reengineering Through Measurement-Driven Inference. MIS Quarterly, 22(4), 509-534.

Nissen, M.E., Snider, K.F., & Lamm, D.V. (1998). Managing Radical Change in Acquisition. Acquisition Review Quarterly, 5(2), 89-105.

Oz, E. (1994). Information Systems Mis-Development: The Case of Star*Doc. Journal of Systems Management, 45(9), 30-35.

Ruparel, B. (1991). A Case Study of Systems Analysis at the American Red Cross. Journal of Systems Management, 42(7),13-21.

Schwalbe, K. (2000). Information Technology Project Management. Cambridge: Course Technology.

Shank, M.E., Boynton, A.C., & Zmud, R.W. (1985). Critical Success Factor Analysis as a Methodology for MIS Planning. MIS Quarterly, 9(2),191-130.

Struth, R.G. (2000). Systems Engineering and the Joint Strike Fighter: The Flagship Program For Acquisition Reform. Acquisition Review Quarterly, 7(3), 221-231.

References

REFERENCES

References

Acquisition 2005 Task Force. (2000, October). Final Report: Shaping The Civilian Acquisition Workforce of The Future (Prepared for the Under Secretary of Defense for Acquisition, Technology, and Logistics and the Under Secretary of Defense Personnel and Readiness). Washington, D.C.

Adams, A. & Sasse, M.A. (1999). Users Are Not The Enemy. Communications of the ACM, 42(12),40-46.

Ang, S. & Slaughter, S. (2001). Work Outcomes and Job Design for Contract Versus Permanent Information Systems Professionals on Software Development Teams. MIS Quarterly, 25(3), 321-350.

Broadbent, M., Weill, P., & St. Clair, D. (1999) The Implications of Information Technology Infrastructure for Business Process Redesign. MIS Quarterly, 23(2), 159-182.

Chatzoglou, P. & Macaulay, L. (1997). The Importance of Human Factors in Planning The Requirements Capture Stage of a Project. International Journal of Project Management, 15(1),39-53.

References

Gill, J.H. (2001). Crisis in the Acquisition Workforce: Some Simple Solutions. Acquisition Review Quarterly, 8(2), 83-92.

Gupta, M., Holladay, H., & Mahoney, MJ. (2000). The Human Factor in JIT Implementation: A Case Study of the Ambrake Corporation. Production and Inventory Management Journal, 41(4),29-33.

Hilson, G. (2001). Human Factor Plays Big Role in IT Failures. Computing Canada, 27(6), 18.

References

Jefferson Solutions (2000, May). 9909 Refined Packard Count (Key Acquisition and Technology Workforce Based on September 30,1999 DMDC Data). Washington, D.C.

Lippert, S. K. (2001). An Exploratory Study into the Relevance of Trust in the Context of Information Systems Technology. Doctoral Dissertation. The George Washington University, Washington, D.C.

Martinsons, M. & Chong, P. (1999). The Influence of Human Factors and Specialist Involvement on Information Systems Success. Human Relations, 52(1),123-152.

The National Defense Authorization Act for Fiscal Year 1990. (1990). The 101 Congress of the United States. Washington, D.C.

Roy, M.C., Roy, K., & Bouchard, L. (1998). Human Factors in Business Process Reengineering. Human Systems Management, 17(3),193-204.

Shouksmith, G. (1999). Management and Organization. Proceedings of the 1999 International Air Traffic Control Management Conference. Singapore: Civil Aviation Academy.

References

Struth, R.G. (2000). Systems Engineering and the Joint Strike Fighter: The Flagship Program For Acquisition Reform. Acquisition Review Quarterly, 7(3), 221-231.

Tonnessen, T. (2000). Process Improvement and the Human Factor. Total Quality Management, 11(4-6), 5773-5778.

Winslow, E.K. (1992, February). The Arrogance of the Term Resistance To Change. Unpublished Paper.

Winslow, E.K. (1998, March). Change Processes in Organizations. The George Washington University, Washington, DC.

AuthorAffiliation

Susan K. Lippert

Drexel University, USA

AuthorAffiliation

BIOGRAPHICAL SKETCH

AuthorAffiliation

Susan K. Lippert is an assistant professor of Management Information Systems in the Department of Management at Drexel University, Philadelphia, PA, USA. Her current research interests include use and management of information technology. Her special interest is in the exploration of technology trust. She has also completed research in the area of technological innovation in training and education. Dr. Lippert received her PhD in MIS and an ABA in Logistics, Operations, and Materials Management from The George Washington University, Washington, D. C. Professor Lippert has published in the Journal of End User Computing, the Journal of Management Education, and the Journal of Mathematics and Science Teaching. She has presented papers at numerous conferences and symposia such as the Academy of Management, the Information Resources Management Association, the International Conference on Information Systems, and the Academy of Business and Information Technology.

Subject: Studies; Project management; Government agencies; Information systems; MIS

Location: United States, US

Classification: 9130: Experimental/theoretical; 9550: Public sector; 9190: United States; 5240: Software & systems

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 112-129

Number of pages: 18

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: tables references

ProQuest document ID: 198655915

Document URL: http://search.proquest.com/docview/198655915?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 75 of 100

The lonely comate: The adoption-failure of an intranet-based consumer and market intelligence system

Author: Hendriks, Paul H J; Jacobs, Wendy H

ProQuest document link

Abstract:

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

The case study concerns the disappointing reception of an intranet application at TopTech, a prominent player in the field of electronics. The application in question, called Comate, which stands for "Consumer and Market Intelligence Technology Environment," was conceived and built by the central staff department for Consumer and Marketing Intelligence (CMI) of the company. When this application was introduced some years ago, its purpose was to smooth information flows between CMI departments worldwide and to enhance networking between these departments. The organization decided to form a project team to investigate the reasons for the lacking acceptance of the system by intended users and to establish what would be the most appropriate reaction on the part of Central CMI: change the system, initiate new, supportive initiatives, or abandon the Comate project altogether. The case study examines how this project team tackled the problem. The team decided to address the evaluation, diagnosis, and redesign of the system and its possible contribution to CMI from the perspective of the system's acceptability. Key component in its methodology was the integrated use of the Technology Acceptance model (TAM) and Task-Technology Fit model (TTF).

BACKGROUND

A few years ago, a large global electronics company, that had its headquarters in The Netherlands, introduced an application to support its consumer and market intelligence. This application, called Comate (Consumer and Market Intelligence Technology Environment), was offered via the company's intranet facilities to staff departments all over the world. The main rationale for developing and introducing the application was twofold. First, its aim was to channel information requests from local departments to the central Consumer and Marketing Intelligence (CMI) Department and to enhance the communication between these departments. Second, by using the system, the central CMI Department hoped to achieve standardization and efficiency gains in its governance oflocal departments. The functionality of Comate included access to market reports, product data related to consumers and markets, consumer and market monitors, facilities to support communication with the central CMI Department, address and expertise information of departments and people from all over the world, access to information about ongoing and finished projects, and the like. However, the figures concerning actual usage of Comate showed that the system was not being used to the extent that was expected and intended. In fact, because of the disappointing reception, the organization deemed the Comate Project a failure. A regional component proved to be present in the figures signaling this failure. In some countries, the system was used on a regular basis by at least a small group of people; in others it was hardly used at all. However, in none of the countries did the reception and usage ofthe system meet the standards defined beforehand.

Despite its name, the system apparently did not encourage "mating behavior." This was a big disappointment to the head of the CMI Department, Hans Broekmans, as it was his initiative to start the Comate Project and his initial ideas that constituted to a large degree the basis for the current content and operation of the system. He realized that a decision had to be made regarding the future of the Comate system, for the sake of improving the flow of CMI information, but also to prevent the failure of the system from affecting his career within TopTech or elsewhere. How should he react? Should additional functionality be added to the system? Were the datasets presently offered perhaps not the ones Comate's users desired and should others be added? Was the interface perhaps difficult to use, and if so, why? Should additional measures be taken to instruct, support, and guide the users of the system? Or should the discontinuation of the Comate Project be considered?

At the time Hans Broekmans had only some vague notions as to how to answer such questions. He had no clear idea as to which reaction to the disappointing reception of Comate would be most appropriate. He therefore decided not to rush things, as apparently he had done when the system was built, but to look into matters a little more carefully. He formed a project team with a threefold task. First, the team should evaluate the use of the current system to identify reasons for the current lack of usage. Second, he requested an exploration of possible redesign alternatives based on a diagnosis of the current situation of how CMI information was produced, distributed, and used. Third, he asked the team to specify the lessons to be learned from the evaluation of the current system and the diagnosis of CMI's operations, and to use these lessons for substantiating a recommendation as to what the appropriate path to follow would be, i.e., redesigning the current system, reconsidering the procedure of its introduction, or abandoning the project altogether. He decided to appoint the head of his IS department, Johan van Breeveldt, as the project team leader. He selected two ofhis Information System (IS) developers and two marketing specialists as team members. As it happened, a student from the Nijmegen School of Management had just applied for a position as an apprentice in order to conduct her final thesis research. She and her thesis supervisor were also added to the team.

With a total turnover of approximately 30 billion euros in 1998, the company in question (a multinational electronics firm that will be referred to as "TopTech" in this case study) is a Top 10 player in its field. TopTech is a strongly diversified concern operating in some 80 business areas varying from consumer electronics to medical systems and from software to semi-conductors. These activities are clustered into eight divisions. The case studied here involves the division TopTech Consumer Electronics (TCE). Together with the Domestic Appliances and Personal Care division, TCE constitutes the Consumer Products product sector. In terms of sales, TCE is the biggest division of TopTech (a 28% share in total sales; the other divisions' shares range from 2% for Software and Services to 23% for Components and Semiconductors). The products of TCE are marketed in the fields of information, communication, and entertainment. In this market TopTech is one the world's top three market players. The total workforce of the division consists of approximately 46,000 people worldwide. The organization of the division is based on two combined principles: a product principle, leading to six business groups (television, video, audio, peripherals, consumer communications, and digital networks) and a regional principle, leading to four regions (Europe, Asia and Africa, North America, and South America). The intersection of regions and business groups leads to 24 Business Planning Teams (BPTs) that are accountable for their own results.

The case study concerns the Consumer and Market Intelligence (CMI) function of TopTech. CMI closely relates to what in the literature is more commonly referred to as Business or Competitive Intelligence (BI or CI). Kahaner (1996, p. 16) offers the following description of CI: "Competitive Intelligence is a systematic program for gathering and analyzing information about your competitor's activities and general business trends to further your own company's goals." CMI at TCE is organized as a central staff department located at headquarters (Central CMI), and CMI departments for each individual business group (CMI BG TV, CMI BG Video, etc.) as well as for each individual region (CMI Europe, CMI NAFTA, etc.) located at various places in the world. The overall goal of the whole CMI organization is (1) to ensure the representation of ideas and perceptions of consumers and business partners in TCE decisions and processes, and (2) to provide an objective judgment of the outcomes of these decisions in terms of sales, shares, prices, and distribution. Within this context, the mission ofCentral CMI is to: "Proactively provide accurate, reliable, and valid Consumer and Market Intelligence to TCE Units worldwide within a clearly defined structure of professional methods and TopTech's values" (TopTech internal memo).

CMI generates and uses both internal and external sources. External sources range from contracted research by investigation bureaus to United Nations reports and monitors, and from statistical data from national bureaus of statistics and other commercially available panel data to publicly available intelligence on the Internet. Internal sources involve marketing, financial, and logistical data. The users of these sources are intermediate and end-users. Intermediate users are staff at various CMI departments who may benefit from reports from other departments (reports drawn up for one region or business group may also be relevant to others, etc.). End-users are product and marketing managers in the business planning teams as well as general management of TCE.

SETTING THE STAGE

At the end of 1996, Central CMI came up with the idea of developing a database application for the data sources the department distributed. At the time, the customers of Central CMI received most data via hard copy and some data via e-mail. The department recognized that both methods had several shortcomings. Delivering in hard copy implied delays because one would have to wait until the full report, usually referred to as a "book," was printed. Producing and printing these "books" was a time-consuming and costly process because of their size and number. Further delays were introduced by the delivery method of hard copy, particularly when destinations such as Sao Paulo or Singapore were involved. It was also very difficult, ifnot impossible, to make the necessary adaptations once the "books" were printed. E-mail often caused attachments to arrive in mutilated form because of the usually complex graphics included. Also, the department often ran into problems because of the size of the attachment. E-mail also involves risks of security. Reasons such as these induced the department to develop a system to handle these problems.

Early in 1998 the Comate system that resulted from this idea was put into operation. Comate was built on IBM's Lotus Notes functionality and was offered to users on TopTech's intranet via the Domino system. Comate consisted of the following five applications:

1. Market Data: offers processed data and analyses in the form of presentations concerning markets, market shares of competitors, distribution, price movements, market predictions, and socio-economical and technological trends;

2. Research Projects: contains the results of research projects completed by internal and external investigators;

3. Project Informer: contains information about planned, current and completed research projects run by Central CMI;

4. Let's Japan: provides a monitor of technological developments in Japan and follows the main competitors and their investments in consumer electronics, research and product development in that country;

5. CMI Contacts: contains organizational charts of the TCE organization, and a knowledge map of the connections of Central CMI inside and outside the TopTech organization.

Access to Comate has to be authorized by Central CMI. The home page of the system, which is accessible to all TopTech employees, offers a registration form to request permission to use the system. At the time the project team led by Johan van Breeveldt started its work in the spring of 1999, some 250 people all over the world were granted this permission. The first two applications mentioned, Market Data and Research Projects, were the most popular in Comate. To illustrate the functionality of Comate some examples from Market Data will be presented. The application can be regarded as a collection of search tools on top of a large set of documents, with some additional functionality loosely linked to search actions. Search actions for documents or their authors usually start by selecting one of the categories "Product," "Region," "Contact," and "Publications," with an additional entry "New Publications." Clicking, for instance, the option to search for documents related to specific products offers a taxonomy of products at several hierarchical layers, based on the standard classification of TopTech with which all employees -in varying degrees of detail -are familiar. New layers will appear when users zoom in on a specific class of products (or if they choose at any point in the hierarchy to "expand all"). Documents are typically connected to the base categories of the taxonomy. Apart from the hierarchical menu system organized around products, regions, etc., some additional search functions are offered. Most of the additional functionality in Comate is introduced for the purpose of stimulating communication among Comate users. For all documents, additional meta-information is stored, including the names of the authors. A typical example is the response button that is connected to every document. Clicking this button will open a new window allowing the user to send remarks or questions to the authors in question. When the user files his or her comments, an e-mail message is sent to the authors to notify them. To read these comments, they have to log in to Comate and navigate to the document to which the comments apply. These comments and reactions are accessible to all users of the system, allowing them to contribute to the discussion.

With regard to this case study, it is important to note that the Comate system was developed on a top-down basis. Central CMI, and particularly Hans Broekmans who considered the project "his offspring," pulled all the strings in the project. Its customers, the intended intermediate and end- users of CMI sources, were hardly involved in its development and implementation. Also, when the system needed to be expanded or adapted, no customers were involved. No systematic consultations with people outside Central CMI's development staff ever occurred. This may appear as more surprising than it actually is; the system was conceived primarily as an extension of the work of Central CMI, and not as an aid to make life easier for the customers of Central CMI. It was intended to help streamline existing procedures and speed up current routines in the work of that department. The rationale was that if requests for information could be processed faster and at less cost through Comate, this would be to the benefit of all parties involved.

CASE DESCRIPTION

Perception of Failure and Call for Clarification

Comate was put into operation in January 1998. In the spring of 1999, approximately a year and a half after its introduction, the reception of Comate proved disappointing. The data in the login database of the system showed that only a few dozen of the 250 people authorized to use the system did so on a regular basis. The data also showed that users typically only inspected a few pages per visit and that the duration of an average stay in Comate was short. Although the central CMI department did not keep track of the number of e-mail and hardcopy requests for information, the undisputed impression existed that, contrary to the intentions and expectations, these numbers did not decrease during the period of Comate's operation. These data led Central CMI to conclude that the introduction of Comate was a failure and that the system did not live up to the expectations of its designers. As described in the introduction, this assessment induced the staff responsible for Comate, and more particularly the head ofCentral CMI, Hans Broekmans, to ask for an explanation ofthis failure and to inquire what users would regard a useful and usable system. These questions formed the starting point for the investigation by Johan van Breeveldt and his team. Their task was to uncover the information needs of designated system users, present or potential, both by looking in retrospect at reasons for the current lack of usage and by identifying variables influencing a broader acceptance of the system in the future.

The problem that faced the project team at the start of its work was how to find an appropriate and workable restriction of its domain and how to provide the best direction to its work. The team members were well aware of the fact that the success and failure of information systems (ISs) refer to matters of great complexity, linked to great diversity of individual issues, and addressed in divergent ways in multiple IS development approaches and methodologies (e.g., see Currie & Galliers, 1999). The team decided first of all to focus on the acceptability of Comate to users and to direct the investigation towards reaching an understanding of the elements that determine acceptability. Following Grudin (1992) and Nielsen (1993; 1999), the acceptability of ISs can be split into social acceptability (standards, existence or absence of pressure to use the system, etc., see also Venkatesh & Speier, 1999) and practical acceptability (costs, reliability, usefulness, etc.). The project team then decided to concentrate on the latter concept, because it felt that understanding matters of practical acceptability had a greater urgency. The next question was how to define this domain and how to expand the definition into researchable issues and, eventually, questions to be asked of the actual and intended system users. The domain of practical applicability is usually broken down into the concepts of usefulness and ease-of-use (e.g., Nielsen, 1993, 1999). As these two concepts surfaced in the initial meetings of the project team, they met with considerable enthusiasm, as team members were well aware of the fact that these concepts constitute the cornerstones of the well-known Technology Acceptance Model (TAM; see next section). The cause for this enthusiasm was the fact that TAM was recognized as a well-- established, robust model, thus providing the investigation with a strong theoretically based rationale for identifying relevant variables. The decision was quickly made to use the two concepts of usefulness and ease-of-use as the main vehicles for establishing the information needs vis-a-vis Comate.

TAM and TTF

As indicated above, the project team decided to start its work by exploring the concepts of perceived usefulness (PU) and perceived ease-of-use (PEU) in order to establish how a definition and elaboration might enable them to identify reasons for the failure of Comate and specify the diagnostic questions that the team should answer. These two concepts are the key independent variables influencing the attitude towards IT and intention to use IT, as specified by the Technology Acceptance Model (TAM, see Davis, 1989; Davis, Bagozzi, & Warshaw, 1989). PU is defined as "the prospective user's subjective probability that using a specific application system will increase his or her job performance within an organizational context" (Davis et al., p. 985). PEU refers to "the degree to which a person believes that using a particular system would be free from effort" (Davis et al., p. 985). The project team decided to study the vast literature on TAM to establish whether or not the model could provide an appropriate perspective for answering the evaluative and diagnostic questions Hans Broekmans had asked. The team found that TAM is a generally accepted and successful model (selective overviews of TAM research are, for instance, available in Lederer, Maupin, Sena, & Zhuang, 2000; Venkatesh & Davis, 2000), undoubtedly owing to its common sense nature, appealing simplicity, and robustness (empirical tests invariably show significant relations between the independent and dependent variables in the model, compare Lederer et al., 2000; Szajna, 1996; Venkatesh & Speier, 1999). However, it was also noted that the explanatory power of the original model is not very high, not to say mediocre, with a typical value for explained variance of around 40% of (Dillon, 2000). Besides, the team found multiple equivocalities, with regard to the nature of the relationships and interactions between PEU, PU, and usage (for an overview, see Lederer et al., 2000), the importance of new constructs that some researchers introduced, and the various ways new variables appeared to affect the relationships among the original variables (e.g., Gefen & Straub, 1997; Veiga, Floyd, & Dechant, 2001). This, it decided, was bad news for the investigation, because it implied that TAM alone could not provide the firm ground it needed for detecting weaknesses in the current Comate and for directing prospective diagnosis. A quote from Doll, Hendrickson and Deng (1998, p. 839) may serve as an accurate characterization of the general opinion of the team at that time, as these authors note that: "Despite its wide acceptance, a series of incremental cross-validation studies have produced conflicting and equivocal results that do not provide guidance for researchers or practitioners who might use the TAM for decision making." From its study of the accumulated writings on TAM, the project team drew two conclusions. First, it felt the need for further elaboration of the two concepts of PU and PEU at the conceptual level in order to establish their constituent elements. Second, the team decided that an exploration of other explanatory variables in addition to PU and PEU was called for.

In an additional literature review of the broader class of technology acceptance models, the project team found particularly interesting ideas, useful for both these purposes, in the task-technology fit (TTF) model (e.g., Goodhue, 1995, 1998; Keil, Beranek, & Konsynski, 1995; Lim & Benbasat, 2000; Marcolin, Compeau, Munro, & Huff, 2000). The basic suggestion of TTF is that whether or not the qualities of the system will induce people to use it depends on the task concerned. As Goodhue (1995, p. 1828) puts it: "A single system could get very different evaluations from users with different task needs and abilities." While TTF is newer than TAM and has not attracted as much research attention, research results for this model equally show its robustness and explanatory power (see references above). Just like TAM, TTF has a strong common-sense appeal in its suggestion that IT usage can only be understood if the reason to use the IT, i.e., the task, is included in the picture. The project team concluded that while TTF involves a different perspective on utilization behavior than TAM, these models appear to be complementary rather than contradictory. For instance, it found that Mathieson and Keil (1998; see also Keil et al., 1995) had shown that neither task characteristics nor technology features in their own right can explain variations in PEU, but the interaction between the two classes can. TTF therefore influences or defines PEU. Similar suggestions have been made as to the relationship between TTF and PU (e.g., see Dishaw & Strong, 1999; see also Venkatesh & Davis, 2000: their "interaction between job relevance and output quality" closely resembles TTF). Research by Dishaw and Strong (1999) corroborates the fruitfulness of the idea to integrate the basic concepts of TAM and TTF, as these authors show that a combined TAM/TTF model outperforms an individual TAM model as well as an individual TTF model.

Rethinking Comate

The project team decided to use the combined insights of TAM and TTF to direct its evaluative and diagnostic work. It reached this stage of its investigation some three months after its inception, which was a bit later than anticipated mostly due to the large amount of IT acceptance literature it encountered. The task it faced at this stage was to find a useful interpretation and combination of the conceptual foundations of both models and the cumulative outcomes of studies applying the models. The team was well aware ofthe fact that these studies do not translate automatically into design directives for ISs. IT acceptance studies pay much attention to issues of significance in assessing the contributions of variables explaining IT usage, which was not the main concern of the investigation at TopTech. In one ofthe meetings where - again - numerous figures and statistics representing the explanatory power of the models crossed the table, Johan van Breeveldt stood up and exclaimed: "lam not the least interested in how things work in 90,95 or 99% of the cases! My only interest is in finding out how things work in one case-ours!" These discussions led the project team to define the following agenda: first, it needed to specify and elaborate on the concepts of usefulness and ease-of-use within the context of TopTech's Consumer and Market Intelligence. Next, it needed to identify indicators to serve as hooks for two task realms: the diagnosis of the appropriate organizational context and the redesign and evaluation of the system. The third issue on the agenda concerned the translation of these indicators into questions to be put to selected staff. The fourth task it set was to identify, define, and specify other factors in addition to PU, PEU and TTF. As to this class of additional variables, the team adopted the pragmatic approach of not defining these beforehand but identifying them by inviting respondents to name such factors after considering PU-, PEU, and TTF-inspired questions. The remainder ofthis section will focus on the first item on this agenda. The other items will be addressed in the next two sections, describing the data collection strategy and the outcomes of the empirical part of the investigation.

The challenge facing the investigators, given their decision to use TTF as a key component in the definition of perceived usefulness and ease-of-use, was to link the functionalities of Comate to a description of the tasks involved. They decided upon the following three-step procedure for meeting this challenge: the identification of an appropriate model of the tasks, the recognition of a suitable model of the technology functionalities, and the connection of both models. For the first step-identifying the classes of tasks involved in gaining and enhancing the intelligence of markets and customers-the team adopted the commonly accepted model of the Business Intelligence (or BI) Cycle (e.g., Kahaner, 1996; Pollard, 1999; Prescott & Miller, 2001). The BI cycle typically includes four stages:planning and direction (identifying the mission and policies of BI, etc.), collection (data collection and initial processing of these data), analysis (processing data so they can be used for BI-related decisions), and distribution (getting the analysis outcomes on the right desks). The first stage ofthe BI cycle, planning and direction, falls outside the scope ofthe Comate case, which only relates to the tasks of collection, analysis, and distribution. As to the second step in defining TTF-modeling the functionalities of the technology-the project team decided to build its elaboration on the 4C framework of groupware functionalities (Vriens & Hendriks, 2000), which is an adaptation of the 3C framework (Groupware White Paper, 1995). The four C's are circulation, communication, coordination, and collaboration. Circulation involves the distribution of information to a broader audience, not aimed at establishing some form of interactivity with that audience. Communication concentrates on the establishment of interaction between senders and receivers of information. Coordination refers to matters of sharing resources, sequential and other correspondence among the subtasks of a larger task, and overlap between individual tasks that are not constituent elements of some overarching task. Collaboration occurs when two or more people are working together on the same task. Functionalities of Comate implemented at that time or considered for future implementation may refer to any of these four classes.

While it had not taken the team long to come up with the three-step procedure and to decide that it would provide a good and useful structure for its definition work, it encountered some irksome problems when it got to the third step of the procedure: How to connect the BI cycle and the 4C framework? and Where did the distinction between usefulness and ease-- of-use come into the picture? Should these two concepts be treated on a stand-alone basis, leading to two separate applications of the whole procedure, or could they be included in one procedure through some mutual connection point? It took the team several rounds of sometimes heated discussions to work towards a solution of these problems. The break-- through moment in these discussions occurred when Maartje Zijweg, one of the marketing specialists, proposed to distinguish between the content and process sides of the CMI tasks. This distinction, so she argued, would provide the basis for two different but related perspectives on tasks and their connection to the functionalities of the technology. Examining this connection from a task-content perspective would lead to the recognition of issues of usefulness. Starting from a task-process perspective would enable the team to recognize issues of ease-of-use in the connection between these tasks and the functionalities of the technology. The other team members applauded this suggestion.

There is no way of telling any more who made the second suggestion that helped the project team out of its deadlock. Several team members claimed authorship of the suggestion, leading to endless back-and-forth discussions. This suggestion was to detach the distribution stage from the BI cycle, to reintroduce it within and between the other stages of the BI cycle, and to elaborate it using the 4C framework. The reinterpreted BI cycle that emerged as the result of this reshuffling is shown in Figure 1. The four C's come into the picture when the question is asked how an application such as Comate may support the tasks within the main classes of the BI cycle (the upper sequence in the figure) and between the stages of the cycle (the lower sequence in the figure). The concepts of circulation, communication, coordination. and cooperation then appear as an elaboration of the way in which connecting to other individuals with similar or related tasks may enhance the task performance of an individual. The four C's are four different ways in which these connections may materialize. They are also the classes of functionality in which the Comate application may prove valuable. When these functionality classes are studied in terms of leading to more effective task performance, the usefulness of the application is at stake. Ease-of-use issues are at stake when the question is asked as to whether using Comate leads to more efficient task performance.

Data Collection Strategy

The data in the case study-both for the evaluation and the diagnosis/redesign steps-- were collected by means of interviews with several classes of interested parties: actual users, designated users who appeared to use the system hardly or not at all, potential users who had not been included in the Comate-related efforts before, system designers and content specialists at the central CMI department. As to the subclass of actual or potential users, the group of interviewees consisted of intermediate users and end-users of the system. Most of the intermediate users were marketing managers at the corporate, regional, or business-unit level. The end-users included product and marketing managers for individual classes of products and other staffmembers of the local consumer and market intelligence departments.

As to the content of these interviews, a distinction was made between the assessments of usefulness and ease-of-use. Research has shown that users are better equipped to establish beforehand what they want an individual system to do than how they want it to do that (e.g., see Venkatesh, 2000; Venkatesh & Davis, 1996, 2000). The project team saw this as a justification of separating data collection procedures for the concepts of PU and PEU. As to the usefulness of Comate, the general direction ofthe interviews involved the sequence of diagnosis-evaluation-redesign. As to ease-of-use, they followed the sequence of evaluation-diagnosis -redesign. To identify other factors than those directly related to ease-of-use and usefulness, the wrap-up phase of each interview contained questions aimed at uncovering the relevance of such factors-both from scratch and on the basis of a list of named factors (such as awareness of the existence of the system). Separate questionnaires were prepared for intermediate and end-users.

The questions concerning usefulness were clustered into five domains of potential usefulness. The groupware functionality "circulation" was split into two domains: (1) circulation within the collection stage and in the connection ofthis stage with the subsequent analysis stage, and (2) circulation within the analysis stage and in the subsequent stage of connecting the producers and consumers ofthese analyses. The other groupware functionalities "communication," "coordination," and "collaboration" were treated as separate domains, because Central CMI deemed their importance secondary to the importance of circulation. For each domain, the following subjects were addressed via the following sequence of closed and open questions:

* characterization of the tasks involved (e.g., domain 1: receiving sources, offering sources to others), specification of elements of the task, general evaluation of the task

* identification of problems related to the task and its elements

> designating such problems

* identifying problems from scratch ("What problems occur?")

* scoring listed problems ("Do these problems occur?")

* recognizing problems that should be included in the list ("What other problems occur?") > assessing the importance of named problems

> finding ways to address these problems and other issues to improve task settlement

* evaluation of Comate in relation to problems and suggested solutions for people familiar with the system

* solicitation of ideas on potential (new) functionalities for an intranet application with reference to problems and suggested solutions.

The interviews on ease-of-use started from the evaluation of the current system ("How do you like the way the system works?") and worked towards diagnostic and redesign-- oriented questions concerning ease-of-use ("How would you want the system to work?"). They started with questions addressing issues at the global level of the system (registration procedures, home page of the system, instruction, manuals and utilities, general search facilities, switching between applications, etc.). The remainder of these interviews was organized around the five applications that made up the system (Market Data, Research Projects, etc.). Respondents were asked to establish the link with the groupware functionalities "circulation," "communication," etc., by presenting them with open questions relating individual functionalities to task elements (e.g., "Does the response button facilitate communication?") and open questions relating the overall application to task domains (assessing ease-of-use of circulation, coordination, etc., via the applications Market Data, Research Projects, etc.). Ease-of-use related questions were only put to actual users of the system.

Results

The outcomes of the rounds of interviews held by the investigators are presented here following the structure of these interviews, which were organized around the five TTF domains of potential usefulness and ease-of-use described above. The outcomes for these domains are then summarized, leading to the final picture of the perceived usefulness and ease-of-use of the system.

As to the first domain, the collection of reports to be circulated and their distribution to the analysts, the potential value of Comate appeared undisputed among those who were aware of the existence of the system, even if they themselves used it hardly or not at all. The main problems they faced as to the availability of sources appeared to be the timeliness of their delivery, the lack of clarity in delivery procedures, and the lack of time the end-users usually had at their disposal when facing tasks for which the use of sources was indispensable. While people recognized that solving these problems would involve more than the introduction of ICT, the general feeling was that Comate, with some adaptations, could do a good job in easing the pain. The criticisms of Comate leading to this call for adaptations included: lack of clarity in the organization of files and location of data, problems with the accessibility of data, problems of authorization, the awkwardness and limitations of the query and search facilities of the system, and the response time for some queries. One respondent observed that the external research bureau that triggered most of the criticism because of delays and vague delivery dates and procedures could do a much better job if it were to publish its reports in batches via Comate instead of in one go. At the same time, it should be noted that many people appeared to be unaware of the existence of the system, either because they forgot that they had been granted permission to use the system or because they had not been included in the circle of initial users in the first place. One respondent remarked: "The concept of 'Intelligence' these people at Central CMI appear to have would fit better in the CIA than in our company. If these people had wanted the existence of the system to remain a secret, they could not have done a better job." Several CMI staff members reported that, on several occasions, they had wanted to offer their sources on Comate, but had refrained from doing so. The reasons they mentioned were that some of them had no idea whether or not this was allowed or even possible. Others complained about the lack of transparency in the uploading procedures, especially when it concerned updating existing sources.

The second domain involves the equivalent of the first domain for the analysis stage of the BI cycle. It refers to questions as to how to support the inbound and outbound flows of sources in the analysis networks and the distribution of sources throughout these networks. Again, people recognized the potential value of Comate in this domain. They pointed to particular problems because of the confidentiality of some of their analyses and because of problems of fully understanding the "ins and outs" of these analyses when applied in contexts other than the original. Several people mentioned risks of misinterpretation and potential status loss keeping people from offering their analysis outcomes to others and from using the analysis work of others. In the words of one of the marketing managers interviewed: "What it really comes down to is sharing knowledge about how, when, and why a particular analysis is useful. Sharing knowledge is much more than distributing a set of PowerPoint files." Calls for adjustments, related to problems occurring in the processing of analyses, concerned several elements of these analyses: their number, form, time frame, and method. There were many complaints about the low availability ofthe work ofother analysts, via Comate or other channels, even leading some people to question the raison d'etre of Central CMI, as that department hardly offered any analyses. When analysis outcomes did become available, most of the time they appeared in a format that was not suited for use outside the context for which they had been generated. Particularly, long-term analyses appeared to be lacking, which was considered unfortunate as these could provide a kind of organization-- wide backbone into which department level analyses could be plugged. Several critical comments were inspired by doubts as to the scientific stature of analyses that had been put on Comate. In short, many comments involved the suggestion to reconsider Comate from the position of the potential consumers of these analyses instead of from the producers' viewpoint.

The third domain concerns the communication aspects within all stages of the BI cycle considered in the investigation. It was hardly surprising that the interviewers found multiple examples of communication in all stages ofthe BI cycle, between parties within and between departments, at the same geographical location and across locations, and concerning a wide variety of subjects and situations. Typical means that were used in these communications were telephone, e-mail, fax, presentations, or face-to-face contacts. But not Comate! Most people indicated that they experienced no insurmountable barriers to communication, apart from some occasional problems of time-zone differences that could well be by-passed by using e-mail. The main spot where communication support had been introduced in Comate was the response button mentioned above. All the people who knew of the existence of Comate were also aware of the existence of this function in the system. Apparently, in the limited advertising for Comate, the response button had played a significant role in highlighting the potential surplus value of the system. The assessments of this surplus value were, without exception, negative. People indicated they never used it and had no intention of doing so in the future. They offered several explanations. Getting feedback from the authors of the document would simply take too long if they used the feedback button; they preferred to pick up the phone. Also, the fact that remarks entered via the response button would become publicly available met with much criticism. It could do undue harm to both the authors of the documents and the authors of the comments. Also, most questions people appeared to have did not concern an individual document but were of a more general nature. Several people noted that if any type of functionality for supporting communication might be useful in Comate, it would be the establishment of some form of electronic discussion group or database. Such a discussion platform might, for instance, support the location of relevant documents, which people identified as a more relevant topic when communicating in an electronic environment than discussing the contents of these documents.

The fourth domain addresses questions as to whether and how coordination within and between the stages of the BI cycle call for support. While several people did experience problems of coordination-both within their own department and in their relationships with departments elsewhere-the general feeling was that using Comate, or an adapted version of the system, for solving these problems did not make much sense. As one of the interviewees commented: "What sense is there in offering a Porsche to a baby, if it can hardly walk? They had better spend their time on making the things that are available now work, instead of offering all kinds of exotic new things."

As to the fifth and final domain that involved matters of collaboration within and between groups of collectors and analysts of CMI-related information, summarizing the opinions ofpeople outside the Central CMI department was not very difficult, as these proved to be unanimous. None of the actual or would-be users of Comate saw the point of supporting collaboration through a computer system such as Comate. The general feeling was that supporting cooperation through an application such as Comate within their own departments was not necessary or even possible. They did not see the point of dressing up Comate with specific functionalities aimed at supporting collaborations outside their own departments. Either they did not work together with people outside their own departments, or they did have collaborative relationships with people elsewhere, but experienced no problems or challenges for which Comate could be valuable.

Summarizing the findings as to the usefulness of Comate, the conclusion was that the system was or could be turned into an appropriate system for circulating information, provided that all parties involved were willing to publish their sources. The primary function for which Comate appeared to be used was for searching information. Comate appeared not to be used as a communication system, and respondents indicated that they had no intention of using it as such in the future. The main reasons for this were a generally felt preference for personal contact, the resistance to broadcast personal remarks to an anonymous audience, the fact that hardly any questions that people had were related to an individual document, and the tediousness of writing down questions. Comate was not considered useful as a coordination or collaboration system either, because respondents indicated they did not experience problems in these realms that the system could help resolve. As to the content of the system, a key element of usefulness, respondents stated that they missed information about competitors and distribution. They also asked for an increase in the number of analyses offered on Comate. Dedicated presentations linking several sources to a specific research goal were considered even more useful than sources by themselves, either as such or as templates for performing new analyses leading into new presentations.

As to ease-of-use, the interviews showed that the user-friendliness of Comate left a lot to be desired. The respondents complained that the overviews in the system were not clear. They did not consider the system to be attractive. Comate even was characterized as tedious and not inviting to work with. Also, several controls were found to malfunction: no single respondent appeared to use the response button, and many people complained about the search functionality, which they considered below par and badly in need of improvement. Three facets of the system related to ease-of-use were mentioned in particular. First, the indistinctness and intricacy of the registration procedure form appeared to deter people from requesting access to the system. Second, updating, while recognized as crucial for the system to be useful, was generally considered as a cumbersome procedure, particularly because no clarity existed as to what were the responsibilities of individual users and departments regarding updating and which documents could be updated by specific users and which could not. Third, respondents complained about deficient explanation facilities within the system, the lack of a help desk for handling individual problems, and the absence of short training courses. Giving explanations, as several respondents suggested, could clearly demonstrate that using Comate will save time and could, as a result, help convince people to supply their own information.

CURRENT PROBLEMS/CHALLENGES FACING THE ORGANIZATION

The case study that we described follows the work of the project team led by Johan van Breeveldt whose task it was to provide TopTech with the ammunition needed to decide what to do with the Comate information system. The team's work, and therefore also the focus of the case study, concerns the connection of the first and a possible second life cycle of that information system. We have described an individual life cycle as consisting of the stages of diagnosis, design, implementation, and evaluation. The focus of the case study is on the evaluation stage of the first cycle, which we staged in such a way that it could be connected to the diagnostic and redesign stages of the second life cycle without a reconceptualization of the issues at stake. As we have described in our account of the project team's work, TopTech has also gained insight into some elements of the initial stages of the second life cycle. No full account of the start of a second life cycle for Comate can be given as yet. The elements presented appear as isolated pieces of a puzzle that has yet to be laid down. The key problem the organization currently faces is to decide whether or not extending the life of Comate is a good idea. Responsible for making this decision is Hans Broekmans, the head ofCentral CMI. While the initiation of Comate's first life cycle took place almost completely on his desk, in the current state of affairs it is no longer conceivable that Hans Broekmans alone will be able to make the decision. Several other stakeholders will want to have their fingers in the pie. Among those stakeholders are the managers of the CMI departments of the business groups and the regional CMI departments. They enter the decision-making stage as representatives of TopTech's internal BI network. Also, the external parties that play a role in TopTech's intelligence network are players interested in steering the decision in the direction that suits their interests, including the much criticized external research bureau that produces most of the externally commissioned reports or "books." Because of the perceived failure of the initial version of Comate and the criticisms it generated concerning the overall operation ofCentral CMI, the project has also attracted the attention ofthe board of directors. The board's critically inquisitive interest puts an additional pressure on Hans Broekmans to do things right this time, or at least better than the first time.

From the work of the project team, it has become clear that four areas are crucially important when dealing with the interests of the stakeholders: issues of leadership style, knowledge-sharing and cross-cultural issues, usefulness and ease-of-use-issues, and organizational change and system introduction issues. We will discuss these four areas subsequently.

Issues of Leadership Style

Comate had been conceived and introduced into the organization via a top-down approach. The initial reason for starting the Comate Project was the observation that procedures concerning the dispatch of information requests that Central CMI received could be improved, as we described earlier in this case study. It must be remembered that the justification for introducing Comate was primarily based on considerations as to the good of Central CMI. In these considerations, the good of the customers of Central CMI, i.e., BI staff in regional and local CMI departments, entered as a derivative from Central CMI's interests. Take, for instance, this characteristic statement by Hans Broekmans: "Our clients are the ones that will benefit most from smoother operations at CMI Central." The top-down nature of the introduction of Comate reflects the way Hans Broekmans conceives his responsibilities. He is a very energetic, talkative, and amiable man, but also a person who strongly believes that things will not be done right unless a strong leader sets the course and lays down a plan for others to follow. He is not the type of person who would postpone his decisions until he has consulted all interested parties or until some form of agreement or compromise has been reached. He is also characterized by the fact that he always works with his door closed. People who want to see him cannot just walk into his office; they have to make an appointment beforehand. While by and large being a sociable person, he is also known for his sudden outbursts of anger. People recognize him as champion for defending the interests of Central CMI outside the office, but at the same time he is not seen as someone who will join others putting their shoulders to the wheel when some unexpected problem occurs within the office. He will rather set a deadline for his staffto meet in fixing the problem.

While this conception of how leadership should be executed does not appear inappropriate for running Central CMI, it is bound to lead to clashes with the type of leadership and management that BI specialists in other departments expect or need. Most of these people are highly trained knowledge workers, who claim sufficient autonomy and intellectual freedom to decide for themselves what defines the quality of their work within their local circumstances. They expect Central CMI to play a facilitating role, not a strictly directing role, although they will accept that headquarters- and Central CMI as its mouthpiece-sketches the outline that defines the boundaries of their freedom. They resist others making their decisions for them. Most ofthese BI professionals are highly intrinsically motivated. Lifetime employment is no exception at TopTech, although regional variations exists. For instance, in Latin America, where TopTech is recognized by the public as the "number one" brand in its field and working for the company ensures high status, employees often have family-type ties with the company. In Europe and Northern America, the emotional character of the ties is different, and the average duration of the engagement with TopTech is shorter. In these two continents too, a substantial proportion of TopTech's workforce appears "married to the company" (as evidenced for instance by the fact that outsiders see TopTech as a typical example ofa company characterized by the "Not-Invented-Here" syndrome, which indicates the existence of a sense of superiority). This implies that they will not consider looking for jobs elsewhere if not forced to do so. In the current situation, there is reason to ask whether the type of leadership shown on the Comate Project is the type of leadership needed to make the system a success.

Knowledge-Sharing Issues

The much criticized response button connected to documents available through Comate, that was introduced for the purpose of stimulating communication between producers and users of these documents, indicates the aspiration of the designers of the system that Comate would become a meeting place for its users. Perhaps inspired by the popularity of knowledge-management approaches, the idea was that Comate could be a useful instrument for stimulating and facilitating knowledge sharing among BI professionals worldwide. However, in their initial development activities, Hans Broekmans and the technical developers of the system had simply introduced these functionalities into the system without any explicit consideration of how and why BI people do or do not share knowledge. The investigation of the project team led by Johan van Breeveldt did not delve into these issues in a systematic fashion either. While the prevailing opinion of the interviewees was that the current functionalities of Comate would sooner frustrate knowledge sharing than bring it about, with a clear undertone that they resisted sharing knowledge through Comate-like technology altogether, it would be too rash to jump to the conclusion that the Comate system could play no role at all in stimulating knowledge sharing and knowledge transfer. In a business realm where knowledge creation is core business, there is no lack of awareness that knowledge sharing can make the difference between successful and ineffective intelligence development. Social networking typically drives BI work. A better BI professional distinguishes him/herself from a good BI professional by the quality of his or her social network. Knowing who knows what is key business in competitive intelligence work. The attitude towards knowledge sharing among BI professionals is therefore invariably positive, and people are always interested in learning about new tools that truly enhance knowledge transfer and knowledge sharing. This also explains the strong aversion to the types of functions that were offered through Comate, because, as we saw, these were seen as frustrating rather than enhancing knowledge sharing. In a world where knowledge sharing lies so close to the heart, anything that erects barriers will be hissed down.

What makes studying knowledge-sharing practices and barriers particularly complex in the situation of TopTech with its offices in many countries is the fact that multiple cultures exist within the firm that all influence the attitude towards knowledge sharing in different ways. TopTech has clear regulations as to how specific knowledge-sharing flows should be generated. Headquarters sends out instructions, deadlines, information about targets, etc. The local offices send back their reports on a regular basis following strict formats. These flows relate almost exclusively to management information. No clear and unambiguous overall policy exists as to sharing knowledge by BI professionals at an operational level. No formal structures for knowledge sharing exist to give these people a hold. It should be recognized that coming up with such structures would be problematic because knowledge-- sharing practices are very different in BI offices in different locations and cultures. The social networks that define the operation of the BI function and constitute the main backbone of knowledge-sharing flows operate very differently in different cultures, and do not connect easily to each other. For instance, in cultures with a high-power distance, as present in several South American, Asian, and South European countries, the social networks typically have a strong vertical axis, connecting individuals mutually through their supervisors. Direct horizontal linkages are usually stronger in cultures with a low-power distance, such as most West European and North American countries. TopTech does not allocate time and resources to activities aimed at transferring existing knowledge to other parts of the organization where that knowledge may be useful. In summary, connections between the various BI offices follow a clearly defined path with strict regulations and are limited to the targets, goals, and outcomes of BI, and not to the operational process of BI collection. The language of these communications is English. Mutually, BI offices have no systematic contacts, for instance, between business groups' "audio" in two different countries if these countries are in a different region, or between business groups' "audio" and "video" within the same country.

Because of this lack of connection between social networks, chances are small that someone faced with a specific problem will find another person who has experience with related problems if this person does not belong to his or her social network. Within BI circles at TopTech, there is a broad recognition of the surplus value of enhanced knowledge sharing and transfer. Defining programs to further these processes seems like maneuvering in a maze of mazes; it presumes an understanding of the different ways knowledge sharing develops within different cultural settings, as well as being able to deal with the challenges of cross-- cultural knowledge sharing between offices in different locations. How ICT, in general, and a specific system like Comate, can play a role in this maze of mazes is not well understood, but it is clearly too soon to conclude that Comate has no possible role to play in this arena. The inquiry by Johan van Breeveldt has only scratched the surface of the issues involved, but it has had the effect of moving concerns of knowledge sharing higher on the agenda.

Usability Issues

The first two areas of challenges and problems-leadership style and knowledge sharing-involve elements of the organizational context influencing the success and failure of Comate. Characteristics of the system itself also play a part here. In its current form, the intended users do not consider the current system very usable. Some quotes may serve to illustrate this: "If they [i.e., Central CMI] want their pet to be a success, they had better come and take a closer look at how we do our work, and, perhaps more importantly, how we do not like to do our work." "I do not believe that the builders of Comate have much in common with my colleagues and myself. These people do not have the least clue of how our day-to-day routines run. They think more in terms of procedures and instructions, than in terms of what is needed to get the job done. Their conceptual point of departure is the technology-all the good it brings and how fancy it may look-and not our daily-life worries of picking up the right signals from customers and competitors." These comments along with others indicate that Comate does not connect to how BI professionals go about their daily routines and, as a consequence, it is not considered useful. Along with the criticisms of awkward and user-- unfriendly elements in its user interface, the overall verdict can only be that Comate is currently not a usable system, which explains much of its adoption failure. Looking into issues of usability is clearly an important area of concern at the hinge point of the first and second life cycle of Comate. Deciding whether or not to continue the Comate Project depends on the question of whether its functionalities can be redesigned in such a way as to make the system usable. The investigation of Johan van Breeveldt and his team has only begun to unravel the intricacies involved here. Their study appears more as an evaluation of the current system than as a systematic and complete needs assessment.

Implementation and Organizational Change Issues

Comate has not landed in TopTech. The first version was not introduced as a pilot version, but it does not appear as the launch ofa full-blown information system either. Fences have been placed around its introduction, and its promotion did not receive the attention it deserved. The question remains as to who should have been convinced that using Comate would be a good idea. Were these the local and regional BI managers, the analysts who were designated as intermediate users, the intended end-users, or the producers of reports? What appears indubitable is that attempts should have been made to convince people of the system's boons. Also unanswered is the question of whether addressing issues as to the most effective introduction procedures should not have been taken up much earlier, by involving managers and possible users in conceiving and testing prototype versions. Establishing that things went wrong in the first round is no guarantee that things will run smoothly in a second round. But some progress has been made; it did result in an increased awareness that Comate's PR needs to be developed, as indicated by the calls for promotional campaigns, extended help facilities within and outside the system, and training and discussion meetings. But such initiatives alone will not save the day for Comate. The situation is complicated by the fact that, because ofthe way Comate was introduced, people cannot look at the system without looking at Central CMI too. It is hard to identify which part of the criticism of Comate is disguised criticism of Central CMI. In addition to the discussion on a possible reintroduction of Comate, a discussion seems necessary as to the overall operation of the BI function in TopTech, with its division of tasks over several offices and many channels whose cooperation is, at times, far from ideal.

Dilemmas Confronting the Organization

Currently, TopTech is considering what line of action appears most appropriate. The options from which the company- and in particular Hans Broekmans-has to choose are those that we described in the introduction: Should they continue or discontinue the Comate project? In case of continuation, which alterations should they make to the functionalities of the system? Which implementation and organizational change procedures should they consider? Questions implied are those involved in deciding which criteria to take into account when weighing these alternatives, establishing how these criteria can be met, and deciding which path to follow as to dealing with the combination of these criteria. If there is one thing in particular the investigation by Johan van Breeveldt and his team produced, it is that answering these questions is a formidable task. Looking at Comate alone will not suffice. The operation of the BI function at large is at stake, as indicated by the critical comments of the interviewees. If future versions of Comate will only serve to confirm and re-establish the role of Central CMI in the operation of TopTech's BI function, any attempt to revitalize Comate will be futile. The four classes of issues described before define the areas for special attention. The tasks involved concern dealing with both the questions implied in each individual class and with their integration. For instance, considering issues of usability is directly related to the choice of strategy as to the cross-cultural knowledge-sharing issues and vice versa. Each of these tasks presents TopTech with just as many dilemmas. The ultimate dilemma is to decide whether or not to continue with Comate by integrating solutions and answers to the broad spectrum of problems and questions involved in these four areas and their integration.

As to Hans Broekmans himself, he is not fully convinced that commissioning the investigation was the best idea he ever had. He now questions whether he should have instructed Johan van Breeveldt to stick to the more traditional issue of software design, rather than allowing him to fan out to all sorts of organizational issues. He wonders if perhaps the inquiries have stirred more unrest than would be good for him, for his department, and indeed for the survival of the Comate system. One thing is clear to him: while decisions concerning the continuation of Comate may formally still be his department, the number of prying eyes is such that he feels a great distance between the formal and the actual situation. And he is not sure whether or not he really likes this idea. He feels as though he has lost custody of one of his beloved offspring.

References

FURTHER READING

References

Appreciating issues of usefulness and task-technology fit in the Comate case presumes an understanding of the operation ofthe Business Intelligence function. Any of the textbooks by Kahaner, Pollard, and Prescott & Miller that are mentioned in the references section are a good source for furthering this understanding.

Many authors address issues of ease-of-use or user-friendliness of computer systems and their user interface. As an example that specifically targets ease-of-use related to usability consider the works by Nielsen mentioned in the references section.

For issues of leadership style, you may visit:

Fiedler, F. E. ( 967).A theory of leadership effectiveness. New York: McGraw-Hill.

Hersey, P. & Blanchard, K. H. (1977). Management of organizational behavior (3rd ed.) Englewood Cliffs, NJ: Prentice-Hall.

Vroom, V. H. & Jago, A. G. (1988). The new leadership: Managing participation in organizations. Englewood Cliffs, NJ: Prentice-Hall.

An ever-growing stream of studies addresses aspects of knowledge sharing within organizations. Useful examples of studies that address cross-cultural issues in knowledge sharing are:

Davenport, T. H. &Prusak, L. (1998). Working knowledge. How organizations manage what they know. Boston, MA: Harvard Business School Press.

De Long, D. W. & Fahey, L. (2000). Diagnosing cultural barriers to knowledge management. Academy ofManagement Executive, 14(4),113-127.

Ford, D. & Chan, Y. (2002). Knowledge sharing in a cross-cultural setting: A case study (0209). Kingston: Queen's School of Business, Queen's University at Kingston.

References

REFERENCES

References

Currie, W. & Gathers, R. (1999). Rethinking management information systems: An interdisciplinary perspective. Oxford, UK: Oxford University Press.

Davis, F. D. (1989). Perceived usefulness, perceived ease of use, and user acceptance of information rechnology. MIS Quarterly, 13(3), 319-340.

Davis, F. D., Bagozzi, R. P., & Warshaw, P. R. (1989). User acceptance of computer-- technology-A comparison oft theoretical-models. Management Science, 35(8), 9821003.

Dillon, A. (2000). Group dynamics meet cognition: Combining socio-technical concepts and usability engineering in the design of information systems. In E. Coakes & D. Willis, R. Lloyd-Jones (Eds.), TheNew Sociotech: Graffiti on theLong Wall, 119-126. London: Springer.

References

Dishaw, M. T. & Strong, D. M. (1999). Extending the technology acceptance model with task-- technology fit constructs. Information & Management, 36(1), 9-21.

Doll, W. J., Hendrickson, A., & Deng, X. (1998). Using Davis's perceived usefulness and easeof-use instruments for decision making: A confirmatory and multigroup invariance analysis. Decision Sciences, 29(4), 839-869.

Gefen, D. & Straub, D. W. (1997). Gender differences in the perception and use ofe-mail: An extension to the technology acceptance model. MIS Quarterly, 21(4), 389-400.

Goodhue, D. L. (1995). Understanding user evaluations of information systems. Management Science, 41(12),1827-1844.

References

Goodhue, D. L. (1998). Development and measurement validity of a task-technology fit instrument for user evaluations of information systems. Decision Sciences, 29(1),105138.

Groupware White Paper. (1995). Cambridge, MA: Lotus Development Corporation.

Grudin, J. (1992). Utility and usability: Research issues and development contexts. Interacting With Computers, 4(2), 209-217.

Kahaner, L. (1996). Competitive Intelligence: from black ops to boardrooms- how businesses gather, analyze, and use information to succeed in the global marketplace. New York: Simon & Schuster.

References

Keil, M., Beranek, P.M., & Konsynski, B. R. (1995). Usefulness and ease ofuse-Field-study evidence regarding task considerations. Decision Support Systems, 13(1), 75-91.

Lederer, A. L., Maupin, D. J., Sena, M. P., & Zhuang, Y. L. (2000). The technology acceptance model and the World Wide Web. Decision Support Systems, 29(3), 269-282.

Lim, K. H. & Benbasat, I. (2000). The effect of multimedia on perceived equivocality and perceived usefulness of information systems. MIS Quarterly, 24(3), 449-471. Marcolin, B. L., Compeau, D. R., Munro, M. C., & Huff, S. L. (2000). Assessing user

competence: Conceptualization and measurement. Information Systems Research, 11(l),37-60.

References

Mathieson, K. & Keil, M. (1998). Beyond the interface: Ease of use and task/technology fit. Information cg Management, 34(4), 221-230.

Nielsen, J. (1993). Usability engineering. Boston, MA: Academic Press. Nielsen, J. (1999). Designing web usability. Indianapolis, IN: New Riders.

Pollard, A. (1999). Competitor intelligence: Strategy, tools and techniques for competitive advantage. London: Financial Times/Pitman.

Prescott, J. E. & Miller, S. H. (2001). Proven strategies in competitive intelligence: Lessons from the trenches. New York: Wiley.

Szajna, B. (1996). Empirical evaluation ofthe revised technology acceptance model. Management Science, 42(1),85-92.

Veiga, O. F., Floyd, S., & Dechant, K. (2001). Towards modeling the effects ofnational culture on IT implementation and acceptance. Journal ofInformation Technology, 16(3),145158.

References

Venkatesh, V. (2000). Determinants of perceived ease of use: Integrating control, intrinsic motivation, and emotion into the technology acceptance model, Information Systems Research, 11(4),342-365.

Venkatesh, V. & Davis, F. D. (1996). A model of the antecedents of perceived ease of use: Development and test. Decision Sciences, 27(3), 451-481.

Venkatesh, V. & Davis, F. D. (2000). A theoretical extension ofthe Technology Acceptance Model: Four longitudinal field studies. Management Science, 46(2),186-204. Venkatesh, V. & Speier, C. (1999). Computer technology training in the workplace: A

longitudinal investigation ofthe effect of mood. Organizational Behavior and Human Decision Processes, 79(1), 1-28.

Vriens, D. J. & Hendriks, P. H. J. (2000). Viability through web-enabled technologies. In M. Khosrow-pour (ed.), Managing web-enabled technologies in organizations: A global perspective, pp. 122-145. Hershey, PA: Idea Group Publishing.

AuthorAffiliation

Paul H.J. Hendriks

University of Nijmegen, The Netherlands

AuthorAffiliation

Wendy H. Jacobs

PricewaterhouseCoopers N.V., The Netherlands

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Paul H.J. Hendriks (PhD in the social sciences, 1986, University of Nijmegen, The Netherlands) is an associate professor of Knowledge and information in Organizations. He has worked at the Free University of Amsterdam and the University of Nijmegen where he is currently a member ofthe Nijmegen School ofManagement. His current research interests include the role of motivation in knowledge work and organizational structures for knowledge work. He has published several books on research methodology, Geographical Information Systems and computers. He has also been published in several academic journals, including the International Journal of Geographical Information Science, Information and Management, Knowledge-Based Systems, Decision Support Systems, Expert Systems With Applications, Geographical and Environmental Modelling and Knowledge and Process Management.

AuthorAffiliation

Wendy H. Jacobs has studied Business Administration at the University of Nymegen, The Netherlands where she was granted with a master's certificate in 2000. She did her final project at the consumer and marketing intelligence department of the multinational electronics firm that was staged in the article. Her final thesis addresses the connections between groupware and business intelligence. Currently she works at PricewaterhouseCoopers where she joined the Global Incentives Services department. She gives advice to companies and non-profit organizations that want to apply for the incentive programs of The Netherlands and the European Union. She also writes progress reports to inform the Dutch government and the European Commission about their subsidy projects.

Subject: Studies; Intranets; Problems; Product acceptance; Information systems

Classification: 9130: Experimental/theoretical; 5250: Telecommunications systems & Internet communications

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 130-150

Number of pages: 21

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198739534

Document URL: http://search.proquest.com/docview/198739534?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 76 of 100

Large-scale sustainable information systems development in a developing country: The making of an Islamic banking package

Author: Okunoye, Adekunle

ProQuest document link

Abstract:

This case study explores the difficulties encountered in technology transfer to developing countries, specifically examining a company offering IT services to an Islamic bank. The case highlights the circumstances that led to the bank's decision to develop the systems locally. The case looks at the outsourcing decisions, project management issues, and systems development problems, as they relate to developing countries successful IS projects. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

Information technology (IT) transfer to developing countries is often affected by various problems. Most available application packages are too expensive and were originally designed to work in a developed economy. The international features of the application packages reduced the problems associated with long duration and huge cost of customization. Nevertheless, there are still some processes that require many peculiar requirements that customization ofthe off-the-shelf applications cannot meet. With the rapid changes in IT and the business environment, it is becoming essential to rely on information system that can be sustained and upgraded without much cost in order to meet those changes. This case describes a project for the development of such a system.

We present the background of the IT company and an Islamic bank as the customer. We highlight the circumstances that led to their decision to develop the systems locally. We discuss the facts that surround the development of the system: the outsourcing decision made by the African Arab Islamic Bank (AFAIB), the project management and systems development at Technology Associates Ltd. (TA), and other information system issues related to developing countries and their effect on the project's success.

BACKGROUND

While information systems management (e.g., Yahya, 1993) and implementation (Nidumolu & Goodman, 1996; Kirlidog, 1997; Lin & Berg, 2001) in developing countries has received some attention in the literature, there are few reports of cases of information systems development processes (e.g., Madon, 1992). Most efforts are focused on problems of infrastructure (Odedra, Lawrie, Bennett, & Goodman, 1993; Moyo, 1996). The call for more case study research by Montealegre (1999) was again focused on implementation issues. The activities of the indigenous software developers and companies have not received proper attention and make the possible lessons that could be learned from them limited. Information systems research has traditionally focused on organizations in the US and Western Europe without considering how this could be applied and extended to developing countries (Dasgupta, Agawrwal, & Ioannidis, 1999). The actual implementation in developing countries has not been able to benefit from this kind of results, as the local factors pose significantly different circumstances. Several systems have been developed where only the context of region of origin has been taken into account. This has resulted in information systems solutions that are not sustainable, even if they meet the needs of organizations in developing countries.

With globalization and internationalization of labor, it becomes important that we begin to have more contextual knowledge of information systems development in developing countries. In this regard, a locally oriented information systems methodology has even been proposed (Korpela, 1994; Korpela, Soriyan, Olufokunbi, & Mursu, 2000), yet comprehensive knowledge of the IS development activities from a real-life example could broaden our understanding of the processes and methods.

SETTING THE STAGE

Around December 12,1996, the staff members at the research and software development (R&D) unit of the Technology Associates (TA) company were busy thinking what would be the best strategy to convince the management of AFAIB, a new company licensed to operate Islamic banking in Country X, to award the banking software project to the company. Khaled Al-Sayer, an expatriate finance manager from the Islamic Development Bank, Jeddah, was not convinced that any local company in a small country like Country X should be entrusted with such a mission-critical strategic system. Among his major concerns were the complexity of the Islamic banking operation compared to conventional banking, the tight schedule, and the budget.

Khaled had worked in many Islamic banks in the Middle East. In his last place of work in Bahrain, he worked with a group of programmers to develop the system they use there. Upon his posting to Country X, he had made arrangement to adapt the system for the new bank without considering the fact that the system was developed specifically for a particular bank and not for general use in any Islamic bank. This has been the problem with most of the available Islamic banking packages and is one of the reasons why that bank had to develop its own system locally. There was also the problem of technology, as, at that time, there was no local expertise in Country X to support the kind of technology used in the development of the system at Bahrain. In 1996, the Internet was not very available in Country X and remote support would have been too expensive. Due to other capital expenses, AFAIB had limited resources to acquire available expensive commercial banking packages. In addition to the fact that the operation of Islamic banking differs from conventional banking practices, customization would, in turn, increase costs and delay delivery. All these facts left the management of AFAIB with the option of searching within the sub-region for an affordable and sustainable system with adequate support and provision for upgrading in view of future expansion.

There are only few possibilities, since the banking packages available at sub-regional countries are also expensive and the problems of customization due to original design are also present. The package in use in another Islamic bank in the neighboring country had its interface in a different language with a different accounting structure. Ahmed Barde, the managing director of AFAIB, a seasoned financial practitioner and one-time senior executive at the central bank of Country X, contacted his colleagues in the banking sector. At this time, there were three banks operating in Country X. One was Standard Chartered Bank (SCB), a multinational banking group that used BANKMASTER for its main banking operations. We call the other two, Bank A and Bank B. They both use in-house banking systems developed locally.

The management of Bank A agreed to sell its banking system to AFAIB and provide support to customize it. Bank A actually had the capacity since the main actor in the development of the package was still with the bank as the IT manager. After lengthy negotiations, the high price demanded by Bank A seemed to discourage the management of AFAIB. The issue of competition was also another major consideration. Bank A was going to be one of AFAIB's main competitors, and there was concern about entrusting the backbone of its operations to a competitor. There are, however, situations where competitors become partners; for example, in Hong Kong, owners of leading supermarket chains and department stores joined together to build an electronic commerce infrastructure to address common problems (Damsgaard, 1998).

While all this searching was going on, the management of TA kept visiting AFAIB and using other local contacts to convince its management that TA had the solution to AFAIB's systems problems. There appeared to be some scepticism at the bank about the qualification of TA, the only software house in Country X. This was despite the fact that TA had most of the major companies and organizations as customers and had undertaken many successful large-scale software development projects in the past (e.g., a billing system for a national utilities company, a works management system for a World Bank-assisted project organization, etc.). In addition, most of TA's management and operational staff were trained abroad and had considerable experience from working in various places, including banks. In fact, one of the major banks is one of TA's main customers. Usman Garba, TA's managing director, is still responsible for the payroll system that he developed while working there. With no other option left, the management of AFAIB contacted TA and a demonstration of a prototype banking application was fixed for the 26th of December, 1996. A prototype was designed by TA's developers based on their experience in banking and accounting systems and basic Islamic banking operation procedures provided by Khaled and other former colleagues of Usman, now employed at the bank.

The prototype was presented in the presence of AFAIB's management team (Operation Manager, Investment Manager, Finance Manager, and the Managing Director). Khaled asked several technical questions and others also probed to confirm the readiness of TA to meet AFAIB's requirements. They inspected TA's facilities, and their fears were reduced though not totally allayed. They now considered the risk of trusting TA as minimal.

The main problem was now the issue of time. They had hoped to open to the public by middle of February 1997 and wished to start using the system from the first day. Before any serious development work could commence, there were still other issues like the nature of the contract, cost, etc., which could not be addressed until a more detailed analysis could be carried out. After two weeks of intensive preliminary analysis, draft, and redraft of the contract, representatives of both companies finally signed the contract. The management of TA was able to use the software contract to negotiate the hardware maintenance and networking contract. The bank was able to start its operation with the necessary modules. A banking system that covered most of its operations was ready within 10 months.

ORGANIZATION BACKGROUND

The African Arab Islamic Bank

Even though Country X is a secular state, it is predominantly an Islamic country. The country is a member of the Organization for Islamic Conference (OIC), which partly owned the Islamic Development Bank (IDB) (http:/www.isdb.org). For avery long time, multinational banks like Standard Chartered Bank and some other regional banks practicing conventional banking dominated the banking industry. They had established clientele and resources to tackle any new entrant to the market. The founders of AFAIB were not discouraged by the that market situation, but carefully adopted a better strategy to enter what seemed to be a saturated market. One major strategy to gain entry into new market was to change the rules of the game. One of the reasons why Netscape was able to compete with Microsoft could be attributed to this approach. Netscape did not play the game in the usual way; it changed the terrain and moved the competition to a level ground where the huge customer base and resources of Microsoft could not easily provide a competitive advantage (Cusumano & Yoffie, 1998). AFAIB used a similar strategy to enter the banking industry in Country X. AFAIB understood the religious beliefs of the people of Country X, and introduced another form of banking that would not be based on interest but on profit, as recommended in the Holy Quran, in which many of the people of Country X believe. Thus, in 1996, Islamic Development Bank, Saudi Arabia, Social Security and Housing Finance of Country X, Country X National Insurance Company, and several private individuals in Country X and one other African country came together to found a bank called the African Arab Islamic Bank.

The bank commenced operations in January 1997 to carry on banking business in all its departments and branches in accordance with Islamic (Sharia) principles and practices with a view to making a profit for its shareholders and depositors and to contributing to the socio-economic development of Country X. Apart from accepting deposits from customers and providing products and services traditionally rendered by conventional banks, AFAIB grants financing facilities for short-, medium-, and long-term economically and financially viable undertakings. The bank is, thus, mandated to carry on both commercial and development banking activities and, at the same time, trade in commodities. In addition, the bank assists the disadvantaged people of the community.

AFAIB is divided into five major departments: operations, finance & administration, investment, treasury & foreign exchange, and monitoring & recoveries (Appendix A). Each department has distinct functions, but the activities of all departments are coordinated towards the attainment of the bank's corporate objectives; i.e., to carry on Islamic banking business in all its departments and branches in accordance with Islamic principles, with the view to making profits and contributing to the economic and social advancement of Country X. The bank's services are opened to all individuals regardless of their religion. The bank performs investment management functions based on "Mudarabah Contract," which is a profit-sharing contract between two parties. The first party (investor) provides funds and the other party (manager) provides professional services. The profit is shared between the two parties based on a predetermined, agreed to ratio. Islamic principles do not allow dealing in interest (usury) basis. Interest is understood to mean a predetermined return on cash lent out. The bank invests funds using investment windows consistent with Islamic principles. In addition, the bank provides customer services that are normally offered by conventional banks, such as letters of credit, letters of guarantee, current account, trading in currencies, etc. (see Gerrard & Cunningham, 1997, for more detail on Islamic banking products).

The board of directors of AFAIB consisted of the representatives of IDB and other local directors. The management team was comprised of Ahmed Barde (managing director), Khaled Al-Sayer (expatriate finance manager), Jeremy Bongo (operation manager), and Shehu Abdulahi (investment manager). Kuranga Yusuf later joined as the counterpart finance manager. Apart from Shehu who does not have conventional banking experience, all other members of management team had worked in a bank before in different capacities. AFAIB has, from the beginning, understood that its expertise is in Islamic banking and decided to outsource other related services like information technology. AFAIB knew the importance of IT in business and especially in banking, which require a huge data processing and information management. AFAIB directly acquired the basic hardware with the assistance of the contacts of Khaled in the Middle East, and eventually contracted the development of the banking software and acquisitions of other necessary software and hardware to a local company called Technology Associates Ltd. (TA).

Technology Associates Ltd, Country X

In spite of the political instability and economic downturn that followed the military takeover of the government in Country X in July 1994, Usman Garba and his colleagues still went ahead to start the company they had planned. From inception, Technology Associates (TA) set out to become a leader in information technology, committed to excellence and providing appropriate technology and solutions to meet the business needs. With their own personal resources, contributions, and loans from family as business angels, Garba and his colleagues started TA. They realized that it was becoming increasingly necessary that original software packages be developed locally for optimum computer and business applications. They also realized that it was right time to have a local company to provide adequate support for the local business, which was definitely missing as at the time of TA's incorporation. Foreign-owned companies dominated the IT industry, focusing on marketing off-the-shelf packages and using expatriates to provide support and services. TA was primarily structured into three functional departments: Research and software development (R&D), technical services and communications, and training and support services (Appendix B) and managed by Musa Abass, Sheikh Bwari, and Vicky Alabama, respectively.

A major strength of TA is the ownership and management structure. Apart from Alhaji Shettima Jalo, an uncle to one of the directors, all the remaining directors of TA also work as managers in the departments mentioned above; thus there is reduction in decision-making levels. Most decisions can be made during a management meeting or at a short impromptu directors' meeting. Unlike many start-up companies, TA was not under any pressure to make a profit and was able to concentrate on building a solid customer base and, as such, began to be trusted by the local business community. Education and training of the management was other strength of TA. Since there was no university in Country X, the management team all trained abroad in Computer Science. Despite the option to remain abroad with higher pay and huge demand, all chose to return home to work for local companies, after which they started their own company, TA. There was also a close friendship and even family ties between the directors, which has a strategic importance in business survival in Africa (Lawrie in Odedra, Lawrie, Bennett & Goodman, 1993). They all speak a common local language and five other foreign languages: Chinese, French, Arabic, Russian, and English (the official language in Country X).

In 1996, there were about 20 permanent staff working at TA. The business development and growth was not easy, especially convincing local businesses to develop software to support their services. Many do not yet understand the advantages in using software to support business processes, even though they use computers for other purposes like word processing and keep basic spreadsheets. Few that have seen the need are comfortable with the off-the-shelf foreign packages, which they often acquire directly when they travel abroad or through friends and families. The majority of the international organizations usually rely on their expatriate-IT manager and already have contact with existing foreign-owned IT companies. Thus, in the early years, TA was almost developing free software in order to convince the business community of its use and the company's capabilities. During these early years, TA became involved in the development of taxation software for the Tax Department of the Ministry ofFinance and Economic Development, with the supervision of a consultant from Harvard University. This paved way for the development of a billing system for the National Utilities Company (NUC) at a time when it was in serious crisis.

After the military takeover of the government in 1994, there was disagreement between the French company running the NUC and the new government. In a nutshell, the French company switched off the billing system that was being partly controlled from France and all the expatriate staff that could help also left the country. TA was able to use this crisis to convince the local businesses of the need to look inwardly and locally for a mission-critical system. TA brought out the effect of over-dependency on foreign-developed applications. Other units ofTA also performed excellently in discharging their professional duties and soon won the confidence of the local businesses. When the local area network ofthe United Nation Development Program's (UNDP) national office was struck down by lightning, TA was able to restore it within a reasonable time and provided technical support for numerous businesses. Today, the majority of users in Country X were trained at the TA education center, where corporate and individual training is provided at affordable prices.

Getting competent staff is a general problem in sub-Saharan Africa (Odedra et al., 1993; Moyo, 1996), and Country X is not an exception. The demand for well-trained experts in information technology is greater than the supply. Despite this, TA ensured that it recruited the best IT personnel available in the market and provided many incentives to retain them. They also hire and train locals with high potential to learn new skills and eventually employ them in different positions. When required, TA recruits experts from other countries in sub-- Saharan Africa. Among the staff from another country is Joseph Cardozo, a programmer who later played a major role in the product developments at TA.

CASE DESCRIPTION: THE MAKING OF AN ISLAMIC BANKING PACKAGE

After the awarding of the AFAIB contract, TA was confronted with choosing the best approach to proceed with the project. The project proposal and contract contain a vaguely written functional specification without detailed technical specification. This was partly due to lack of time and shared trust that followed the demonstration of the prototype. It was agreed that the system would be developed in phases, based on the urgent needs and stage of operation of the bank. For example, it was compulsory that the account-management module be ready as soon as possible, while profit calculation could wait since the first time to use that feature would be after three months of operation.

Being a small company, almost everyone at TA was involved in the project. In this case, we only concentrate on the software development aspect of the contract, although necessary references are made to the hardware aspect. Four people were actively involved in the analysis, programming, testing, and implementation of the system: Usman Garba, Vicky Alabama, Musa Abass, and Joseph Cardozo. They constituted the development team. Joseph was appointed as the Project Manager to coordinate the development work and liase with the bank for daily updates and demonstrations of new features. He was also involved in the development of several modules and supported Vicky Alabama, who led the testing.

Contract and Agreement without Detailed Analysis

Under normal circumstances, and being the first time that these two organizations cooperated with each other, there supposed to be some kind of reasonable level of detailed description of what should be delivered. This was difficult in this situation since neither party knew how far the system would be developed. What was agreed upon was only the delivery of a banking system that would allow account management, post and process transactions, and perform normal banking procedures in addition to the profit calculation. The fact that the detailed description was not in written form posed some problems at later stages of the project.

System Development Process

Choice of Technology and Methodology

Even though there are various ISD methodologies, each one has various advantage and disadvantages (see Avison & Fitzgerald, 1995, pp. 261-406, for detailed discussion).Considering the time and the low-cost requirements, prototyping was chosen as the methodology for developing the system (for further detailed review of prototyping see Alavi, 1984; Budde et al., 1992; Hardgrave & Wilson, 1999; Henson, 1991; Jason & Smith, 1985; Mogensen, 1991; Trigg, Bodker, & Groenbaek, 1991). According to Hirschheim and Klein (1992), making a prototype to eventually become the system involves five phases, as represented in Figure 1. The first stage is to identify some of the basic requirements without any pretensions that these are either complete or not subject to drastic changes. The second phase is to develop a design that meets these requirements and to implement them. The third phase is to have the user experiment with the prototype under the developer's supervision, recording bad and good features. The fourth phase is the revision and enhancements of the prototype based on the outcome of the third phase. This phase includes redefining and gradual completion of the requirements and also improving the interface and reliability. The last phase is actually continuous and includes repetition of phases three and four until the user is satisfied or money and time do not permit further revisions.

They also decided to use one-tier procedural architecture (see Chaffee, 2000) with enhanced capability to utilize the local area network. Since the whole project had started with a demonstration ofa prototype in exactly similar hardware environment designed for the bank, the users were able to see the system in real-life situation. Although there are different kinds of prototyping, as described by Hirschheim and Klein (1992), this project used several features of each variant of prototyping. At earlier stages, horizontal prototyping was used to give the users an idea of the system without much computation, except when it was absolutely required. As the project advanced, and with the basic features already in place, emphasis shifted to vertical prototyping that provides full functionality for each module. The system was also designed in a cooperative manner (Trigg, Bodker, & Groenbaek, 1991) and could also be seen as evolutionary development (Budde, Kautz, Kuhlenkamp, & Zullighoven, 1992). Since the project team lacked detailed understanding of Islamic banking principles, it worked closely with Khaled, the finance manager.

Prototyping involves heavy use of productivity tools such as database languages, code generators, screen painters, and generators, etc., to enhance the process of logical design and ease the physical design in a cost-effective manner. This influenced the choice of the programming language and the techniques used. Because Khaled had been previously exposed to software development using Visual Basic, he strongly wished that the system could be developed with it. However, the development team at TA was not prepared to experiment on a technology where it lacked expertise. This has led to the failure of many software development projects (see Paynter & Pearson, 1998, for example, and Lyytinen, Mathiassen, & Ropponen, 1998, for software risks). Although it was not a problem to use Visual Basic, the risk was considered too high with the time schedule of AFAIB. Handling the functionality and meeting the specification of a new banking paradigm were considered sufficient challenges. In its previous projects, TA had used Clipper and FoxPro. To meet the prototyping need, the team finally agreed to use FoxPro, which provides enough functionality to support prototyping. Emphasis was put on writing reusable codes, and the system was highly thus reducing the coding time and making changes easier. The system was designed and implemented in a Microsoft DOS environment; however, the networking, file and record-- sharing capability of Foxpro enabled the system to run on the bank's Novell Network LAN. The entire system resides on the server, and the data was not separated from the procedures as in the case of client/server systems. This obviously affected the speed of the system and lead to some minor problems associated with file sharing and record-locking techniques of flat files.

Security and reliability of the system is one of the major priorities of the management of AFAIB. Consideration was given to this from the very beginning. Apart from the well-- defined, role-based access to the system, the tables were encrypted and the data was scrambled at record level.

Project Management

Unlike most projects, the starting date of this project was known but the completion period was agreed upon without any specific end date. In principle, when the need of the users were met, i.e., when a complete banking package acceptable to both parties was delivered, the project would be considered completed. This was a bit clumsy since the requirements of a growing organization could keep increasing and, thus, the project may never end. Nevertheless, this did not raise much concern since TA saw it as an opportunity to develop a longer-term relationship with the bank and secure all its future IT projects. Even though the project was large enough to use project management tools, none were used on this project- everything was handled manually. The writing of the technical and user's manual in parallel with development assisted in simultaneously recording the relationship between one module and the others. The programming conventions of TA also ensured that each programming module was property addressed and documented with detailed title and header information (date created, major data files, author, date amended, old file, etc.).

The project manager often met with the finance manager to clarify some design issues and demonstrate the latest update. When required, the entire team met with the representatives of the bank, mostly with the finance manager and the operation manager, to discuss the progress of the project. There were disagreements on a few occasions, when the finance manager changed what he had requested earlier after it had been implemented with much effort. TA was also under pressure to deliver the first indigenous Islamic banking system in the country. Some of these problems could be attributed to lack of any detailed specification in the contract. However, on those few occasions, differences were settled amicably.

Various risks were identified early and were carefully taken into consideration throughout the project. The bank was set up to keep a minimum essential manual record of the transactions, which meant the system could not be down at any time once the operation began, or the banking operation would come to a halt. There was also zero tolerance for transaction errors, which could adversely affect the image of the bank. Thus, adequate provisions were made in the error handling procedures. For example, a transaction had to be completed once it started, otherwise the debit might not have a corresponding credit and the whole account would not balance. This was a difficult and important issue, not only from the programming perspective, but also from the developing countries' infrastructure problems, for example, the inadequate electricity supply that often caused data corruption. It was also important that TA deliver each module as required; there could be no delay since it would mean an interruption in the bank's operations. The issue of budget and time overrun was out of the way by the nature of the contract. It was a fixed amount payable periodically without any direct attachment to the deliverables. Since the project did not have any specific end date, successful completion of the set objectives thus concluded the project.

In the absence of any written communication plans, the project team met often to agree on some important design issues, resolve any conflict, and to monitor the state of the development. Almost on daily basis, the bank was shown the latest version and its comments were incorporated immediately. The users were involved in the testing, which revealed several errors that would normally have occurred and been found after the system was in use. This experience also familiarizes the users with the kind of possible errors they might encounter when using the system and what to do at that stage. Their reception to the system was quite nice and the feeling of ownership was clearly evident through their participation. With the TA's experience with regard to problems with preparation of technical and user's manuals, these were written in parallel with the development. The usual practice was to wait for the system to be ready before the work on the manuals began. This usually causes delay in its completion.

Communication and Power-Related Issues

As the success of the project become more realistic, everyone wanted to be part of the project. This led to some conflicts of interest and minor misunderstandings among the staff, but not directly within the development team, as it was too busy for any conflicts. As mentioned earlier, while the software project was going on, the hardware and networking project was also in top gear at the bank. When the bank eventually started operation and it began using the system, the error-handling program usually returned a red screen with the message, "Press ESC to continue and report the error to TA's engineer .......The problems were often reported to Sheikh Bwari or his staff who were often at the bank. As the head of technical services, he was very interested in the project. He knew that the hardware-- servicing contract was anchored to the success of the software and was always eager to respond to the problems instantly.

Although he understood the process of software development, he always felt that the team was not doing enough to make the system stable and reliable. He usually spoke at the bank on behalf of the development team on what he knew a little about. This occasionally brought some disagreement between him and the development team. He sometimes made promises that are not realizable within the given time and expected the development team to comply. Through the head of the R&D, the development team also emphasized that the users were supposed to be communicating with them directly through the project manager and not through someone they considered external to the development process. It took some time before the problem was completely resolved, actually until the system become more stable and the users were no longer scared of the common errors.

Cultural Issues and Influences

Some practical issues that we often neglect in work practices sometime affect the output and the quality of project. Individuals have personal beliefs and values, and aligning those to fit into the organization where they work or the kind of work they do becomes quite important. The workers at the bank had to pray five times a day, three of which were within working hours. As a matter of fact, the room next to the banking hall, adjacent to the computer room, is a mosque. They often had to have a break during presentations or meetings to have prayer. Considering the pressure and the willingness of the project manager to get to the root of any pending problems, it often led to some frustration when the people who were supposed to be working with him had to break for prayers. As mentioned earlier, Musa Abass, the R&D manager at TA, is fluent in Arabic, the native language ofthe Egyptian finance manager. This automatically enabled a cordial professional relationship between the two of them and, in effect, with the development team. They often preferred to speak in Arabic on issues that did not concern other team members. Other members of the team even allowed Khaled to use Arabic to explain those Islamic banking concepts that could not be easily translated and explained in English. On the few occasions that the bank's chairman visited the bank from Saudi Arabia, the language capability of the TA development team became useful. Apart from his impression about the performance of the system, the chairman was very comfortable with the language ability and religious beliefs of the vendor's team. Thus, a relationship that was beyond vendor-customer developed between the two companies due to this cultural influence.

Professionalism, Ethics, and Trust

While every detail might not be clearly spelled out, AFAIB had a clear goal for the project-an application system to run its banking operation. Khaled was an expert in Islamic finance and accounting, but it was not long before the development team realized the extent of his understanding of software development. AFAIB did not yet have any justification to hire a full-time IT manager, thus it had to rely on TA for all the IT services and strategies. Occasionally, the bank sought advice from IDB at Jeddah, but it still had to rely on TA for its implementation. This dependency and lack of adequate in-house expertise created an avenue for monopolistic bargaining for TA. TA was also left with its choice of technology and any kind of practice convenient for it. It was here that the professionalism of TA came into play. In spite of all these dependencies and freedom, TA ensured that it critically considered all possible options and provided justification for all the decisions made in the project. The approach used was to make the project manager completely independent of the team and work as a client advocate. In this role, he questioned any decision he felt was not good enough from professional point of view. He always took time to explain to Khaled why a particular option was chosen and its advantage over the others.

Similarly, AFAIB relied on TA to staff the department. TA assisted the bank to recruit one of its own trainees to work as the operator of the system and manage the IT unit of the bank. Again, without strictly adhering to professional ethics, it would have been easy to influence the operator to carry out the wishes of TA while compromising the quality and integrity of the system. As soon as the operator became a member of the AFAIB staff, he used his exposure and experience to contribute to the project and offer several constructive criticisms, even though the project was at advanced stage at the time ofhis arrival at the bank. There existed a mutual trust and care that transcended the vendor-customer relationship between TA and AFAIB. AFAIB believed TA would provide the best system that would enable the bank to compete well in the market without compromising the business strategy to its competitors (who also happened to be customers of TA). At this stage, every other bank wanted to know more about Islamic banking and its mode of operations. The relationship was not of customer-vendor but more of partners where both working towards the success of the project and organizational developments.

Intellectual Property and Software Ownership Issue

Who should own the intellectual property right to the final product? Was it AFAIB that understood Islamic banking and paid for the services to code it into the system for its use, or TA that labored to interpret and translate the Islamic banking knowledge into a codified form and got paid to do so? This issue of ownership was not discussed in much detail at the time the contract was awarded. AFAIB was preoccupied and satisfied to get a system to start its operations without thinking about the ownership issue and the future of the banking system. Meanwhile, TA had added a clause that gave it the ownership of the software. But the question was would TA be able to resell the package without the permission of AFAIB? As of the time this case study was written, this issue has not arisen and the relationship between TA and AFAIB was still very cordial.

Motivation and Reward System

There are many factors that could be responsible for the delivery of the system within the expected period. Apart from the fact that everyone was enthusiastic about the project, TA also provided an enabling environment and encouraged its staff to work hard. There was a goal-oriented culture and everyone involved in the project had a sense of achievement and belonging. All the project team members never hesitated to work overnight to deliver a new module in the following morning. The working culture at TA prior to this project allowed for flexible resumption and closing time. This became useful on this project as the development team members were already used to long hours of work. The leadership at the organization provided a good example. Usman Garba had a record of working later than anyone and arrived before all other team members. He was able to combine the development work with his normal management and administrative tasks, without allowing any of his duties to suffer. At the beginning of the project, there were no promises of any reward for the core development team if it met the deadline; it just worked in a professional manner and accepted the satisfaction of delivering a good product as its motivation. Although not having the possibility of providing stock options as is common in the Western countries, TA does offer yearly profit sharing to reward its staff.

Project Completion

The end of the project was a relative issue since there was no specification of the exact features that should be present in the completed system. However, after the first six months, the system was able to handle most of the basic operations of the bank; profits had been calculated twice. Profit calculation was one of the major tasks in the whole project. The system was also able to process various kinds of investment: Musharaka, Mudaraba, Istisna, etc., without any major problem. On a daily basis, the bank could produce trial balances and other reports, and everybody seemed happy. The system was accepted after nine months of development. To officially mark the end of the project, TA and AFAIB organized a big hand-- over ceremony. However, there were still other parts of the bank and banking operations that needed to be computerized. The finance department still depended heavily on spreadsheets for some processes and calculations; the input comes mostly from the banking system but had to be re-entered manually.

At the handing-over ceremony, the project manager highlighted many features for the next version of the system. Even though e-banking was then not well-known in the country, he described a scenario where corporate customers could directly link their accounting systems to the banking package. He also suggested upgrading the system to a Microsoft Windows-based application. He suggested other applications like payroll, fixed-asset management, credit analysis system, etc., to complete the automation of the entire bank and its services. He suggested n-tier architecture where the user services would be separate from business and data services (Chaffee, 2000). All of these additional features would make the system more robust and scalable in preparation for when other AFAIB branches would be added to the system.

Exposure to Technology

Shortly after the handing over and the official conclusion of the project, the project manager travelled to one Middle Eastern country in the fall of 1997 on annual vacation. During his holiday, he visited several organizations and was surprised to realize how far behind the technology that was used in the project was in comparison. He was exposed to new approaches that would have made the development work faster with better quality. Even though TA was able to accomplished most of the requirements with FoxPro, he found out about modern tools for software development and was eager to spread the news when he returned back to his company. The management of TA were quite aware ofthe developments in software tools, but it was confronted with many limitations due to the geographical location. As mentioned earlier, TA was the best IT organization in the country and there was no place to train its staff locally. The cost of sending them abroad would be too high, considering the fact that the market is a bit small and the businesses are not prepared to pay for the cost of modern technology. For example, in 1997, there was an attempt to recruit one Oracle expert from a neighboring country in order to bring Oracle expertise to TA. The attempt failed due to his demands. The local companies are not prepared to pay for the cost of the software, hence there was a need to balance the use of technology and the local market realities.

CURRENT CHALLENGES AND PROBLEMS

There have been rapid developments and changes in the IT industry since 1996 when the project started. These also brought about changes in the business environment. Electronic banking was added to the telephonic banking that was common at the time. The architecture of the AFAIB system was not ready for either of these. The major competitors of AFAIB introduced ATM, changed their banking systems and offered more IT-based services, yet AFAIB is performing well in the market. Within the first two years of operation, it had good percentage ofthe market. AFAIB was also aware that it needed to quickly upgrade its software and integrate its systems to meet the dynamics of the banking industry. It realized that it was locked into TA as its IT provider, at least for software services. AFAIB had invested so much on the software that it would be very difficult to change it. Changing the system would require amending many aspects of its operation, which might just be too costly. However, the system meets its needs, and TA is committed to providing all the possible support. For the reasons explained earlier, TA still ensured that professional integrity and good practices were maintained throughout the project and to date.

The project manager visited the bank in the spring of 2001, and the system was functioning very well and was stable. AFAIB has started electronic banking with the support ofTA. TA owns the only commercial ISP in Country X and is well-positioned to assist AFAIB in this regard. AFAIB has not appointed a substantive IT manager, and how far TA can continue to provide the kind of support that the bank's expanding operation and more complex applications demands remains an open question. Work is still in progress to upgrade the system to accommodate the recent developments in IT, i.e., making the system integrate well with the Internet and even with wireless technology. This requires a considerable amount of work and time since the architecture ofthe system was completely different. Nevertheless, it is a challenge for TA to meet the need of its client.

ACKNOWLEDGEMENT

The author will like to acknowledge Roman Koehler for the idea of representing prototyping phases with diagram, and Thomas Hughes and Kai Kimppa for their valuable comments on the drafts of this case.

References

REFERENCES

References

Alavi, M. (1984). An assessment of the prototyping approach to information systems development. Communications of the ACM, 27(6), 556-563.

Avison, D. & Fitzgerald, G. (1995). Information systems development: Methodologies, techniques and tools. 2"nd ed. Berkshire, UK: McGraw-Hill

Budde, R., Kautz, K., Kuhlenkamp, K., & Zullighoven, H. (1992). Prototyping: An approach to evolutionary system development. Berlin, Heidelderg: Springer-Verlag.

Chaffee, A. (2000). One, two, three, or n tiers? Should you hold back the tiers of your application? Available online at http://www.javaworld.com/javaworld/jw-01-2000/jw01 -ssj-tiers.html. Accessed January 15, 2000.

Cusumano, M. & Yoffie, D. (1998). Competing on Internet time: Lessons from Netscape and its battle with Microsoft. New York: Free Press/Simon & Schuster.

Damsgaard, J. (1998). Building electronic commerce infrastructure: The Hong Kong retail sector (A). The University of Hong Kong School of Business. Ref. 98/03C. Dasgupta, S., Agawrwal, D., & Ioannidis, A.( 1999, July/September). Determinants of

information technology adoption: An extension of existing models to firms in a developing country. Journal of Global Information Management, 7, 30-40.

References

Gerrard, P. & Cunningham, J. (1997) Islamic banking: A study in Singapore. International Journal of Bank Marketing, 15(6), 204-216.

Hardgrave, B. & Wilson, R. (1999). Toward a contingency model for selecting an information system prototyping strategy. Journal of Management Information Systems, 16(2),113137.

Henson, K. (1991). The use of prototyping for educational software development. Journal ofResearch on Computing in Education, 24(2), 230-240.

Hirschheim, R. & Klein, H. (1992). Paradigmatic influences on information systems development methodologies: Evolution and conceptual advances. Advances in Computers, 34, 293-392.

Jason, M. & Smith, L. (1985). Prototyping for systems development: A critical appraisal. MIS Quarterly, 9(4), 305-316.

References

Kirlidog, M. (1996). Information technology transfer to a developing country: Executive information systems in Turkey. Information Technology and People, 9(3), 55-84.

Korpela, M. (1994). Nigerian practice in computer systems development: A multidisciplinary theoretical framework applied to health informatics. Ph.D. Dissertation. Helsinki University of Technology, Helsinki, Finland.

Korpela, M., Soriyan, H.A., Olufokunbi, K.C., & Mursu, A. (2000). Made in Nigeria systems development methodologies: An action research project in the health sector. In C. Avgerou & G. Walsham (Eds.), Information technology in context: Implementing systems in the developing world. (pp. 134-152) Aldershot, UK: Ashgate Publishing.

Lin, B. & Berg, D. (2001). Effects of cultural difference on technology transfer projects: An empirical study of Taiwanese manufacturing companies. International Journal of Project Management, 19,287-293.

References

Lyytinen, K., Mathiassen, L., & Ropponen, J. (1998). Attention shaping and software risk A categorical analysis of four classical risk management approaches. Information Systems Research, 9(3),233-255.

Madon, S. (1992). Computer-based information systems for decentralised rural development administration. Journal ofInformation Technology, 7, 20-29.

Mogensen, P. (1991). Towards a prototyping approach in systems development. Scandinavian Journal ofInformation Systems, 3, 31-53.

Montealegre, R. (1999). A case for more case study research in the implementation of information technology in less-developed countries. Information Technology for Development, 8(4),199-208.

References

Moyo, L. M. (1996). Information technology strategies for Africa's survival in the twentyfirst century: IT all pervasive. Information Technology for Development, 7(1), 17-29.

Nidumolu, S. & Goodman, S. (1996), Information technology for local administration support: The governorates project in Egypt. MIS Quarterly, 20(2),197-225.

Odedra, M., Lawrie, M., Bennett, M., & Goodman, S. (1993). International perspectives: SubSaharan Africa: A technological desert. Communications of the ACM, 36(2), 25-29.

Paynter, J. & Pearson, M. (1998). A case study of the Web-based information systems development. Available online at: http://www.cecil.edu:8000/reports/ www_Case_Multimedia_98.pdf. Accessed January 21,2002.

Trigg, R., Bodker, S., & Groenbaek, K. (1991). Open-ended interaction in cooperative prototyping: A video-based analysis. Scandinavian Journal of Information Systems, 3,63-86.

Yahya, A. (1993). On the Problems of Information Technology Management in Developing Nations. Proceedings of the Conference of the ACM Special Interest Group on Computer Personnel Research ACMS[GCPR 93 (April 1-3, pp. 349-355) St. Louis, Missouri.

AuthorAffiliation

Adekunle Okunoye

University of Turku and TUCS, Finland

AuthorAffiliation

BIOGRAPHICAL SKETCH

AuthorAffiliation

Adekunle Okunoye is a doctoral student at the Turku Center for Computer Science and University of Turku, Department ofInformation Technology, Finland. He hold BSc and MSc degrees in Computer Science. He is a member of the British Computer Society with about ten years of practical experience. His research focuses on knowledge management, new information and communication technologies, globalisation, and national development. To date, he has published in various conference proceedings and journals.

Subject: Studies; Information systems; Developing countries; LDCs; Technology transfer

Classification: 9130: Experimental/theoretical; 5240: Software & systems

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 168-183

Number of pages: 16

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198720990

Document URL: http://search.proquest.com/docview/198720990?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 77 of 100

Bankcard payment system in the People's Republic of China

Author: Fong, Michelle W L

ProQuest document link

Abstract:

This case explores the needs for and development of an efficient payment system to be used in trading in goods and services in the People's Republic of China, an emerging market economy. The case looks at the Golden Card project and discusses the successful implementation and the problems that still need to be overcome before the initial objectives of the project can be met. Some of the problems addressed are low public confidence in the system, weak technological support, and an inadequate regulatory framework that prevent the full realization of a supportive payment system for overall economic development. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

An efficient payment system is necessary to support efficient trading in goods and services within open market economies. Information technology has been used by many of these economies to achieve efficiency in their payment systems. The People's Republic of China, an emerging market economy, regards an efficient electronic payment system as imperative for economic liberalization, for supporting low cash usage and improving monetary control within the economy. By means of the "Golden Card" project, it aimed for a flexible, convenient, fast, secure and seamless electronic payment system beneficial to economic performance. Although efficiencies in the electronic payment system were achieved in some of the developed regions, there have been teething problems such as low public confidence in the system, weak technological support and inadequate regulatory framework that prevent the full realization of a supportive payment system for overall economic development.

BACKGROUND

Importance of the Payment System

In many countries, the payment system had been taken for granted until the financial crisis in the 1970s which brought into focus its importance to the stability ofan economy (Bank for International Settlements, 1994) and resulted in the increasing use of technology in this system (Hopton, 1983; Mester, 2000; Guibourg, 200 1).

An efficient payment system is necessary to support trading in goods and services because payment constitutes an essential practice in the commerce of any economy, and prompt settlement has major implications on the stability and liquidity of the economic system. There have been suggestions that an efficient payment system is necessary for economic advancement, particularly in developing and emerging market economies (OECD, 1993; Balino et al., 1994; Folkers-Landau et al., 1994; Bhala, 1995; Listfield & Montes-Negret, 1994,1995; Sato & Humphrey, 1995; Balino et al., 1996; Cecchetti & Krause, 2001). Governments of these economies are aware that a competent payment system can help improve macroeconomic management, resources utilization and the control of monetary aggregates. On the global front, the trends in business globalisation and financial market liberalisation have also propelled these governments to address the need for competency in their payment systems in order to remain relevant in the global trade and financial systems.

Technology has been used to automate the payment system for the purpose of injecting the system with unprecedented efficiencies (Morelli, 1986; Folkerts-Laudau et al., 1994; Balino et al., 1994). The benefits to an economy of information technology applications in the payment system are apparent in the speed, traceability and liquidity that the technology can provide over and above manual processing. Payment systems are becoming more electronic in many open trade economies. Developing and emerging market economies cannot afford to be locked out of the global market because of technology inadequacies, as trade is their lifeline for economic well being and development.

The People's Republic of China, like many other developing and emerging market economies, has been experiencing pressures to reform its payment system since the initiation in 1979 of its economic reform program and its transition from a command to a market-based economy. The initial desire ofthe Chinese government in constructing an efficient electronic payment system was to lessen the high level of cash usage and improve monetary control within the economy. The high usage of cash has given rise to a sharp increase in counterfeit currency activity in the Chinese economy, especially when its doors were first opened to world trade (Jinrongshibao, 22/5/95). In addition to counterfeit currency in the system, an inefficient payment system can result in flight ofcapital or unauthorised withdrawal of capital. It has been estimated that flight of capital totalled to about US$27 billion in the early 1990s with more than $7 billion of China's foreign exchange reserves leaking out of the country's financial reserve system without trace. It was intended that the construction of a national electronic payment system (known as "China National Advanced Payment System" or "CNAPS") would also curb unauthorised leakage from the financial system. High value payments have to be cleared by the Central Bank in this modern electronic payment system, and this would provide a better means of tracing the flow of funds than the manual system. Although government departments and affiliated organizations have been conforming to the policy of using the electronic payment system for payment settlement, the electronic payment system is still relatively underused among the Chinese. Attempts by the government and banks to cultivate mass acceptance (especially among private individuals) for the Chinese payment system has been confronted with several daunting obstacles. In fact, the poorly developed electronic payment system in China has been accused of stifling overall economic development (Lee, 2000; Business China, 2001).

The Chinese government is keen to resolve problems and difficulties that prevent the full realization of a supportive and efficient electronic payment system, especially in view of its recent successful admission into the World Trade Organization (WTO).

The "Golden Card" Project

In 1993, the Chinese government initiated the "Golden Card" project1 that aimed to build a modern nationwide electronic card-based payment infrastructure facilitating monetary management. This initiative was driven by the vision that the widespread use of a bankcard as a payment alternative would enable better monetary control and low cash usage within the economy. The State Golden Card Project and Leading Group was subsequently formed, with representations from various state-owned entities (telecommunication, banking, science and technology sectors, and local government authorities), to lead this project. Through this group, the government began to aggressively promulgate the issuing of bankcards by its (state-owned) banks and the use of these bankcards under this Golden Card project. The project targeted to achieve 200 million cards in circulation in more than 400 cities and developed county-cities, which have a total population of 300 million inhabitants, by 2003. The 10-year time span was envisaged to involve three phases of development (Zhao, 1999):

1) 1994-1996(Experiment phase). The Golden Card project commenced in the prosperous areas and coastal regions whose infrastructures were relatively well developed and where financial and commercial activities had been more significant in economic contribution. Twelve cities2 primarily along China's East Coast were selected as the beachheads in this phase, and three million cards were targeted for issue to the inhabitants of these regions.

2) 1997-1999 (Diffusion phase). It was planned to implement the Golden Card project in 30 to 50 additional cities, which have a combined population of 100 million people. The national target set for the total number of bankcards issued in all the selected cities (inclusive of cities that were targeted during the experiment phase) was 60 million bankcards.

3) 2000-2003 (Popularisation phase). In this phase, the use of bankcards was to become predominant in more than 400 cities within the Chinese economy, and the aim was to achieve 200 million bankcards in these cities.

The Golden Card project has added great impetus to the issue of bankcards by the local banks. The inauguration of the project was carried out with fanfare, and a high level of publicity was given to the advantages of making use of a bankcard-"one could travel the whole of China with a bankcard in hand." The number of bankcards has indeed grown at a rapid rate over the years. Figure 1 shows a significant increase in the issue of bankcards since 1993, which dwarfed those numbers attained in the early stages when the bankcard had just emerged in the Chinese economy. Since 1995, the growth rate for the number of bankcards on issue has been at least 40% each year. In fact, the number of bankcards on issue has exceeded the predetermined targets of the different phases. At the end of 1996 (end of the experimental phase), the actual number of bankcards issued was 20 million, at least six times greater than the predetermined target of three million cards. By the end of 1998, the actual number of cards issued (110 million) had already exceeded the predetermined target of 60 million cards in the diffusion phase. And, by the end of 2000, the number of bankcards on issue exceeded the pre-determined target of the popularization phase by 20%.

History of the Bankcard in China

The history ofthe country's first contact with credit cards traces back to the period when the then head of state, Deng Xiaoping, was holding the reins of power and was opening the economy to world trade. Along with the new economic development, the Bank of China became the first agent in the country to handle overseas issued credit cards in 1979. This role exposed the bank to experience the value of the credit card business and led to the initiative of issuing a domestic bankcard in 1985. The Bank of China Pearl Delta branch issued the first bankcard in the nation in that year. This first bankcard was a local card that was only usable within the Pearl Delta region. In 1986, the Bank of China branch in Beijing introduced a nationwide bankcard, known as the Great Wall Card, for domestic use in local currency. After the bank joined Master International and Visa International as a member in 1987, it issued the first international Great Wall Card. Since 1989, the other state-owned banks have become members ofthese organisations and have begun to issue similar bankcards, or their corporate bankcards.

Types of Bankcard

In China, the issue of credit cards has been subject to tight control and distribution, and a majority of the cards issued by the banks are ATM cards, POS cards or a combination of both (known as a debit card). Presently, the number of credit cards issued in the domestic economy is less than 10% of the total cards issued by the local banks in the economy. The ATM, POS and debit cards are largely referred to as "bankcards" in China. The ATM card is a means of access to banking transactions at the ATM. The transactions conducted at the ATM have been commonly deposit, withdrawal, saving and inquiry transactions that can also be conducted over the bank counter. The POS card, on the other hand, is a means of access to electronic payment for goods and services between the seller and buyer (who is also a POS cardholder). Debit cards incorporate the withdrawal and deposit features of the savings card. They have the additional attribute of being a payment card (POS card) that allows the cardholders to close transactions through their escrow accounts, which have a preexisting credit balance to cover a certain value of the total transactions. The transactions will not be aggregated like the credit card on an accrual basis but are supposed to be debited directly, online3, at the cardholder's bank account, as soon as the cardholder gives the authorization.

SETTING THE STAGE

Low Bankcard Usage Rate

Despite the strong growth in the number of bankcards issued by local banks, the economy still has a long way to go in achieving the objectives of a lower cash usage rate and efficient monetary management through the bankcard payment system (Xia, 2000). The achievements, so far, do not look solid when compared to major card using economies.

The percentage of bankcard holders is 5.4% in China, which is far below that of the USA (89%), Canada (97%), Japan (96%) and Germany (96%). In 2000, the Chinese used a bankcard on an average of twice every three months, which was insignificant in comparison to USA's 28.5 times, Canada's 40.5 times and Japan's 7.1 times. There have been a high number of dormant bankcards in the economy (Zhang et al., 2000), and this has also been the case in the twelve cities that were selected as the beachheads for the Golden Card project (Zhong & Wu, 2000). Nine percent of cardholders in these cities used a bankcard once every fortnight, 24% used it two to three times a month, and 67% used it less than once a month or not at all. Overall, the vast majority of debit cardholders used the bankcard as a withdrawal instrument (at the ATMs) rather than as a payment instrument (at the POS terminals).

The degree of use of the ATMs and POS terminals by customers and agents is also an indicator of the level of usage and acceptance of the bankcard and the electronic payment system.

ATMs. The Bank of China installed the first ATM in China in 1987. Since then, there has been an increase in the number of ATMs installed by different local banks in the economy (Figure 2 shows the number of ATMs installed in China). Despite the increase in the number of ATMs installed in China since 1987, the scale of ATM installations in China in 1998 was considered to be equivalent to the USA in 1980 and was regarded as at an intermediate stage of development by 1990s standards (Zhang, 1999).

In 2001, the level of use of ATMs by bankcard holders throughout the country was low, at a national daily average of about five transactions per installed ATM (Liu, 2001). The low level of ATM usage is also a problem in the twelve cities that were selected as beachheads in the experiment phase ofthe Golden Card project. At the end of 1998, there were 4,500 ATMs installed in these cities through which approximately 80,000 transactions were conducted per day (Zhang, 1999). This means that there were, on average, 18 daily transactions per ATM, which is below the break-even level of operation of 50 daily transactions per ATM in China. The average time interval between each of these transactions conducted in the day in the twelve Chinese cities was 81 minutes, which was far below the 8.6 minutes experienced in the USA. The ATMs in other less prosperous and less busy cities were even more underutilized. For example, the average daily number of withdrawal transactions at an ATM installed by one of the local banks in Guangxi in 1998 was five. In the first three months of 1999, which fell within a festive season when households normally incur high levels of expenditure, the average daily number of withdrawal transactions was only nine per machine (Zhang, 1999). The type of transaction most frequently conducted at the ATMs was discovered, from written-off ATMs (which had reached the end of their useful life span), to be largely withdrawal. The deposit feature of these machines was greatly underutilized (Wang et al., 2000).

POS terminals. Although the trend in Figure 3 registers an increase in the installation of POS terminals, there has been low usage and acceptance of the debit card as a payment instrument, by both cardholders and contracted agents.

By the end of June 2000, 400,000 operators from the retail and entertainment sector in the Chinese economy were contracted to accept bankcards issued by different banks. However, this was only 5.4% of all the retail and entertainment operators located in the city areas, despite the 51% annual increase in the number of agents contracted to accept bankcards. A separate study found that retail consumption transacted via bankcard was only 38% ofthe preexisting credit balance in the escrow accounts ofthe four major banks in China (Wu, 2001). In fact, the level ofuse of electronic payment modes by the Chinese for their retail transactions has been low. The value of retail consumption transacted through the electronic payment method was found to be only 3% of the national retail sales value in 2000 compared to 81% in the USA and 64% in Europe. These indicate that the majority still prefers the traditional way of buying and paying in cash for their goods.

CASE DESCRIPTION

The Slow Rate of Acceptance of the Electronic Payment System

Bad Experience and Inexperience

In the purchase decision-making process, consumers are normally motivated to use a product when they have a need or a problem that requires a solution and will purchase or adopt a product that offers the optimal solution to their need (Kotler et al., 1994, Prelec & Loewenstein, 1998; Kotler et al., 2001; Soman, 2001). Accordingto consumer behavior theory, the consumer's first experience with a product is a critical factor in determining product acceptance or repeat usage behavior (Smith, 1993; Wright & Lynch, 1995; Smith & Swinyard, 1988; Marks & Kamins, 1988; Mester, 2000). Consumers are less likely to purchase the product or repeat usage behavior if they have a bad experience using the product. Bad word-of-mouth is likely to be generated by disappointed consumers, and this can deter product trial by new bankcard holders (Beyer, 1999; Paterson, 1999).

At the initial stage of the Golden Card project, bankcards were largely issued to employees of state-owned enterprises for withdrawing wages and salaries credited into their bank accounts. Instead of receiving a paycheck, the employees withdrew their wages and salaries from their bank accounts using the cards provided by the banks by arrangement with employing organizations. It has been reported that the number of bankcard holders who took the initiative in applying for a bankcard has been very low. Bankcards have been mainly used at ATMs, although a large number of these cards also have debit functions. Bankcard holders seldom utilized these debit functions, which was blamed on the unreliability ofthe electronic payment system. However, the banks pointed out that bankcard holders' unfamiliarity with the machines accounted for the slow rate of acceptance of payment technologies. For example, a study by a bank highlighted the fact that 75% of the unsuccessful transactions at the ATMs were due to lack of operational knowledge on the part of the users, while 15% of the unsuccessful transactions were due to card defects (improper storing of cards by the cardholders), and only 10% of the unsuccessful transactions were related to mechanical and network problems. In addition, the banks substantiated their claim by highlighting that 90% of the debit cardholders thought that their debit cards were only good for withdrawal and deposit purposes at ATMs. Only 5% of the debit cardholders were aware that their debit cards could be used for retail consumption, and another 5% were aware that they could use them for payment transfer and payment of bills for utilities.

While Chinese consumers have a need to withdraw salary and wages and pay for transactions that sustain their livelihood, they feel that the ATM and POS systems do not present a viable solution as payment modes or systems. Most Chinese prefer to make withdrawals from bank branches and prefer the traditional method of payment in cash because of their low level of confidence in the payment modes and systems, driven either by their inexperience or negative experience of card usage or word-of-mouth influence. In the main, the heavily publicized capability of the bankcard (that "one could travel the whole of China with a bankcard in hand") is losing credibility, as the experience has revealed a different situation. This has resulted in a low repeat usage of the bankcard in China.

Weak Technological Support

Although the Chinese government has been encouraging the population to use bankcards in lieu of cash for payment, usage of bankcards and the electronic payment system has remained low. The lack of a comprehensive and integrated information technology support system has also accounted for the low usage and trial levels of the electronic payment system and has contributed to an unreliable and uneconomical (when credit risk4 exposure is taken into account) bankcard verification facility.

When the Chinese government was aggressively promulgating the Golden Card project and the use of bankcard during the experiment phase, the satellite-based interbank network being built by the People's Bank of China was still at the initial stage and was unable to provide processing convenience to either the agents or customers. The electronic payment system has started with a low level of confidence on the part of users. After more than five years down the road, intra- and inter-city bankcard verification and payment settlement transactions are still not being comprehensively supported by information technology (Li et al., 2001; China Daily, 2001). This further eroded bankcard users' confidence in the system and impeded the expansion of bankcard usage. The situation was further aggravated by the banks operating their own dedicated electronic network, and the low level of sharing of ATM and POS facilities has made it very costly and inconvenient for the agents and the customers to adopt bankcard use (Zhang, 2000; Nelson & Leigh, 2001). Overseas experience shows that the evolution of ATM and POS networks appears to consist of five phases: proprietary, shared, multiple members, direct links, and universal (or global sharing). In this respect, China is at the proprietary stage, which was attributed to the technological incompatibility of equipment and the weak telecommunication infrastructure in the country. The absence of a strong coordinating force in network establishment and consolidation at the beginning, and the antiquated telecommunications infrastructure have been impediments to a unified payment network among the various banks. In the mid-1990s, a panel of 38 experts examined the status of the adoption of information technology within the financial system and pointed out that the main problem in the slow progression to an advanced level of technology adoption lies in the absence of coherent strategy and policy among the banks. Even though bank headquarters set standards and requirements, these were not consistent across the different banks (Jinrongshibao, 30/10/1995). The lack of a national direction in technology adoption strategy has led to incompatible technology applications. It was stressed by these experts that financial computerisation should be listed as a national strategy to realign adoption undertakings to ensure compatible technology applications. In 1996, the Central Bank began to alert banks to the problems of noninteroperable systems and encourage banks to move away from proprietary architectures for a more open software design that uses industry standard operating systems. In 1997, the banks located in the twelve cities (beachheads in the experiment phase) began to work towards an interoperable system for a unified ATM system (Shang, 2000). In 2001, the degree ofnetwork interoperability achieved was considered far from satisfactory by one of the Chinese bankcard authorities. Bankcard holders continue to face serious difficulty in areas where telecommunications infrastructure is inadequate (Liu, 2001).

Problems with the POS System

The POS system has been beset by the problem of inadequate technology support since its beginning, as revealed in the following situations.

In areas where telecommunications infrastructure support is well developed, it has been reported that verification of a POS transaction takes ten seconds to process in China. However, cases of consumer complaints that verification processing times in China were at least 15 minutes, half an hour, or even half a day, have occurred (Li, 1995; Cai, 1995). In developed countries, a POS transaction usually takes less than 30 seconds and may even be faster with sophisticated technology. In China, time spent on processing a transaction paid by card via telephone could be equivalent to the amount of processing time for three to four cash transactions (Li, 1995). This discourages bankcard holders from relying on their cards for payment settlement and results in a low acceptance rate for bankcard usage.

The USA's maximum processing time for card payment settlement has been three days. In contrast, processing time is inconsistent and could be very long in China. It has been noted that an interregional card payment settlement transaction by means of a card in China could take 15 days or even one to two months to finalise (Deng & Qin, 1995). An intracity settlement transaction could take two to five days or, at times, six to seven days to finalise payment (Wang, 1995; Li, 1995). As a result, agents have been reluctant to accept payment by card because of the long period involved in the payment settlement process.

In the event of card loss, the prevention of unauthorised use is time consuming and tedious, especially in the less developed areas (Zhang, 2000). When the cardholder reports the loss, the notifying branch will transmit the information to headquarters via a telephone call or fax message. Specialised staff at headquarters will execute the instruction, normally either initiate notification to the various branches of the card loss through the telephone line or wait for the branches to call up for routine updating of details. This intensive process of notification could take ten days from the time the loss is lodged by the cardholder to the time the notification is received by the branches. This involves an unduly long period of time when compared to one-day notification time frames in an overseas country with developed information technology support systems (Fang, 1995). By the time the "blacklist" or the "hot card" list reaches the agents in China, half a month may have expired (Jiang, 1995). Apart from the long time frame involved, the process could be very costly to the parties involved. For the detection of fraudulent use of a card in the system, the fraud may be discovered after seven to thirty days because of the heavy reliance on the postal system for payment settlement (Zhang, 1995b; Liu, 1995; Ma, 1996). The long time frame exposes the bank, agent and the cardholder to the possibility of accumulative credit risk.

The proprietary architectures of the POS systems and the absence of open software design and industry standard operating systems have also resulted in duplicate resources for debit and combination card facilities (Yang, 1996; Zhang, 2000; Zhang et al., 2000). For example, a department store in Guangzhou had to install five different POS systems of different banks at each of its 36 checkout counters. Each unit requires an investment outlay of 8,500 yuan, which total 1.53 million yuan for all installations at the 36 counters. The banks commonly bear the cost of investment and installation, otherwise they face aproblem in recruiting agents to accept their bankcards. If an interbank sharing facility was enabled for the POS set-up in this departmental store, the investment cost would only be 306,000 yuan, without duplication of resources and wastage of installation space and telephone lines.

The unreliable electronic payment system not only keeps the cardholder from using the system but also the agent from using the system or from giving cardholders an opportunity to use the system. POS agents avoid the use of the technologies, using the common excuse of equipment malfunction (Chen, 2000; Tang, 2002). This barrier erected by the agents reduces the consumer's exposure to the use of the technology (affecting trialability). For example, it was found that although there were 4509 cardholders to every POS system in Guangxi in 2000, 67.8% of the residents had no access to, and no opportunity to try, the POS system. This had resulted in a high number of dormant cards (Xiao, 2000).

Regulatory Framework

Prior to April 1, 1996, the legislative structure was not able to provide sufficient protection to the card issuing bank, agent and cardholder in the event of fraud or breach of use (Zhang, 1995a; Chen, 1996). The cash management legislation was used as a guide for regulating market behaviour. In addition to the lack of knowledge in the use and operation of bankcard facilities and poor infrastructure support, cases of overspending and card fraud were on the rise. However, a majority ofthe default values consist of small amounts, less than 1,000 yuan. Because ofthe uncertain legal environment, the legal pursuit of such cases could cost a hundred times more than the accruing value and is uneconomical for the card issuing banks. In a number of instances, these banks have reluctantly become bearers of the losses, with actions confined to the recalling of card and revocation of rights to card use.

Legislation to govern the proper use of bankcards was formally implemented on April 1, 1996. The legislation eliminated many loopholes. The frame of reference for the proper use of a card and the penalty for infringement were specifically laid out in the legislation. The failure to repay overspent amount exceeding 5,000 yuan was punishable as fraud. This was considered a significant step towards achieving a stable environment for bankcard use. Although further steps have been taken by the legislature and the Central Bank in regulating the bankcard environment, further efforts are still necessary in defining the rights and responsibilities of the banks and cardholders.

CURRENT CHALLENGES/PROBLEMS

Information Technology Support

A comprehensive and integrated information technology support system is of critical importance for a flexible, convenient, secure and fast online payment system. For the past ten years, China's telecommunications sector has been growing at annual rates of 30% to 50%. However, China is a country with a massive geographical landscape, and comprehensive wire-based telecommunications coverage will involve a considerable amount of time and cost, especially in the inner and relatively underdeveloped regions. Although there are alternatives for the banking industry in overcoming telecommunications infrastructure inadequacy, these have limitations. For example, a cellular and wireless communications infrastructure may serve as an ideal alternative, but it is only a temporary solution to the telecommunications bottleneck, as it has limitations in flexibility. Similarly, smart cards have been considered as an alternative to overcome the vulnerable features inherent in the magnetic-strip card and the inadequate telecommunications infrastructure in the country, through its ability to store value and information and to permit offline5 transactions. However, the magnetic-strip bankcard constitutes at least 75% of all the bankcards issued in China. Smart card technology is relatively new to the world and is being adopted by a few banks in developed areas such as Tianjin, Shenzhen, Shanghai and Hainan.6 To replace the magneticstrip card with the smart card requires careful analysis in terms of the cost-benefit equation. The sponsorship for the banking service technologies to the customers largely comes from the banks. Each smart card costs 30 yuan (locally made) to 70 yuan (imported), which, on average, is 19 times more expensive than the magnetic card (Jinrongshibao, 19/8/1997). In addition, a terminal that reads smart cards costs four to five times more than one that reads magnetic-strip cards. Smart cards could be a means to avoid the cost of modernising the country's telecommunications system. However, the replacement of magnetic-strip technology with smart card technology means more capital investment with an uncertain or prolonged payment period for the banks. Although the smart card is increasingly being introduced in greater numbers and more cities, its operating framework is not as established as the magnetic-strip card. Unless there are means of financing a rapid transition to the smart card, it is expected that the magnetic-strip bankcard will remain the dominant card for some time.

The Local Banks

The use of technology by the banks for new service delivery to customers has been plagued by resource constraints. The banks' technological capability and resources have been strained in supporting the adoption of technologies for external service support to customers. A clear sign of this problem is the high rate of ATM and POS outage-the result of delay in repair and maintenance due to resource constraints (Liu, 2001). In addition, the lack of hybrid talents-individuals equipped with the knowledge and capability in the technical applications of technology as well as the business operation aspect-has hampered the development of efficient verification and processing of bankcard transactions. The need to educate inexperienced cardholders in the different functions of their cards or the use of payment technologies will exact a further toll on the banks.

Although the number of bankcards on issue has consistently exceeded the predetermined targets of the different phases, the electronic bankcard payment system was unable to efficiently support trading within the economy because of the lack of connection between the networks established by the different banks. On an overall basis, the electronic bankcard payment system still contains islands of networks or networks that are noninteroperable. The local banks have adopted different standards in transferring and reading information in their ATM and POS systems. As mentioned earlier, this was the result of a low level of interaction and cooperation among the local banks in the development of their networks. Exacerbating the noninteroperability of the electronic networks is the reluctance of those major local banks, which have poured significant investment into establishing their networks, to admit or allow smaller local banks to utilize their electronic infrastructure. It was perceived that admitting the smaller players into their heavily invested networks would be giving leverage to the latter's competitive position. The smaller players, for their part, realized that even if they were allowed to use the networks, the cost of entry would be exorbitant and unaffordable. The noninteroperability of the existing networks has attracted concerns from government authorities, as it constitutes a dead weight in the effort to achieve efficiency in the payment system. In early 2000, the Chief of the Central Bank announced that the electronic bankcard payment system would achieve interoperability and standard uniformity in large and medium-- sized cities nationally in three years time. Although the government and the Central Bank have been directing the local banks to consolidate and integrate the existing islands of networks since the mid-1990s, only 27% ofthe ATMs and 35% ofthe POS systems achieved interoperability across 16 major cities and provinces7 in 2000. It is hoped that the dream to "travel the whole of China with just one bankcard in hand" will materialise three years from the Chief's announcement.

Electronic Commerce

The Chinese government supports the development of electronic commerce as a source of economic growth (Cartledge & Lovelock, 1999). Unfortunately, the undeveloped electronic payment system has hindered the progress of electronic commerce in China (Clark, 2000; Einhorn et al., 2000; Hansen, 2000; Burns & Taylor, 2000). It seems that the unpleasant experience with the ATM and POS systems has affected the use of online payment through the Internet. In the absence of integrated nationwide telecommunications networks or an efficient electronic payment system, consumers are cautious in purchasing items through the Internet using debit cards. The total value of online electronic business transaction is still small, despite the increasing number of Internet users and business-to-consumer (B2C) or business-to-business (B2B) sites being established in China (Business Asia, 2000). For example, it was found that 41% of Chinese Internet users held at least one bankcard in their possession in the year 1999 (Business China, 1999), but only 8% ever purchased a commodity or service over the Internet and 2% had made online payment for their purchases in the same year (CNNIC, 2000). This low level of Internet purchase patronage has forced the closure of an electronic business website developed and operated by a popular Chinese bookstore, because its customers felt that it was more convenient and secure to purchase books at the physical location of the bookstore. Despite the small number of actual transactions conducted over the Internet, it is interesting to note that there is a higher level of willingness on the part of Internet users to make Internet purchases. A survey conducted in 1998 revealed that 87% of Internet users would purchase goods and services through the Internet if the online payment and Internet systems were secure and reliable. However, this percentage fell to 59% in 2001 and was attributed to the erosion of users' confidence in the poorly developed electronic payment and Internet environment. Insufficient regulation and poor customer protection in the Internet environment means that consumers who make online payments take all the risk, and this has stifled the development of electronic commerce in the country (Schwankert, 2001; Nelson & Leigh, 2001). In addition, the restricted geographical application of the bankcards also restricted the scope of electronic business. A bankcard issued in Shenzhen is unlikely to be accepted for payment to a company based in Beijing. Innovative solutions (such as using cash-on-delivery system, wire transfer payment prior to delivery and opening of accounts with the seller's bank) undertaken by some businesses to overcome online payment concerns were found to have inflated cost and risk. More attention and resources have to be devoted to ensuring that each purchase is genuine, especially in cases where payment arises at the time of delivery (in the case of cash-on-delivery) instead of before delivery (in the case of online payment). In cases where payment has to be made prior to delivery, customers found it inconvenient to wait for a week before the paid items are delivered.

The Chinese payment system is not developed enough to support online payment. The low level of consumer confidence in the electronic payment system and an undeveloped telecommunications infrastructure have contributed to the slow and limited development of electronic commerce in China. The need for a reliable infrastructure to protect the integrity of payment instructions in an electronic commerce environment would place significant burdens on the government. The government would need to become a significant sponsor of information technology applications and an active player in the telecommunications and information technology sectors.

World Trade Organization

China became a formal member of the World Trade Organization (WTO) on November 10, 2001, after 15 years of negotiations. As a member, China is obligated to gradually open its sectors (telecommunication, finance, insurance, commerce, transport, construction, tourism and intermediate services) to overseas investors and implement market-based mechanisms for free and fair competition in its economy. Opening of markets for foreign participation entails the need to create stability and predictability in the operating environment so that investors can plan their activity in the Chinese market with greater certainty. Moreover, foreign investment and competition will eventually drive radical changes to China's systems, forcing minimum operating standards of efficiency. New laws, regulations and rules need to be drafted, and some decrees need to be amended, while obsolete laws need to be abolished. Since admission into the WTO, the Chinese government has appointed several taskforces to review its legislation for consistency and relevancy in the WTO environment.

While the economic opportunities arising from China's accession into the WTO will be profound, it will be no easy task, particularly when it has been given only three to five years to implement changes across a wide spectrum of sectors in the economy. The electronic payment system will be placed under pressure to cope with the rising market activities due to the new market structure and business practices influenced by the growing presence of foreign companies. The status of electronic payment will also affect China's ability to integrate into the global trading systems, which are increasingly supported by information technology. New forms of payment are expected to emerge in the WTO scene, particularly the credit card service and the Internet online payment system, given China's vast population (frequently viewed as huge market potential by foreign companies) and the increase in the entry of foreign companies with wide experience in sophisticated transaction systems. It is hoped that foreign participation, particularly in the financial, telecommunication and distribution sectors will strengthen and ensure efficiency in the electronic payment system.

Footnote

ENDNOTES

Footnote

1 The "Golden Card"project is one of the eight projects that were initiated by the Chinese government to develop electronic information systems. The other projects were the State's Public Economic and Information Telecommunications Project (Golden Bridge), the Foreign Trade Information Resource Network (Golden Customs), the Electronic Currency and Modern Payment System (Golden Card), the Taxation and Electronic System (Golden Taxation), the Industrial Production and Circulation Information System (Golden Enterprises), the Agricultural Comprehensive Management and Service Information System (Golden Agriculture), China Education and Scientific Research Computer Network and Talent Project (Golden Intellectual), and finally, the National Economic Macro-Policymaking Support System (Golden Policy).

2 Liaoning Province, Dalian City, Beijing City, Tianjin City, Shandong Province, Qindao City, Jiangsu Province, Shanghai City, Hangzhou City, Xiamen City, Guangdong Province, and Hainan Province.

Footnote

3 "Online" means the equipment that reads the magnetic-strip card is directly linked to the processing bank or clearinghouse computer.

4 Credit risk refers to risk, faced by the creditor, of the inability of debtor to generate enough returns to cover all expenditures and to continue running the business profitably. Credit risk can arise as a result of costly financial sourcing to discharge pressing payment obligations (Borio & Bergh, 1993).

5 Transactions recorded by the agent or merchant and processed in a batch at the end of the day; no call is made with each card payment transaction.

Footnote

6 The number of smart cards issued in the late-1990s was about 3% of the total bankcards issued by the banks in China (Liu, 1999). The adoption of smart card is comparatively more pervasive in the Chinese telecommunications and transportation industries than in the banking industry. The ratio of smart cards in circulation in the banking industry, the telecommunication industry and the transportation industry is 10:40:50 (Dan, 1999).

Footnote

7 Beijing, Shanghai, Tianjin, Guangdong province, Shandong province, Jiangsu province, Shenzhen Special Economic Zone, Fuzhou, Hangzhou, Shenyang, Wuhan, Kunming, Dalian, Xiamen, Qingdao and Haikou.

References

FURTHER READING

References

The Asian Banker (2002). Payment System: China launches national payments network. The Asian Banker. Retrieved May 24,2002, from: http://www.theasianbanker.com/ A556C5/newsletter.nsf/all/B6FOC9A2DE23F22B48256B89003AF1B3?opendocument.

Foy, C. & Maddison, A. (1999). China: A world economic leader? The Organisation for Economic Cooperation and Development: The OECD Observer, 215, 39-42.

Zapalska, A. M. & Edwards, W. (2001). Chinese entrepreneurship in a cultural and economic perspective. Journal of Small Business Management, 39 (3), 286-292.

References

REFERENCES

References

Balino, T. J. T., Dhawan, J., & Sundararajan, V. (1994). Payment system reforms and monetary policy in emerging market economies in central and Eastern Europe. International Monetary Fund Staff`Papers, 41 (3), 383-410.

Balino, T. J. T., Johnson, 0. E. G., & Sundararajan, V. (1996). Payment system reforms and monetary policy. Finance Development, 33 (1), 2,4.

Bank for International Settlements (1994). 64th Annual Report: 114/93 - 3113/94. Basle, Switzerland: Bank for International Settlement.

Beyer, L. (1999). Customer service: The good and the bad. Credit Card Management, 12 (7),104.

References

Bhala,R.(1995). Towards a payments system law for developing and transition economies. Washington, DC: World Bank.

Borio, C. E. V. & Bergh, P. V. (1993). The nature and management of payment system risks: An international perspective. BIS (Bank for International Settlements) Economic Papers (no. 36). Monetary and Economic Department, BIS.

Burns, S. & Taylor, C. (2000). Promises, promises. Far Eastern Economic Review, 163 (14), 42-44.

Business Asia (2000). The gates to China. Business Asia, 32 (13), 8.

Business China (1999). The promise of electronic commerce. Business China, 25 (17), 5-7. Business China (2001). Solving the payments puzzle. Business China, 27 (7), 3-4.

Cai, L. (1995). Thoughts regarding Golden Card project. Computer and Credit Card, 5, 1012.

References

Cartledge, S. & Lovelock, P. (1999). Chinapromotes the Internet. The China Business Review, 26(3),12-13.

Cecchetti, S. G. & Krause S. (2001). Financial structure, macroeconomic stability and monetary policy. National Bureau of Economic Research Working Paper Series, Working Paper 83 54.

Chen, J. (2000). Bankcard is driving the development of electronic currency and the importance of managing the development ofthe commercial bank. China Credit Card, 44(1),6-10.

Chen,T. (1996). China's bankcard development and its future. Computer and Credit Card, 3,9-12.

References

China Daily (2001). Streamlining Bank Card System. China Daily. Retrieved May 15,2002 from: http://www.china.org.cn/english/2001/Feb/7751.htm.

Clark, D. (2000). China reluctant to buy in to e-commerce. Telecommunications. November, 34(11),141-144.

CNNIC (2000). Semi-annual survey report on Internet development in China (2000.1). China Internet Network Information Center. Retrieved January 19, 2002 from: http:// www.cnnic.net.cn/develst/e-cnnic2000.shtml.

Dan, B. (1999). China: The Smartcard and ATM market. Tradeport. Retrieved November 21, 2000 from: http://www.tradeport.org/ts/countries/china/isa/isar0006.html.

Deng, X., and Qin, N. (1995). Technology is an enabler in the rapid development of credit card business. Computer and Credit Card, 1, 13-16.

Einhorn, B., Engardio, P., & Webb, A. (2000). China's tangled Web. Business Week, July 17, 56-58.

References

Fang, W. (1995). In year 2000, the world's biggest personal computer market is in China. Guangdong Financial Computer, (4), 43.

Folkers-Landau, D., Garber, P., & Lane, T. D. (1994). Payment system reform in formerly centrally planned economies. In D. Folkers-Landau, G. Caprio, & T. D. Lane, Building sound finance in emerging market economies (pp. 91-112). Washington, DC: International Monetary Fund.

Guibourg, G. (2001). Interoperability and network externalities in electronic payments. Sveriges Riksbank Working Paper Series, Working Paper 126.

Hansen, F. (2000). New opportunities in China. Business Credit, 102 (7), 42-44.

Hopton, D. (1983). Payment systems: A case for consensus. Basle, Switzerland: Bank for International Settlements.

Jiang,H. (1995). Golden project implementation problem and solution. Computerand Credit Card, 5, 8-9.

Jinrongshibao. (1995-97). Jinrongshibao. Beijing.

References

Kotler, P., Chandler, P. C., Brown, L., & Adam, S. (1994). Marketing: Australia and New Zealand. 3rd ed. Sydney: Prentice Hall.

Kotler, P., Clark, E., & Stewart, A. (2001). Marketing. 5th ed. New South Wales: Person Education Australia.

Lee, B. C. (2000). The retail payments system and Internet commerce. In S. M. Rahman & M. S. Raisinghani (Eds.), Electronic commerce: Opportunity and challenges (pp. 233245). Hershey, USA: Idea Group Publishing.

Li, D. L., Xue, C. H., & Gou, Z. L. (2001). Analysing the risk of new generation integrated application system. China Credit Card, 10, 32-34.

Li, J. (1995). Credit card development constraints and strategies. Computer and Credit Card, 5,13-15.

References

Listfield, R. & Montes-Negret, F. (1994). Modernising payment systems in emerging economies. Washington, DC: World Bank.

Listfield,R.&Montes-Negret,F. (1995). Payment systems in Latin America:A tale oftwo countries, Colombia and El Salvador. Washington, DC: World Bank.

Liu, L. (2001). Main issues in bankcard business development. China Credit Card, 10, 3537.

Liu, S. (1999, August 2). China's IC-card industry draws global players. Electronic Engineering Times, 1072,30-31.

References

Ma, G. (1996). Structure and realisation of central bank treasury business processing system. Financial Computer of China, 6, 17-18.

Marks, L. J. & Kamins, M. A. (1988). The use of product sampling and advertising: Effects of sequence of exposure and degree of advertising claim exaggeration on consumers' belief strength, belief confidence, and attitude. Journal of Marketing Research, August 25, 266-281.

Mester, L. J. (2000). The changing nature of the payment system: Should new players mean new rules? Business Review-Federal Reserve Bank of Philadelphia, March/April, 3-26.

Morelli, G. (1986). Payment systems in eleven developed countries. Journal of Banking Research, 16 (4),173-174.

Nelson, S. & Leigh, N. (2001). China. APEC: E-com legal guide. Retrieved May 15,2002 from: http://www.bakerinfo.com/apec/chinaapec-main.htm.

OECD (1993). Transformation of the banking system: Portfolio restructuring, privatisation and the payment system. Paris: Organisation for Economic Co-operation and Development.

References

Paterson, K. (1999, April). Giving a boost to word-of-mouth advertising. Rough Notes, 142 (2), 84-85.

Prelec, D. & Loewenstein, G. (1998). The red and the black: Mental accounting of savings and debt. Marketing Science, 17 (1), 4-28.

Sato, S. & Humphrey, D. B. (1995). Transforming payment systems: Meeting the needs of emerging market economies. Washington, DC: World Bank Discussion Papers 291. Schwankert, S. (2001). E-payment: Asia's online reluctance. Internet World, 1(1), 52-53. Shang, F.L. (2000). Speed up the development of bankcard business, drive the Golden Card project construction. China Credit Card, 44 (1), 4-5.

Smith, R. E. (1993). Integrating information from advertising and trial: Processes and effects on consumer response to product information. Journal of Marketing Research, May 30,204-219.

References

Smith, R. E. & Swinyard, W. R. (1988). Cognitive response top advertising and trial: Belief strength, belief confidence and product curiosity. Journal ofA dvertising, 17 (3), 3-14.

Soman, D. (2001). Effects of payment mechanism on spending behavior: The role of rehearsal and immediacy ofpayments. Journal of Consumer Research, 27 (4): 460-474.

Tang, W. (2002). Refusal of agent to accept Peony card for payment in less developed regions. China Credit Card, 1.

Wang, J. C., Liao, T., & Li, S. B. (2000). Analysing the present application and development status of ATM. China Credit Card, 55 (12).

Wang, M. (1995). POS management in agent's outlet. Computer and Credit Card, 6,3536.

Wright, A. A. & Lynch, J. G., Jr. (1995). Communication effects of advertising versus direct experience when both search and experience attributes are present. Journal of Consumer Research, March 21, 708-718.

References

Wu, W. G. (2001). Analysis of bankcard business in the state-owned banks. China Credit Card, 10, 32-34.

Xia, F. Q. (2000). Appropriate timing to instigate consumption through credit card. China Credit Card, 44 (),19-21.

Xiao, Y. J. (2000). Analysis of increasing the pace of consumption through credit card consumption. China Credit Card, 44 (1), 22-23.

References

Yang,H. (1996). Banking and financial control in reforming planned economies. Basingstoke, Hampshire: MacMillan.

Zhang, Q. H., Wang, X. C., & Wang, Z. J. (2000). Chinese banks' current development problems and strategies. China Credit Card, 44 (1), 30-32.

Zhang, W. ( 995a). Credit card development problem and solution. Computer and Credit Card, 4,19-20.

Zhang, Y. X. (2000). Where is the one interoperable financial card? China Credit Card, 46 (3),67-68.

Zhang, Z. (1995b). Credit card present development problem and solution. Computer and Credit Card, 6,15-17.

Zhang, Z. Q. (1999). Moving away from problem areas in automatic banking system. Computer and Credit Card, 40 (9), 2-7.

Zhao, J. M. (1999). Electronic money. Guangdong: Guangdong Economic Publisher. Zhong, C. N. & Wu, J. P. (2000). Credit card is an effective catalyst for economic growth. China Credit Card, 47 (4),10-15.

AuthorAffiliation

Michelle W. L. Fong

Victoria University, Australia

AuthorAffiliation

BIOGRAPHICAL SKETCH

AuthorAffiliation

Michelle W. L. Fong is a lecturer in the School of Applied Economics, Victoria University, Australia. Prior to her academic and research career, she worked with different business systems in different corporations in Singapore, Malaysia, China and Australia. This gave her an insight into the information technology applications within these organizations, which spurred her research interest in the adoption, diffusion and leapfrogging of information technology.

Subject: Studies; Payment systems; Technological change; Problems; Emerging markets

Location: China

Classification: 9130: Experimental/theoretical; 9179: Asia & the Pacific; 5240: Software & systems

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 184-200

Number of pages: 17

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: graphs references

ProQuest document ID: 198658825

Document URL: http://search.proquest.com/docview/198658825?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 78 of 100

Student laptop ownership requirement and centralization of information technology services at a large public university

Author: Newby, Gregory B

ProQuest document link

Abstract:

This case explores a large, highly ranked public university's decision to implement a requirement for all incoming undergraduates to own a laptop computer to potentially control increased expenditures for information technology by shifting some of the cost of technology to students and decreasing the need for centralized general-purpose computing laboratories. This case analyzes the relative success of this endeavor, educationally and in cost savings to the university. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

A large, highly ranked public university implemented a requirement for all incoming undergraduates to own a laptop computer starting in Fall 2000. To control increased expenditures for information technology, this requirement has shifted some of the cost of technology to students by decreasing the need for centralized general-purpose computing laboratories.

At the same time, a shift towards centralized academic computing support occurred. This shift was away from information technology resources, services and support based in individual departments. This shift, engineered by the newly formed office of the Chief Information Officer (CIO), was envisioned to generate cost savings through economies of scale.

Headnote

The educational impact of the laptop requirement is starting to be felt, but adoption is not widespread in daily classroom use. Envisioned cost savings have not yet become apparent. However, laptop ownership has enabled some new classroom activities and helped to reinforce the leading-edge image of the university.

BACKGROUND

The subject of this case study is a large US-based public university with a liberal arts focus. Ranked well within the top 50 universities by US News and World Report (2001), and within the top 10 public universities overall, the institution had a solid history of leadership in education. Like most public universities, a large component of the subject's mission was to bring low-cost and high-quality education to the undergraduates ofthe state. With tuition under $5000 per year for in-state students, and numerous nationally recognized academic programs, the university had a good record of accomplishment on this mission.

Universities, by definition, are composed of schools and colleges. All universities have a variety of undergraduate academic programs based in the schools and colleges, typically including liberal arts (such as humanities and social science), the sciences (physics, biology, chemistry), and professional studies (business, journalism). Graduate programs at the subject organization included the range of undergraduate programs listed here, plus medical professions and others, with more than 100 different Ph.D. and master's degrees offered.

The different schools and colleges within the subject university had different needs and uses for information technology. By 2000, all students and faculty, regardless of their academic program or home department, made significant use of information technology. Students made regular use of email and the Internet for class research, communication with their peers and faculty, and fundamental activities such as course registration and tuition billing.

Within the university, there had historically been inequity across academic units (the schools, colleges and academic departments that compose them) for information technology access and support. Units with strong internal and external finding (from grants and other sources) might have been able to provide laboratory or research facilities for students and faculty, while units without such funding needed to split their technology funds for a variety of purposes.

Laboratory and research facilities would include materials that were discipline specific (such as Bunsen burners for wet chemistry labs), but all disciplines relied on general-purpose microcomputers and servers. In addition, these computers required staff support to purchase, configure and maintain. In many disciplines, specialized software was required that could be quite expensive or time consuming (in support staff hours) to acquire, configure and maintain.

Special-purpose laboratory and research facilities supported faculty and graduate students, but undergraduates tended to require general-purpose computing facilities. The subject university, like most universities of its size, had a centralized nonacademic unit that controlled most general-purpose computing facilities. This academic computing unit ran central servers for the campus (backup servers, email servers, Web servers, etc.) and numerous computing laboratories with microcomputers, printers and a variety of software. The unit also offered training and support on a variety of topics, from basic email use to advanced statistical computing.

Because the academic computing unit focused on student needs, departments could effectively outsource their requirements for microcomputer support, software maintenance and staffing to the unit. Historically, this meant that schools and departments without significant specialized computing needs and flexibility in funding had very little discretionary budget for information technology. The result, which was most apparent in the humanities and some other academic disciplines, was that faculty and staff had woefully outdated desktop computers, little or no appropriate software, and no departmental support or funding for upgrades.

To summarize the organizational setting:

1. A top-ranked public university, with a mission to educate undergraduates from across the state at a reasonable cost.

2. A centralized nonacademic computing department, offering centralized servers, training, software and support. This department ran numerous microcomputing laboratories on campus for student use.

3. Many academic units (schools, colleges and the departments that composed them) with strong internal infrastructure for information technology, including specialized computing facilities, personnel and a recurring budget.

4. Many other academic units that relied on the academic computing department for their students' needs but had little or no budget or staffing resources to meet the needs of their faculty, or the specialized needs oftheir discipline, or to equip classrooms or other shared spaces.

SETTING THE STAGE

A large, US-based public university faced significant challenges in keeping up-to-date computing facilities for students and faculty. Because the budgeting process for the university could be unpredictable, and funding and funding sources for a particular department, school or college were changeable, deans and department heads were forced to choose between information technology expenditures and other necessities. Ina given year, a dean might be forced to choose between physical infrastructure (such as office renovation for staff), supplies (such as a new photocopier) and information technology (such as new faculty desktop PCs). The dean might have no assurances that the same level of funding would be available in a future year, making long-term planning difficult.

In the late 1990s, the subject university recognized several important facts:

1. Little standardization in information technology purchases and practices existed, resulting in many different and hard to maintain microcomputers and related facilities, with little staff to effectively maintain them.

2. Specialized software for particular disciplines was available in some laboratories, but not others. Centralized university-wide practices for software acquisition was available for the lowest common denominator software only (e.g., Microsoft Office and operating systems, statistical software from SAS, and desktop applications and utilities such as Norton Anti-Virus).

3. Centrally administered computing laboratories were extremely popular, but also very expensive to run. Regular upgrades to hardware and software were required, and staffing and infrastructure were required, as well as space.

4. Many faculty members, as well as departmental computing laboratories for students, were languishing with computers more than four years old. Some buildings had not yet been updated to bring 10 ObaseT networking to all classrooms and offices. Wireless standards, while emerging, were too changeable for campus-wide deployment.

5. Increasing numbers of students owned computers, from a variety of vendors, in laptop and desktop formats. These students made use of network connections in the dorms, libraries and elsewhere to do their work. Students without their own computers would visit computing laboratories, but many laboratories lacked modern hardware or software. 6. Computers were becoming critical to the everyday academic lives of students and faculty. Several leading departments, combined with the overall technology prevalence on campus, made it clear that ubiquitous networked computing was a near-term expectation for constituencies.

These and other facts led the campus administration to seek to control costs through increased centralization of computing services and facilities and to create standard expectations for student computer ownership. In early 1998, a plan was announced that was intended to control costs while mandating student ownership of laptop computers. The plan was put into effect for all undergraduate freshmen incoming in fall 2000, who were required to own a laptop computer compliant with university specifications. While there was no specific requirement for graduate students, several graduate programs decided to implement their own laptop ownership requirement. The decision to require student ownership of computers was not unusual among higher education institutions (see Communications ofthe ACM, 1998). The subject university was an early adopter and one of the earliest large public universities to require computer ownership.

After an open bidding process, the university negotiated with a leading multinational hardware vendor to supply laptop computers to the university at a moderate discount, with customizations and warranty services not otherwise generally available in 1998. Students, as well as campus departments and faculty, could purchase this vendor's computers via the university, or they could purchase a computer elsewhere, as long as it met the minimum performance requirements.

In spring 1999, as part of the overall program for increased centralization and standardization, several academic departments that had substandard computing facilities were upgraded. These departments, including biology and English, would also deliver some of the first laptop-customized content for the freshmen of 2000.

CASE DESCRIPTION

The Cost and Necessity of Computing

A laptop is only so useful if it's not networked Either make the wireless cards part of the package or increase the number of Ethernet jacks by a factor of 25 or so. (Student quote from Li & Newby, 2002)

Soaring costs combined with increased reliance on information technology, including basic microcomputers and software, had been recognized at academic institutions since at least the early 1980s. By the late 1990s, the pace of hardware and software innovation and increased performance had resulted in a tough reality: the effective lifetime of a modern computer was at most three to four years. Even this short lifetime assumed capable systems administration and upkeep, including regular software upgrades for the operating system and applications.

The harsh reality was that leading universities needed to provide good computing facilities for students and faculty. Ongoing upgrade needs were a fact, as was the need for expert support staff to maintain the equipment, plan, and train the users. Features of the latest software and new devices (such as scanners, color printers and digital cameras) were and are desirable in the academic setting. Demand for centralized services of all types was high and growing.

By the end ofthe 2011 century, email and Web pages at leading universities had achieved infrastructure status. Everything from student registration to coursework happened via email and the Web, and even short outages of central computing facilities could have disastrous impact. At the subject university, the response was to centralize services under a new Chief Information Officer (CIO) position and task this officer with controlling costs, increasing quality of service, and ensuring equity of access to computing for all students and faculty.

Recognizing that budget disparity and autonomy were challenges to the CIO's goals, the university administration's response was to increase centralization. Whereas departmental computing laboratories had been the norm, centralized laboratories would be favored (with funding for departmental computing slashed). Instead ofeach department, school or college having technology staff dedicated to that unit, the units would turn to the centralized administrative computing unit for assistance. Departments were not forced to utilize centralized services, and many chose to maintain their own separate infrastructure for email, Web pages, tech support, etc. In order to do so, the departments had to possess sufficient budgetary latitude (from grants and many other sources), along with a department chair or dean willing to allocate the needed funds.

The result of this centralization was generally favorable. Those departments with specific needs (and the money to support them) could go their own way. Departments without money or specific needs, which included most of the large departments offering service courses to undergraduates, could utilize more cost-effective centralized services. In turn, those departments would lead the way at integrating laptop computers into their courses.

The CIO envisioned cost savings because of student ownership of laptop computers and increased centralization of facilities. The cost savings after two years, if any, were hard to see and never made public by the administration. In fact, evidence of increased expenditures for computing was available in most departments-and in the student loans of incoming freshmen. Centralized computing facilities and their support infrastructure (staff, software, etc.) didnot go away and continued to require costly upgrades. Demand for training and other services, as well as centralized large-scale platforms for statistical and scientific computing, continued to grow. While it seemed logical to assume some cost savings due to better standardization on microcomputing equipment and decreased need for specialized departmental staff, real budgetary figures supporting these cost savings were not made available to support this case study.

Criticism of the Laptop Ownership Requirement

I was frustrated because I already have a laptop (one I'm still paying for), although it's four years old and can't be upgraded to current standards. (Student quote from Li & Newby, 2000)

The implementation of the laptop requirement, along with increased centralization and standardization, met with some resistance, especially from technically proficient faculty. Because of the budgetary control the central administration of the university has over most departments, as well as standards for incoming students, the plan was able to go forward with few changes. Criticism included:

1. Pedagogy. The utility of laptops (or any computers) for undergraduate education had not been adequately demonstrated, and the fit with some academic programs was not clear.

2. Cost. At $2000 to $3000 (depending on the model purchased), the laptop computer increased the first-year tuition, room, board and fees total costs for a student by 3050%.

3. Longevity. The student laptop was expected to last for all four years of the undergraduate education (and a warranty service for those bought through the university was intended to maintain this functionality). However, four-year-old computers were seldom able to utilize modern software or devices and were difficult or impossible to upgrade.

4. Infrastructure. While 802.1 lb wireless was available in some parts of campus, most classrooms had no network connectivity and few or no power outlets for student use. This limited the utility of the computers for many types of applications that faculty could envision.

5. Support. Little faculty training was included, and there were few incentives for faculty to incorporate laptop use into their courses. At the same time, students were offered almost no training on how to utilize their computer effectively, with little attention to proper ethics or security for computer use.

Overall, however, events proceeded as planned. Faculty upgrades to biology, English and other departments preceded the first semester of laptop-enabled freshmen. The curricula for several large-section freshman-oriented courses were upgraded to include laptop use for science laboratory and writing assignments.

Ten to twenty percent of incoming freshmen were given grants to help cover the cost of their laptop computers, or pay for them entirely. The others were offered some help in getting a student loan to cover the cost of the computer. Part of the grant funding came from proceeds from the laptop sales by the campus, and part came from central university sources.

Use in the Classroom and on Campus

I've seen some students taking notes on their laptops, but I've also seen students using computers in class to surf the Web, engage in instant messaging conversations, and check their email.

People will check their email or play games in class instead of paying attention, annoying the rest of us with their typing. (Student quotes from Li & Newby, 2002)

Some of the best uses of laptop computers in the classroom appeared in the academic units that already had the best computing infrastructure and support. High-technology departments such as computer science, information science, journalism and business had already integrated the use of Web pages and modem microcomputer software and applications into their curricula. In these departments, faculty had access to the same modem infrastructure, and many faculty members had already adapted their courses to utilize it.

Unfortunately, many students at the subject university were unable to benefit from these leading departments. This was either because they did not take courses there, or simply because the first two years or so of the undergraduate education emphasized general liberal arts requirements over specialized courses. These general liberal arts courses were likely to be taught in very large classrooms (more than 100 students), often by teaching assistants or adjunct faculty, and with little integration of laptops.

In those courses where the laptop plan had focused, laptop use was evident. Students were able to engage in writing exercises, science laboratory experiments, and other educational activities. These activities were not previously available or were not as flexible and powerful as they were with the laptops.

Because all incoming freshmen had laptops, prevalence of their use was evident everywhere on campus. Students in libraries and classrooms would use their laptop computers for taking notes and, where available, to access the Internet. Off-campus housing, like on-campus dormitories, offered high-speed network access. Even cafes and other offcampus eateries started to provide power outlet access and 802.11b network connectivity for their patrons. By 2002, most ofthe campus was covered by 802.11b. Power and workspaces remained hard to find in most parts of campus.

The use of centralized services by these laptop-enabled students somewhat decreased the demand for general-purpose software in public computing laboratories. Demand for special-purpose software and equipment, however, such as multimedia software and scanners, was higher than ever. Student laptop computers came with at most a few hundred dollars worth of software: an operating system, a Web browser, office productivity software (including a word processor), and utilities. A computer in a well-equipped departmental laboratory would often have in excess of $10,000 of software, ranging from statistical applications to modeling, with many high-end peripheral devices.

The demand for centralized email, Web pages, and other server-based facilities continued to grow. So did the demand on the university's already considerable network bandwidth to the outside world, as everything from multimedia email, to Web pages, to peerto-peer file sharing gained in popularity. Demand for centralized training did not grow much for the first generation of laptop-enabled students, primarily because these students (usually recent high school graduates) were already familiar with email, the Web and office applications.

Student Perceptions

Because I'm so inexperienced with computers, I felt compelled to purchase my laptop from U-thus making it an even more expensive purchase-so that I would be guaranteed assistance in case of any problems.

I've been frustrated because most professors do not require it in class... xxxx does not require us to use the computers enough to justify the laptop requirement.

Faculty will need to greatly increase their computer skills to successfully incorporate laptop use in the classroom. Another is the variation in faculty support, some professors seem to think the requirement is unnecessary and therefore have little reason to incorporate laptops into their courses. (Student quotes from Li & Newby, 2002)

A doctoral student in information science at the subject university, in cooperation with the author of this case study, performed research on student perceptions of the laptop requirement (Li & Newby, 2002). The study, first conducted in fall 2001 with a follow-up in spring 2002, gathered qualitative and quantitative data from graduate students and faculty in the school of information and library science, which had historically been a leader in the use of information technology at the subject university.

The school studied was not an accurate mirror of the rest of the university but exhibited many of the same trends. The school implemented its laptop requirement for graduate students one year after the university's requirement, for fall 2001. The research did not address the general undergraduate population, but rather the more specialized graduate population of the school. Nevertheless, the empirical data gathered in the research echo the less formal reports, student newspaper articles, informal interviews, course syllabi and other sources of data used for this case.

The overall perception of the students is that laptops were underutilized in the classroom, and their uses did not justify the expense of the laptop purchase. Students who purchased from the university believed they overpaid and wished they had better guidance to make an informed purchase elsewhere. Students who purchased elsewhere felt uncertain about the support they could get from centralized computing. Students did not see pedagogical benefits to laptops in the classroom and questioned faculty commitment to their use.

Nearly all students (out of 41 responses, from a student population of about 275) were willing to be patient as the school's faculty decided how to integrate laptop use in the classroom. By the end of spring 2002, however, many students had never been required to bring their laptop to the classroom and had not taken courses that had integrated the laptop.

The research also solicited input from the school's 17 full-time faculty, but very little was forthcoming. Analysis of course syllabus materials revealed that of 100 or so course sections offered in the school during the 2001-2002 academic year, only a handful made regular use of laptops in the classroom. Another handful made occasional use, as a replacement for scheduling time teaching in the school's computer laboratory. The vast majority had no explicit laptop requirement.

These negative results are offset somewhat by the phase-in of the laptop requirement for the school. As for the undergraduate requirement for the university as a whole, incoming students were given the requirement, but students already enrolled were not required to purchase a laptop. For the school, most graduate students graduated in two years, resulting in about one-half turnover in the student body every year. Thus, only the second year would see nearly 100% of students with the laptop requirement. Nevertheless, the fact that such a small proportion of course sections have made use of the laptop requirement during the first year is disquieting.

Success?

It will probably take several years to assimilate the laptops. We're still just figuring out how they will be most useful.

In the future, many of the students entering the program will have grown up using laptops in their classrooms before they even get to the university level, so I think it will be the norm rather than being a special requirement. (Student quotes from Li & Newby, 2002)

The leading-edge image of the university, along with the value of the education it provides to the people of the state, was served well by the laptop requirement. Significant upgrades to centralized services occurred, awareness and support for the integration of computing into coursework improved, and interested faculty members had good intellectual and practical resources for this integration. Departments with specialized needs were, generally, able to meet those needs as well as they were previously or better. The shift towards increasingly capable centralized resources enabled many departments to eliminate some general-purpose training, facilities and services.

The actual educational impact of the laptop requirement was largely unmeasured and, at least to some extent, immeasurable. In 1998-1999, more than 75% of undergraduates possessed a computer. The laptop requirement meant that students with a computer could bring the computer to class, to the library, etc. Would this portability result in better education? It seemed clear there were several good examples of classroom activities that were enabled or improved when students had a laptop computer. The long-term impact on quality of education, across a four-year undergraduate program, was more difficult to assess.

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

Right now we have great discussions in some classes, but if we all have our attention directed at our laptops we will be losing a lot of the interpersonal communication and class participation.

Inside class, discussion may be reduced for everyone concentrates on his or her screen and is busy typing. Outside class, however, interactions may increase for students are free to contact each other when they have an idea via email if they have the wireless connection to the Internet. (Student quotes from Li & Newby, 2002)

Information technology alone was not sufficient for high-quality undergraduate and graduate education. Challenges facing the subject university included eroding budgetary support from the state, the need for renovations to buildings, soaring costs for library materials, and so forth. Faculty and staff salaries in most departments were not competitive with peer institutions. Demand for education, especially undergraduate education, had grown because of population shifts and a growing high school populace.

Despite information technology's role as one factor among many, it was one of few items with immediate understanding and appeal among all the major constituents of the university (students, faculty, staff, administration, state officials, national accrediting agencies and others). Providing ubiquitous computing and networking was, undoubtedly, the near-term future of leading universities. The subject university had taken an early leadership role among public institutions at reaching towards this future.

The laptop implementation and related technology centralization and upgrade described here was likely to produce numerous new challenges, some of which had already emerged by the second year of the laptop requirement. These challenges included:

1. Software and hardware obsolescence. After only two years of requirements for undergraduate laptop ownership, base requirements for CPU speed and disk drive size doubled. It would be difficult, by the 3rd and 4th year of laptop ownership, to support and service older computers. The software and devices of 2003-2004 might not run effectively, or at all, on the laptop computers of 1999-2000.

2 Providing upgrades. Students were given almost no training in the daily maintenance of their laptop. Operating system and application upgrades, while available cheaply through university site licenses, might be impractical for students with little training and support. Critical security upgrades were similarly likely to go unapplied.

3. Campus warranty service for computers purchased through the major manufacturer's program was in demand. As computers get older, warranty service needs increase and could result in increased costs as well as greater potential for poor service. (Consider: at the start of the laptop requirement, 100% of laptops owned by students in the program were less than one year old. But in the steady state, when all students have laptops, the average laptop will be two to three years old.)

4. Ergonomic challenges were encountered by many students. The campus was not diligent about suggesting external monitors and keyboards for students to use with their laptops while at home. (It did improve dorm furniture to offer better ergonomic positioning for typing, however.) Classrooms were ill equipped to enable students to sit with proper body position to avoid strain, including repetitive strain injuries, while using their computers. Health complaints by students were heard in many classes: lower back pain, wrist strain, eyestrain, and other ailments. There was at least some potential for lawsuits resulting from the lack of appropriate furniture and training for student use of laptop computers.

5. Lack of cost savings was, as described above, a strong possibility. Despite increased effectiveness and utility of computing on campus, it seemed unlikely that significant decreases in the budget for information technology would occur. While this was not, in itself, a problem, state agencies and administrators with budgetary oversight for information technology expenditures could decide to take other measures to control costs.

Many questions about the specific implementation choices made by the subject university remained, as well. At a fundamental level, requiring a laptop over the cheaper desktop alternative can be questioned. The multinational vendor with which the university contracted for provision of laptops is another decision that could be questioned: were there sufficient cost savings from this vendor? By 2002, the vendor (which has significant control over the particular laptop model available through the university laptop program) had never made the top-end technology available. When combined with twice-yearly updates to the model availability, this has resulted in offerings that were badly outdated and not favorably priced by the end of the update cycle.

The notion of standardization for campus computing was difficult, and it seemed that the CIO's goals for standardization were potentially unattainable. While the single vendor was, in fact, the choice of the majority of incoming students (rather than buying a computer elsewhere), there were at least four different models sold to students per academic year. (The models were a medium- and high-end laptop, and both were updated at least once during the academic year as technologies changed.) Thus, the steady state expectation (after four years) is that at least 16 different models would have been sold and in widespread use. (In addition, a similar variety of desktop models would have been deployed to departments and computing laboratories.) It was hoped that the vendor would continue to make repair and support of the older models viable and cost effective, but this is yet to be seen. Furthermore, the possibility of changing vendors existed for a future time.

The overall quality of centralized information technology services was subject to debate. As mentioned above, training for new students' use of their laptop computers was extremely limited-less than 3 hours in the summer before their first semester. The nature and variety of demands that students (and faculty) would make on the centralized support unit was not immediately clear. Academic computing provided significant services for students as part of the efforts described here, including a 24-hour telephone support hotline, some 24hour computing laboratories, and better cooperation with administrative computing and the registrar to ensure all students had a unified login and password to services. Nevertheless, growing pains and unanticipated events were anticipated. Challenges in the first two years included student misuse of the campus network, high-tech cheating, and lack of awareness of security risks to networked computers.

CONCLUSION

I like my laptop and I'm glad I have it, but there are times when I'm not sure the cost was justified by how I use it.

In my opinion, the biggest issue regarding the laptop requirement is balancing/justifying the cost with students' needs.

The fact is that laptops aren't integrated into the curriculum and that students drop $2,000 for nothing! (Student quotes from Li & Newby, 2002)

The university described in this case was highly ranked nationally and a leader among peer public institutions. With a large and diverse student body, it was not feasible to provide an information technology solution that met the needs of all constituencies. By increasing the centralization of information technology services on campus, and implementing mandatory laptop computer ownership for incoming students, a tighter control on costs was expected. Higher quality information technology services were also expected. While actual cost savings were difficult or impossible to measure (and may never materialize), there were clear indicators of increased efficiency through centralization.

The pedagogic benefits of ubiquitous laptop ownership were, from the point of view of the campus CIO and others behind the laptop plan, of secondary concern. Uses for laptop computers in several large undergraduate classes were created, but most classes only benefited to the extent that individual faculty or departments choose to develop laptopfriendly courses or course segments. In most departments, there was little or no pressure for faculty to integrate laptops in to their curricula. However, some departments, especially those with graduate professional programs, significantly redesigned their programs to make use of laptops (and provided faculty with support and inspiration to participate).

The number of families in the US that own computers has continued to grow, and as a result, the number of undergraduate students with computers has continued to grow. It is reasonable for these students to expect that computers, which are already part of their home lives and high school curricula, will be important tools for their college careers. The university described in this case took a proactive step towards ubiquity of networked computing in society by making them ubiquitous on campus. Despite challenges, oversights and obstacles in the particular implementation described here, it seemed likely these steps were in the right direction.

References

REFERENCES

References

Communications ofthe ACM. (1998). Special issue devoted to laptop ownership programs. Communications of the ACM, 41 (1).

Li, B. & Newby, G. B. (2002). Laptop requirement usage and impact in graduate ILS education. In Proceedings of the American Society for Information Science and Technology Annual Meeting, November, 2002 (forthcoming).

US News and World Report. (2001). Best Colleges 2001. Available online at http:// www.usnews.com/usnews/edu/college/rankings/rankindex.htm. New York: Wall Street Journal.

AuthorAffiliation

Gregory B. Newby

University of North Carolina Chapel Hill, USA

AuthorAffiliation

BIOGRAPHICAL SKETCH

AuthorAffiliation

Gregory B. Newby received his undergraduate degree with majors in Communication and Psychology, and his master's degree in Communication at the State University of New

AuthorAffiliation

York at Albany. He originally studied mass media and organizational communication, but took a new focus after starting to make regular use of BITNET in the early 1980s and later, the Internet. Newby examined issues surrounding new electronic communication media use during his PhD studies at Syracuse University. While at Syracuse, he developed a new virtual reality laboratory and worked on development of a visual interface to information space as part of his dissertation. After his PhD, Newby took a position as assistant professor in the Graduate School of Library and Information Science at the University of Illinois in Urbana-Champaign from 1991-1997.

At the University of Illinois, Prof Newby worked extensively to update the information technology curriculum and to integrate education of technological skills for all students. During this time, he founded Prairienet, a public-access community computing system. He was also given responsibility to develop a new technology-based distance education option for the MS degree at UIUC. He has written on information retrieval, humancomputer interaction, electronic publishing, uses and norms for the Internet, and new technologies for business use. Newby has taught courses dealing with Internet use since 1988.

AuthorAffiliation

He is currently an assistant professor in the School of Information and Library Science at the University of North Carolina in Chapel Hill. His research interests are focused on information retrieval, information space, human-computer interaction, and impacts ofnew electronic media. His courses include Information Security, Distributed Systems and Administration, and Internet Applications.

Prof Newby is currently developing an information retrieval software toolkit for large-scale experimentation with World Wide Web data, and has received a three-year federal grant for this work.

Subject: Studies; Portable computers; Students; Colleges & universities; Information technology

Classification: 9130: Experimental/theoretical; 8306: Schools and educational services; 5220: Information technology management

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 201-212

Number of pages: 12

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198679715

Document URL: http://search.proquest.com/docview/198679715?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 79 of 100

Integration of third-party applications and Web clients by means of an enterprise layer

Author: Lemahieu, Wilfried; Snoeck, Monique; Michiels, Cindy

ProQuest document link

Abstract:

This case study reports an Enterprise modeling and application integration project for a young telecommunications company providing broadband applications for the SME market. The project's aim was to define and implement an Enterprise Layer, serving as an integration layer on top of which the existing BSS/OSS would function independently and in parallel. The case details the conception of a unifying Enterprise Model and the formulation of an implementation architecture for the Enterprise Layer, based on the Enterprise JavaBeans framework. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

This case study presents an experience report on an Enterprise Modelling and Application Integration project for a young company, starting in the telecommunications business area. The company positions itself as a broadband application provider for the SME market. Whereas its original information infrastructure consisted ofa number of stand-alone business and operational support system (BSS/OSS) applications, the project's aim was to define and implement an Enterprise Layer, serving as an integration layer on top of which these existing BSS/OSSs would function independently and in parallel. This integration approach was to be nonintrusive and was to use the business applications as-is. The scope of the case entails the conception of a unifying Enterprise Model and the formulation of an implementation architecture for the Enterprise Layer, based on the Enterprise JavaBeans framework.

BACKGROUND

This case study deals with a company acting as supplier of fixed telephony and of broadband data communication and Internet services. A particular feature of the company is that all the telecom services it offers are facilitated via "Unbundling of the Local Loop" (ULL).

ULL is the process where the incumbent operator makes its local network (the copper cables that run from customers' premises to the telephone exchange) available to other operators. These operators are then able to use individual lines to offer services such as high-- speed Internet access directly to the customer. The European Union regulation on ULL requires incumbents to offer shared access (or line sharing). Line sharing enables operators and the incumbent to share the same line. Consumers can acquire data services from an operator while retaining the voice services of the incumbent. Some operators may choose to offer data services only, so with line sharing consumers can retain their national PTT service for voice calls while getting higher bandwidth services from another operator without needing to install a second line.

The regulation on ULL can have a significant impact on the competing forces in the telecom industry: it offers a great opportunity for new companies to enter the telecom market and compete with the incumbent operator. Indeed, by means of ULL the sunk cost of installing a countrywide network infrastructure is not an obstacle anymore for new entrance in the telecom market.

A large telecommunication company immediately understood the business opportunities behind this new regulation and decided to exploit the ULL benefits in all European countries. In a first step, it has created a starter company that is the subject of this case study. As a means to differentiate from the services offered by the incumbent operator, the new company focuses on telecom services for the business market, the small- and medium-sized sector in particular. The main headquarters are located in the first European country where ULL is possible. The starter company was set up in September 1999. In March 2000, it succeeded in acquiring two major investors from the US, which are both specialists in new media. The company has evolved rapidly, and in August 2001 it already surpassed 2000 customers and employed about 150 people. Presently, the company offers its services in two countries. Gradually, the company will extend its coverage ofthe European Union by opening new premises in the countries that enable ULL.

SETTING THE STAGE

Business Units with Stand-Alone Software Packages

The company is organised around four key business units: Sales & Marketing, Service Provisioning, Finance and Customer Services. The business unit Sales & Marketing is responsible for identifying emerging trends in the telecom industry and offering new telecom services in response. They are in charge of P R activities, contact potential customers and complete sales transactions. The business unit Service Provisioning is responsible for the delivery of the sales order and organises the provisioning of all telecommunication services the customer ordered. They have to coordinate the installation of network components at the customer's site and the configuration of these components according to the type of service requested. The business unit Finance takes care of the financial counterpart of sales transactions and keeps track of the payments for the requested services. The business unit Customer Services is responsible for the service after sales. They have access to the entire network infrastructure, and on request they can inform a customer about the progress of a service provisioning activity, about the network status or possible network breakdowns. The main business process is shown in Figure 1.

It is a company policy that the amount of in-house developed software must be limited. The company has therefore acquired a number of off-the-shelf software packages. Apart from the Sales & Marketing business unit that relies only on elementary office software, each of these business units relies on different business and operational support systems (BSS/OSS) that are tailored to the problems at hand. Until recently, all BSS/OSS were functioning independently from each other. The company quickly understood that the integration of the BSS/OSS could improve its competitive position in three ways. On the short run, the company could benefit both from a better performance in transaction processing and more transparency in its business process. On the long run, the activities of the company should become better scalable to an international setup with multiple business units. Now is presented in some more detail how the integration of the BSS/OSS can realise these benefits.

Better Performance

To differentiate from the services offered by the incumbent operator, the company has targeted her services towards the SME market segment. As opposed to the segment of multinational companies, the SME segment typically involves large volumes of relatively small sales orders. But the performance of the present information infrastructure with stand-- alone BSS/OSS deteriorates significantly when a large number of transactions have to be processed simultaneously. A main factor explaining this performance decrease is that the BSS/OSS applications are essentially used as stand-alone tools: each application supports only part of the value chain and is treated in isolation. Although each package is very well suited for supporting a specific business unit, the lack of integration between the different applications causes problems: each application looks only after its own data storage and business rules, resulting in a state of huge data duplication and severe risks for data inconsistency on a company-wide level. As a result a substantial amount of manual work is required to coordinate the data stored in the different packages. To avoid these problems in the future, an integration approach should be adopted guaranteeing a centralized data storage and organizing the automatic coordination between the different BSS/OSS.

More Transparent

By integrating the BSS/OSS applications, company-wide business rules can be maintained that give a more formal structure to the company's business organisation. As a result, the business process will become more transparent and better controllable. Previously, the cooperation between different business units was rather ad hoc and not yet formalised on a company-wide level. As a result, a number of business opportunities/risks could often not be detected by the company. For example, the company had problems with a customer company not paying her bills. Later on the commercial contact of this company reappeared as financial contact person in another customer company, and again bills didn't get paid. This repetition of the same problem could have been avoided if information on people had been centralised. In the current system, data on people is stored in all four business units. Sales & Marketing stores data on in-house sales people, out-house distributors and commercial contacts. Service Provisioning and Customer Services both maintain data on technical contacts. The Finance application keeps track of financial contacts. Since the company mainly deals with SME, an individual often takes several of these roles simultaneously, so that with the current information infrastructure data about one person will be distributed and replicated across several business units. Nevertheless, the company could benefit from an approach ensuring that data on a single person is stored and maintained in one place. Indeed, if a person is not loyal in his or her role of commercial contact, the company should take extra care in the future when assigning this person the role of financial contact. Such a policy is only maintainable if all information on individuals is centralised. (In the integrated information infrastructure such a person will be altered to the state "blacklisted," and as long as he resides in this state he cannot be assigned to one of the above roles.)

Better Scalable

As an early adopter of the ULL opportunity, the company is very likely to become one ofthe major players targeted to the telecom SME market in the European Union. Flexibility in both the adoption of new products, to keep pace with the evolving technology, and in the adaptation of existing products, to conform to different company standards, will be one of the cornerstones to realise this objective. However, the current information infrastructure cannot guarantee this level of flexibility.

The Sales & Marketing business unit is responsible for conducting market research and offering appropriate telecom solutions to keep pace with evolving business opportunities. What they sell as one single product can be further decomposed into a number of parts to install and parameters to configure by the Service Provisioning business unit. An example of this is depicted in Table 1.

In fact, the business units need a different view on products. Sales & Marketing and Finance need a high-level product view and are not interested in low-level issues related to the installation and configuration activities. Service Provisioning needs to know which parts where to install and to configure and does not bother about the high-level sales and marketing issues. In an attempt to keep a unified view on products while accommodating for their different needs, people of the business units tend to twist the product definitions in their respective software packages. By abusing attributes and fields for cross-referencing purposes, they try to maintain a more or less integrated approach.

However, as the set of products in the product catalogue will increase, a unified view is no longer sustainable. Also in an international setup with multiple business units a unified view can be held no longer: what ifa single product from a sales point of view requires different technical configuration activities depending on the business unit. An example of the latter is Internet access: whereas it can be implemented by means of ULL in the Netherlands and the UK, it must be provided with a leased line in Belgium where ULL is not (yet) possible. The company would certainly benefit from a scalable design reconciling the commercial view and the technical view that can be taken on a single product, the former important for the Sales & Marketing and Finance business units and the latter important for the Service Provisioning business unit.

CASE DESCRIPTION

Goals of the Project

The goal of the project was to develop a solution for the integration of the BSS/OSS applications, so as to achieve fully automated processes that are able to handle scalable business processes, systems and transaction volumes. The same software will be used in all European divisions of the company. The company has contacted a team of researchers at a university to consult them for the development of a solution. A consultancy company, unknown at the start ofthe project, will do the implementation. The time frame of the project is roughly five months for requirements engineering, about two months for the technical design of the solution's architecture and another 4 months for implementation. During the requirements engineering period, the company will look for an adequate implementation environment and contract a consultancy company for the implementation part. The remainder of this section outlines the proposal as the university team developed it.

Choosing the Right Integration Approach

1. A bridging approach

A possible approach to the integration problem would be to build "bridges" between the different software packages. Such a bridging approach is usually based on the "flows" of information through the different business units. From the business process shown in Figure 1, we can derive such an architecture for the case at hand (see Figure 2).

The major advantage of this approach is its simplicity. If one chooses to automate the existing manual procedures, the amount of required requirements analysis is limited. In addition, one can rely on the expertise of the providers of the BSS/OSS software to build the bridges. Such architecture does however not resolve data mapping and data duplication problems: information about customers, products, and other common entities is still found in different places. Although it is unlikely that data replication can be completely avoided, another major problem with this kind of architecture is that the business process is hard-coded into the information management architecture. Reengineering of the business processes inevitably leads to a reorganisation of the information management architecture. Such a reorganisation of IT systems is a time-consuming task and impedes the swift adaptation of a company to the ever-changing environment it operates in.

2. An integration approach based on an Enterprise Layer

An approach that does not hard code the underlying business processes is to define a common layer serving as a foundation layer on top of which the stand-alone BSS/OSS can function independently and in parallel (see figure 3). This so-called Enterprise Layer has to coordinate the data storage by defining a unified view on key business entities such as CUSTOMER and PRODUCT. The common information is stored into a shared object database that can be accessed through an event-handling layer. This event-handling layer shapes the manipulation of Enterprise Layer objects through the definition of business events, their effect on enterprise objects and the related business rules. From an integration point ofview this is certainly a more flexible approach: it does not hard code the current business processes and more easily allows for business process redesign. In addition, the replacement of a particular BSS/OSS service will not affect the other packages: all interaction is accomplished through the Enterprise Layer: they never interact directly with each other. In this way the company is more independent of the vendors of the packages. On the other hand, this solution has a number of factors that will make it more costly than the bridging approach:

it requires a thorough domain analysis in order to integrate the concepts of the four functional domains;

relying on the expertise of the software vendors will be more difficult;

there is no experience in the company with such an approach.

Phases of the Automation Strategy and Global Architecture

After considering the advantages and disadvantages of both the bridging and the Enterprise Layer approach, the company has opted for the latter. An additional motivation is that apart from the integration aspects, the Enterprise Layer will allow the future development of e-business functionality directly on top of the Enterprise Layer, rather than via one of the BSS/OSS applications. The automation strategy of the company is hence summarised by the following four steps:

Step 1: Roll outof industry-proven BSS/OSS applications with out-of-the-box functionality. Each application is treated in isolation (total lack of integration).

Step 2: Specification and development of an Enterprise Layer that will support all applications and user interfaces. The Enterprise layer is by definition passive and not aware of its users.

Step 3: Integration of the existing BSS/OSS applications by 'plugging' them in on the Enterprise Layer. The interface between these applications and the Enterprise Layer will be realised by the definition of agents, responsible for coordinating the information exchange.

Step 4: Development of user interfaces on top of the BSS/OSS applications or directly on top of the Enterprise Layer.

At the start of the project, step 1 had been realised: three out of the four main business domains (as represented in Figure 1) were supported by a standalone software package. There existed no automated support for the sales domain: sales business processes were mainly paper-based or used standard office software such as word processors and spreadsheets. The university team was responsible for requirements engineering and technical design for steps 2 and 3.

Modelling the Enterprise Layer

Development of an Enterprise Model: Choice of the Methodology

In order to specify an Enterprise Layer that acts as an integration layer of the existing information infrastructure, it is key that all the company's business rules are formalised and modelled as a subset of the Enterprise Model. This requires the choice of a systems analysis method, preferably one that is suited for domain modelling. Two options were considered:

1. Enterprise modelling with UML

UML has become a de facto standard for Object Oriented Analysis. It has a very broad scope of application and the major techniques (class diagram, state machines, Use Cases) can be used for enterprise modelling purposes. Many CASE tools are available that facilitate the transition to design and implementation. The language is known to practically all IT people, which will facilitate the communication with the implementation team.

On the other hand, UML is not an approach but a language. It is not specifically tailored to enterprise modelling either. As a result, UML is not a great help for the modelling task. Another disadvantage of UML is its informal semantics. Because of the informal semantics, UML offers no support for the consistency checking and quality control of specifications. In addition, the informal semantics also increase the risk of misinterpretation by the implementation team.

2. Enterprise modelling with MERODE

A particular feature of the object-oriented enterprise modelling method MERODE (Snoeck et al., 1999; Snoeck et al., 2000) is that it is specifically tailored towards the development of Enterprise Models. MERODE advocates a clear separation of concerns, in particular a separation between the information systems services and the Enterprise Model. The information systems services are defined as a layer on top of the Enterprise Model, what perfectly fits with the set-up of the project. The Enterprise Layer can be considered as a foundation layer on which the acquired off-the-shelf software can act as information services.

A second interesting feature of MERODE is that, although it follows an object-oriented approach, it does not rely on message passing to model interaction between domain object classes as in classical approaches to object-oriented analysis (Booth et al., 1999; D'Souza & Wills, 1999; Jacobson et al., 1997). Instead, business events are identified as independent concepts. An object-event table (OET) allows the definition of which types of objects are affected by which types of events. When an object type is involved in an event, a method is required to implement the effect of the event on instances of this class. Whenever an event actually occurs, it is broadcast to all involved domain object classes. This broadcasting paradigm requires the implementation of an event-handling layer between the information system services and the Enterprise Layer. An interesting consequence is that this allows the implementation of the Enterprise Layer both with object-oriented and non-object-oriented technologies. Since some of the acquired software is built with non-object-oriented technology, this is a substantial advantage.

A third feature of MERODE is that the semantics of the techniques have been formalised by means of process algebra. This allows the checking of the semantic integrity of the data model with the behavioural models.

On the negative side, MERODE has a narrow scope of application: it is only intended for enterprise modelling purposes. Although some hints are given on how to implement an Enterprise Layer, the MERODE approach gives but very little support for the specification and implementation of services on top ofthe Enterprise Layer. A second major disadvantage of the method is that it is unknown to most people. Because of this and of the peculiar way of treating events and interobject communication, difficulties are to be expected for communicating the requirements to the implementation team. It is likely that the implementation team will not be familiar with the approach and that additional MERODE training will be required.

Based on the above considerations, the project manager decided to go on with MERODE as the modelling approach. The major reasons for this choice are the consideration that quality of the Enterprise Model is a key factor for the success of the Enterprise Layer approach and the possibilities for implementation with a mixed OO and non-OO approach.

Key Concepts of the Enterprise Model

To better illustrate the responsibilities of the different layers, objects in the domain layer and the event handling layer are exemplified by considering an example of an order handling system. Let us assume that the domain model contains the four object types CUSTOMER, ORDER, ORDER LINE and PRODUCT. The corresponding UML (Booth et al., 1999) Class diagram is given in Figure 4.

Business event types are create_customer, modify_customer, end_customer, modify_customer, end_customer, create_ order, modify_order, end_order, create_orderline, modify_orderline, end_orderline, cr_product, modify_product, end_product. The object-event table (see Table 2) shows which object types are affected by which types of events and also indicates the type of involvement: C for creation, M for modification and E for terminating an object's life. For example, the create_orderline event creates a new occurrence of the class ORDERLINE, modifies an occurrence ofthe class PRODUCT because it requires adjustment ofthe stock-level of the ordered product, modifies the state of the order to which it belongs and modifies the state of the customer of the order. Notice that Table 2 shows a maximal number of object-- event involvements. If one does not want to record a state change in the customer object when an order line is added to one of his/her orders, it suffices to simply remove the corresponding object-event participation in the object-event table. Full details of how to construct such an object-event table and validate it against the data model and the behavioural model is beyond the scope of this case study but can be found in Snoeck and Dedene(1998)and Snoeck et al. (1999).

The Enterprise Layer developed in the project covers the company's four main business domains: People, Products, Orders and Configuration.

The People domain concerns both the customers and the salespersons. Information about people is found in all four business processes. The Sales & Marketing process stores data on salespersons (both in-house and distributors) and on commercial contacts for customers. The Service Provisioning application and the Customer Services application both maintain data on technical contacts. Finally, the Financial application keeps track of data about financial contacts. Since the company mainly deals with SME, a single person often takes several roles simultaneously, so that information about the same person can be distributed and replicated across several business processes. The Enterprise Layer ensures that information about an individual person is stored and maintained in a single place.

The Products domain describes the products sold by the company. The four business processes have their own particular view on the definition of the concept "product," and each BSS/OSS maintains its own product catalogue. Again, the Enterprise Layer will be responsible for tying together the description of products. Initially, it was assumed that a single company-wide definition per product would be possible, but soon it appeared that each functional domain had to work with a particular view on this definition. Therefore, the final Enterprise Layer describes products both from a marketing/sales perspective (what products can be sold and for which price) and from a technical perspective (what are the technical elements needed to deliver an item). The sales perspective is variable over time depending on sales marketing campaigns, both from a price and descriptive standpoint. The technical description is constant over time, but new technology may cause a redefinition without changing sales description.

The Orders domain encompasses all business objects related to sales orders. The sellable products are defined and registered in the Products domain; the actual ordered products are registered in the Orders domain. Finance will use this domain.

The Configuration domain keeps track of all business objects related to the technical configuration that is build at a customer's site during provisioning activities. The parts to install and the parameters to configure are defined and registered in the Products domain; the actual installed parts and configured parameters are registered in the Configuration domain. The information of this domain is provided by the Service Provisioning application and is consulted by the Customer Services application.

Business Rules and Constraints

Whereas the above mainly dealt with information structure, the MERODE Enterprise Model also incorporates behavioural specifications. Indeed, as can be seen from the description of the business process, activities of the different departments must be coordinated in a proper way. Notice how in this type of approach the business process is not hardcoded in the architecture. All information flows through the Enterprise Layer. In this way, the integration approach is deliberately kept away from a document-based, flow-oriented, "stovepipe"-like system. Interaction between respective applications is not based on feeding the output document of one application as input to the next in line, but on the concurrent updating of data in the shared, underlying Enterprise Layer. This results in a maximum of flexibility in the interaction between users and system. However, wherever certain workflow-related aspects in the business model necessitate a strict flow of information, the correct consecution of business events can be monitored by the sequence constraints enforced in the Enterprise Layer.

Indeed, sequences between activities are enforced in the Enterprise Layer by allowing domain objects to put event sequence constraints on their corresponding business events. For example, when a customer orders a product, a new order line is created. In terms of Enterprise Modelling, this requires the following business events: create_salesorder, modify_salesorder, create_orderline, modify_orderline, end_orderline. The customer sign event models the fact that a final agreement with the customer has been reached (signature of sales order form by the customer). This event also signals that installation activities can be started. These kinds of sequence constraints can be modelled as part of the life-cycle of business objects. In the given example this would be in the life cycle of the sales order domain object. As long as it is not signed, a sales order stays in the state "existing." The customer_sign event moves the sales order into the state "registered." From then on the sales order has the status of a contract with the customer, and it cannot be modified anymore. This means that the events create_orderline, modify_orderline and end_orderline are no longer possible for this events create order. The resulting finite state machine is shown in Figure 5. possible for this sales order. The resulting finite state machine is shown in Figure 5.

A Layered Infrastructure:

Coordination Agents and User Interfaces

Once the Enterprise Layer is developed, the integration of the business unit applications is realised by plugging them in on the Enterprise Layer. The previously stand-alone BSS/OSS applications now constitute the middle layer. An important feature of the Enterprise Layer is that it is a passive layer that is not aware of its possible users. Therefore, an active interface between the Enterprise Layer on the one hand and the business unit applications on the other hand had to be defined. This interface can be realised by developing agents responsible for coordinating both sides. Such coordination agents will listen to the applications and generate the appropriate events in the Enterprise Layer so that state changes in business classes are always reflected in the Enterprise Model.

For example, by listening to the customer_sign event, the coordination agent for the Service Provisioning application knows when a sales order is ready for processing for Service Provisioning. In a similar way, the Enterprise Layer allows to monitor signals from the Service Provisioning area (such as the completion of installations) and to use these signals to steer the completion of sales orders. At its turn, the completion of a sales order (event set_completed) can be used by the billing agent to start the billing process. In this way, the Enterprise Layer allows for an automated coordination of behavioural aspects of different business areas. A redesign of the business process requires the redesign of the event sequencing in the Enterprise layer but leaves the coordination mechanisms unchanged.

The top layer is established by the development of user interfaces that offer a Web interface to the BSS/OSS applications or directly to the Enterprise Layer. For example, functions related to the sales process (entering of Sales Order Forms) and to customer selfcare functions (access and maintenance of personalised content) are input and output functions performed directly on the Enterprise Layer. The resulting layered infrastructure is depicted in Figure 6.

Implementation of the Enterprise Layer

Choosing the Implementation Architecture

The Enterprise Layer consists of the MERODE enterprise objects, as defined above. These objects embody a combination of data and behaviour. As to the pure data, a relational database (Oracle) seemed to be the obvious implementation choice. However, to implement the entirety of data and behaviour, three alternatives were considered:

1. A combination of stored procedures and relational tables

A first option consisted of a combination of stored procedures (for the functionality) and relational tables (for the data). Indeed, although MERODE is an object-oriented analysis and design methodology, the implementation is not restricted to an object-oriented environment. The object definitions can be mapped to relational structures, whereas the object-event table can be translated to stored procedures. Each horizontal line in the object-event table will define a single stored procedure, resulting in one procedure per event. Each such procedure enforces the necessary constraints upon all objects participating in the event and manipulates the relational database tables to which these objects are mapped.

2. An object-relational approach

A second possibility was to build upon the object-relational capabilities of Oracle. Here, the MERODE enterprise objects would be implemented as user-defined types in Oracle, which combine data and behaviour into "object types," stored in the Oracle database.

3. A distributed object architecture

A third option was to turn to a component-based distributed object architecture such as EJB, CORBA or DCOM. In this approach, the business objects would be represented as distributed objects, which are mapped transparently into relational tables. The external view, however, remains fully object-oriented, such that interaction can be based on method invocation or event handling.

The eventual preference went out to an approach based on a component-based distributed object architecture for several reasons. First, it allows for the Enterprise Layer to be perceived as real objects. In this way, all constraints defined in MERODE can be mapped directly to their implementation. The constraints are not only attributed to events, but also to objects and can be enforced and maintained at the object level (i.e., the vertical columns of the MERODE object-event table: each column represents an object that reacts to different events). This is not possible with a purely relational design or with an object-relational implementation, where object-oriented concepts are still tightly interwoven with relational table structures. As a consequence, a distributed object approach offers the best guarantee with regard to maintainability and scalability. Moreover, a number of "low-level" services such as concurrency control, load balancing, security, session management and transaction management are made virtually transparent to the developer, as they can be offered at the level of the application server.

As to the choice between CORBA, EJB and DCOM, the Java-based EJB (Enterprise JavaBeans) was chosen, offering a simpler architecture and being easier to implement than CORBA. Moreover, unlike DCOM, it is open to non-Microsoft platforms. The EJB architecture guarantees flexibility: all enterprise Beans are components and can be maintained with little or no consequences for other Beans. Also, such environment is easily scalable, as enterprise Beans can be migrated transparently to another server, e.g., for load-- balancing purposes. Finally, in this way, the Enterprise Layer would easily exploit Java's opportunities for Web-based access such as JSP (Java Server Pages) and servlets. The proposed architecture conformed the n-tier paradigm, utilizing the database server only for passive data storage and moving all actual functionality to a separate application server, where the enterprise Beans represent the "active" aspects of the Enterprise Layer (see Figure 5). The MERODE enterprise objects are implemented as so-called entity Beans. These are a specific type of enterprise JavaBean that essentially denote object-oriented representations of relational data, which are mapped transparently into relational tables. Updates to an entity Bean's attributes are propagated automatically to the corresponding table(s). Hence, although a relational database is used for object persistence, the external view is fully object-- oriented, such that interaction can be based on (remote) method invocation or event handling.

All functionality is available in the enterprise Beans on the application server. External applications are to make calls upon the enterprise Beans by means of Java's RMI (Remote Method Invocation). A business event is dispatched to each entity Bean that represents a business object that participates in the event. An enterprise object handles such event by executing a method, in which constraints pertaining to that particular (object type, event type) combination also are enforced. Hence, rather than enforcing integrity constraints at the level of the relational database, they are enforced in the entity Beans' methods. Clients only interact with the enterprise Beans; the relational database is never accessed directly. In this way, the MERODE specification can be mapped practically one-to-one to the implementation architecture.

Interaction Between Applications and Enterprise Layer

Although the data in the Enterprise Layer can be queried directly by means of purpose-- built user-interface components, its primary focus is to offer a unified view on the data objects observed by the respective BSS/OSS applications, to which the Enterprise Layer serves as a foundation layer.

Each BSS/OSS application deals with two potential types of data: its proprietary data that are only relevant to that particular application and the shared data that are relevant to multiple applications and that are also present as attribute values to the objects in the Enterprise Layer. Whereas the proprietary data are handled by means of the application's own mechanisms (such data are not relevant outside the application anyway), it is the task of a coordination agent to provide the application with the relevant shared data and to ensure consistency between the application's view on these data and the Enterprise Layer's. External applications can interact with the Enterprise Layer in two ways: by inspecting attribute values of enterprise objects and by generating business events that affect the state of enterprise objects. These two mechanisms correspond roughly to "reading from" and "writing to" the Enterprise Layer (see Figure 7).

"Reading" from the Enterprise Layer, i.e., information is passed from the Enterprise Layer to an application, is rather straightforward: the co-ordination agent inspects the relevant attributes of one or more enterprise objects and passes these values to the application. As already mentioned, the enterprise objects are deployed as entity Beans. These can be seen as persistent objects, i.e., they are an object-oriented representation of data in an underlying relational database. Entity Beans have predefined set Attribute() and get Attribute() methods, which can be published in their remote interface. In this way, these methods can be called remotely through RMI for, respectively, reading and updating the value of a particular attribute. Hence, attribute inspections come down to calling a getA Attribute() method on the corresponding entity Bean. Applications (or their coordination agents) can call directly upon published get Attribute() methods to retrieve data from the Enterprise Layer.

The situation where information is passed from the application to the Enterprise Layer (the application "writes" to the Enterprise Layer) is a bit more complex: because the updates that result from a given business event are to be coordinated throughout the entirety of the Enterprise Layer (they can be considered as a single transaction), coordination agents should never just update individual attributes of enterprise objects. Hence, in EJB terminology, set Attribute() methods should never be published in an entity Bean's public interface. Changes to the Enterprise Layer are only to be induced by generating business events that affect the state of the enterprise objects, as stated in the MERODE specification.

A business event corresponds to a row in the object-event table and affects all enterprise objects whose column is marked for this row. They are generated by means of another kind of enterprise JavaBeans: session Beans. These represent nonpersistent objects that only last as long as a particular client session. Each business event type is represented by a session Bean. The latter publishes a method for triggering an event of the corresponding type. A coordination agent acknowledges relevant events that occur in its associated application and that have to be propagated to the Enterprise Layer. The agent "writes" to the Enterprise Layer through a single (remote) method invocation on a session Bean. The session Bean's method generates a "real" Java event, which represents the business event, to which the entity Beans that take part in the event (as denoted in the object-event table) can subscribe.

The entity Beans have a method for each event type in which they participate. If a relevant event occurs, they execute the corresponding method. This method checks constraints pertinent to the (object instance, event type) combination and executes the necessary updates to attributes of that particular object if all constraints are satisfied (the effect may also be the creation or deletion of objects). If not all constraints are satisfied, an exception is raised.

For example, when a create orderline event is triggered, four domain objects are involved that each might impose some preconditions on the event:

the order line checks that the line number is unique;

the product it refers to checks its availability;

the order it is part of checks whether it is still modifiable; and

the customer object validates the event against a limit for total cost of outstanding orders.

The global result ofthe business event corresponds to the combined method executions in the individual objects: the update is only committed if none of the objects that take part in the event have raised an exception. Otherwise, a rollback is induced.

Implementation of the Coordination Agents

The BSS/OSS applications that are currently used have very diverse APIs and ways of interacting with external data. The latter will affect the way in which an agent actually mediates between the application and the Enterprise Layer. Some applications only feature an in-- memory representation of their data, whereas others have their own local database with proprietary data. Also, not every application's API will allow for the shared data to be accessed directly from the Enterprise Layer in real time. This section discusses three concrete categories of implementations for a coordination agent and, consequently, interaction mechanisms between an application and the Enterprise Layer. Virtually all kinds of applications will fit in at least one of these (as, obviously, did the applications that were used in the project). The categories can be characterised by means of the moment in time on which the reading from and writing to the Enterprise Layer takes place. One can discern between synchronous interaction without replication of shared data, synchronous interaction with replication of shared data and asynchronous interaction.

1. Synchronous interaction, without replication in a local database

If the application's API allows for data beyond its local database to be accessed directly through a database gateway, all shared data can be accessed straight from the Enterprise Layer, without the need for replication in the application's local database. The coordination agent interacts directly with the application's in-memory data structures for storage to and retrieval from the Enterprise Layer. This is the preferable approach, as the shared data are not replicated, hence cannot give rise to any inconsistencies between application and Enterprise Layer. The interaction is synchronous, as all updates are visible in both the Enterprise Layer and the application without any delay.

Information is passed from the Enterprise Layer to the application on the actual moment when the application wants to access the shared data: the application issues a request, which is translated by the co-ordination agent to attribute inspections on the entity Beans representing the enterprise objects. The result is returned to the application.

An information flow from the application to the Enterprise Layer exists on the moment when the application updates (part of) the shared data: the application issues a request, which is translated by the co-ordination agent to a method call on a session Bean that corresponds to the appropriate business event. The session Bean generates an event in the Enterprise Layer, to which each entity Bean that participates in the event responds by executing a corresponding method, which executes the necessary updates to that particular entity Bean. These updates are only committed if none of the entity Beans raises an exception because of a constraint violation.

2. Synchronous interaction, with replication in a local database

If the application's API does not allow for data beyond its local, proprietary database to be accessed directly through a database gateway, all shared data have to be replicated in the local database for access by the application. The Enterprise Layer then contains the "primary" copy ofthe shared data, and the co-ordination agent is responsible for "pumping" the relevant shared data from the Enterprise Layer into the local database and vice versa. A crucial task of the coordination agent will be to guarantee a satisfactory degree of consistency between Enterprise Layer and replicated data, especially given the situation of concurring business events.

Even in this case, the interaction can still be synchronous if the local database can be kept in consistency with the Enterprise Layer at any time, i.e., all updates are visible in both the Enterprise Layer and the application without any delay. However, the moment of reading from the Enterprise Layer differs from the situation without replication: when the application accesses shared information, all data (both shared and proprietary) are retrieved from the local database. An information flow from the Enterprise Layer to the application now takes place when shared attributes in the Enterprise Layer are updated by another application. For that purpose, the application's coordination agent listens to events (generated by another application) in the Enterprise Layer that cause updates to data relevant to its corresponding application. The mechanism can be implemented by means of the observer pattern (Gamma et al., 1999). When a create, modify or end event on relevant data in the Enterprise Layer is detected by the agent, the information is propagated by issuing inserts, updates or deletes in the application's local database. Note that the Enterprise Layer itself can never take the initiative to propagate updates to an application: it is not aware of its existence.

Similarly to the case without replication, information is passed from the application to the Enterprise Layer when the application updates shared data. These updates are initially issued on the replicated data in the local database. The coordination agent listens for updates in the local database. If such update concerns data that is also present in the Enterprise Layer, it triggers a business event (again by means ofa session Bean) in the Enterprise Layer, which provokes the necessary updates.

3. Asynchronous interaction

When the interaction between application and Enterprise Layer is asynchronous, a continuous consistency between updates in the application and updates in the Enterprise Layer cannot be guaranteed. Again, shared data will have to be replicated in a local database, but this time updates on one side will only be propagated periodically instead of in real time. In terms ofthe risk of inconsistencies, this is ofcourse the least desirable approach. However, it has the advantage of allowing for a very loose coupling between application and Enterprise Layer, whenever a synchronous approach with a much tighter coupling is not feasible. One can distinguish two situations that call for asynchronous interaction; a first cause, when "writing" to the Enterprise Layer, could be the fact that the application's API doesn't allow the co-ordination agent to listen for the application's internal events. Consequently, the coordination agent is not immediately aware of the application updating shared data replicated in the local database. These updates can only be detected by means of periodical polling. Hence, an information flow from the application to the Enterprise Layer exists when, during periodical polling, the coordination agent detects an update in the shared data and propagates this update to the Enterprise Layer.

With regard to "reading" from the Enterprise Layer, a coordination agent can always listen in the Enterprise Layer for relevant events (triggered by another application) causing updates to shared data. This is the same situation as for synchronous interaction with replicated data, where the updates cannot be propagated right away to the application's local database. Indeed, one could imagine situations where the corresponding application is not always able to immediately process these updates, e.g., because it is too slow, because the connection is unreliable, etc. This is a second cause for asynchronous interaction. In that case, the propagation of updates will be packaged by the coordination agent as (XML-) messages, which are queued until the application is able to process the updates (in particular, this situation would occur if in the future part ofthe functionality is delegated to an application service provider, who publishes its software as a Web Service). Information is passed from the Enterprise Layer to the application when the queued updates are processed by the application, resulting in updates to the local database.

Table 3 summarizes the different interaction modalities between application and Enterprise Layer. "A --> E" represents an information flow from application to Enterprise Layer. "A <-- E" represents an information flow from Enterprise Layer to application.

Transaction Management

Transaction management can easily be directed from the session Bean where a business event was triggered. The processing of a single MERODE event is to be considered as one atomic transaction, which is to be executed in its entirety or not at all. The event is generated by a method call on a session Bean and results in methods being executed in all objects that participate in the event. If none of these raises an exception, i.e., no constraints are violated in any object, the transaction can be committed. If at least one such method does generate an exception, the entire transaction, and not only the updates to the object where the exception was raised, is to be rolled back. In this way, the Enterprise Layer itself always remains in a consistent state.

However, if the business event is the consequence of an application first updating shared data replicated in its local database, the coordination agent is to inform the application about the success or failure ofthe propagation of the update to the Enterprise Layer by means of a return value. In case of the event that corresponds to the update being refused in the Enterprise Layer, the application should roll back its own local updates, too, in order to preserve consistency with the Enterprise Layer, which contains the primary copy of the data. Cells marked with a "*" in Table 3 denote situations where there is a risk of inconsistency between application and Enterprise Layer. As can be seen, the issue is particularly critical in the case of asynchronous interaction.

Applications and User Interfaces

The existing BSS/OSS applications interact with the Enterprise Layer through the coordination agents. They are virtually unaffected by being plugged into the Enterprise Layer. Coordination agents are to be rewritten when an application is replaced, such that the applications themselves and the Enterprise Layer can remain untouched.

The existing user interfaces of the third-party BSS/OSS applications are proprietary to these applications and were of no concern during the integration project. Apart from these, new Web browser-based user interfaces have to be developed in-house for direct interaction with the Enterprise Layer. This can be accomplished fairly easily by means of Java Server Page technology. This issue is, however, beyond the scope of this case study.

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

Once the solution was specified, the main challenge resided in the successful implementation of the proposed solution. The choice of the implementation environment was a key influencing factor for success. It is the company's policy to outsource IT development efforts as much as possible. The requirements engineering task is done in-house, but system realisation should be done by buying off-the-shelf software or by outsourcing. In addition, coding efforts should be limited by utilising code generators where possible.

Considerable complications resulted from the implementation environment that was chosen by the company: an application development tool that generates Enterprise Bean code, but that is nonetheless not fully object-oriented. In fact, by no means can it conceal its origin in the relational paradigm. Its so-called "objects" actually behave like single rows in a relational table: they are interrelated by means of foreign keys (instead of object identifiers) and lack the concepts of subtyping, inheritance and real behaviour. Moreover, whereas MERODE defines shared participation in business events as the enterprise objects' means of interacting, the tool only supports event notification at the level of inserts, updates and deletes. These are not very suitable for modelling business events: they pertain to the actual changes to rows in the database but do not carry information about which business event induced the change, ignoring the possibility of different underlying semantics, preconditions and constraints. Therefore, whereas an almost perfect mapping existed between concepts from the MERODE based Enterprise Model and the proposed EJB architecture, several of the MERODE model's subtleties were lost when being translated into the design environment.

Furthermore, MERODE advises a "transformation"-based approach to implementation: the transformation is defined by developing code templates that define how specifications have to be transformed into code. The actual coding of an Enterprise Model is then mainly a "fill in the blanks" effort. MERODE provides a number of examples for transformations to purely object-oriented program code. Also a lot ofexperience exists with transformations to a COBOL+DB2 environment. Transformation with a code-generator had never been done before.

Two additional elements were important in further evolution of the project. The company had explicitly opted for the development method MERODE by asking the MERODE team for assistance in the project. Although the method is in use by several companies and has in this way proven its value, it is not widespread enough to assume that it is known by the programmers of the implementation team. In fact, no members ofthe implementation team were acknowledged with the chosen modelling approach MERODE. The same was true for the members of the consultancy team of the company providing the implementation environment.

Finally, on the longer term there might be a problem of domain model expertise. Initially, it was agreed that the company would appoint one full-time analyst to actually do the requirements engineering. The university team would advise this person. However, due to shortage on the labour market, the company did not succeed to find a suitable candidate. As a result, the requirements engineering has completely been done by the university team. Consequently, valuable domain model expertise resides outside the company.

References

REFERENCES

References

Booch, G., Rumbaugh, J., & Jacobson, I. (1999). The unified modeling language user guide. Reading: Addison-Wesley.

D'Souza, D. F. & Wills, A. C. (1999). Objects, components and frameworks with UML: The catalysis approach. Reading: Addison-Wesley.

Fowler, M. & Kendall, S. (1998). UML distilled: Applying the standard object modeling language. Reading: Addison-Wesley.

Gamma, E., Helm, R., & Johnson, R. (1999). Design patterns: Elements of reusable objectoriented software. Reading: Addison-Wesley.

References

Jacobson, I., Christerson, M., & Johnson, P. (1997). Object-oriented software engineering: A use case driven approach. Reading: Addison-Wesley.

Snoeck M. & Dedene, G. (1998). Existence dependency: The key to semantic integrity between structural and behavioral aspects of object types. IEEE Transactions on Software Engineering, 24 (24), 233-251.

Snoeck M., Dedene, G., Verhelst, M., & Depuydt, A. M. (1999). Object-oriented Enterprise Modeling with MERODE. Leuven: Leuven University Press.

Snoeck, M., Poelmans, S., & Dedene, G. (2000). A layered software specification architecture. In A. H. F. Laendler, S. W. Liddle & V. C. Storey, Conceptual Modeling-ER2000, 19th

References

International Conference on Conceptual Modeling. Salt Lake City, Utah, USA. Lecture Notes in Computer Science 1920. Springer, 454-469.

AuthorAffiliation

Wilfried Lemahieu

Katholieke Universiteit Leuven, Belgium

AuthorAffiliation

Monique Snoeck

Katholieke Universiteit Leuven, Belgium

AuthorAffiliation

Cindy Michiels

Katholieke Universiteit Leuven, Belgium

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Wilfried Lemahieu is a post-doctoral researcher at the Katholieke Universiteit Leuven, Belgium. He holds a Ph D in Applied Economic Sciences from K. U. Leuven (1999). His teaching includes Database Management and Data Storage Architectures. His research interests comprise hypermedia systems, object-relational and object-oriented database systems, distributed object architectures and web services.

AuthorAffiliation

Monique Snoeck obtained her PhD in May 1995 from the Computer Science Department of the Katholieke Universiteit Leuven, Belgium, with a thesis that lays the formal foundations of MERODE. Since then she has done further research in the area of formal methods for object-oriented conceptual modelling. She now is an associate professor with the Management Information Systems Group of the Department of Applied Economic Sciences at the Katholieke Universiteit Leuven in Belgium. In addition, she is an invited lecturer at the Universite Catholique de Louvain-la-Neuve since 1997. She has also been involved in several industrial conceptual modeling projects. Her research interest are object oriented modelling, software architecture and gender aspects of ICT.

AuthorAffiliation

Cindy Michiels is a PhD student at the Katholieke Universiteit Leuven (KUL), Belgium. She holds a bachelors degree in Applied Economics and a master's degree in Management Informatics (2000). Since 2001 she has worked for the Management Information Systems Group of the department ofApplied Economics of the KUL as a doctoral researcher. Her research interests are related to domain modelling, software analysis and design, and automatic code generation.

Subject: Studies; Third party; Applications; Systems integration

Classification: 9130: Experimental/theoretical; 5240: Software & systems

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 213-233

Number of pages: 21

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references tables

ProQuest document ID: 198656116

Document URL: http://search.proquest.com/docview/198656116?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 80 of 100

The impact of e-commerce technology on the air travel industry

Author: Gasson, Susan

ProQuest document link

Abstract:

This case study examines the impact of online reservation systems and e-commerce on the travel industry and looks at how competitive advantage can be obtained from the exploitation of new information technologies, particularly e-commerce technologies, and how the role of travel agents has changed as a result of the new information technologies being used in the air travel industry. The case study further offers a comparison between US and European travel industries and offers concrete suggestions for attaining and maintaining competitive advantage. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

This case study examines the impact of online reservation systems and e-commerce on the travel industry. Two questions are examined:

1 How can competitive advantage be obtained from the exploitation of new information technologies-in particular, e-commerce technologies?

2. How has the role of travel agents changed because of the new information technologies being used to achieve competitive advantage in the air travel industry?

Headnote

Initial discussion concerns the impact of the American Airlines SABRE system, as this has often been touted as giving American Airlines first-mover advantage in the industry. The wider impact of remote-access, computerized reservation systems, or Global Distribution Systems, and e-commerce access to online reservations in the travel industry is analyzed, using Porter's five-force model of industry competitive forces, to understand how the travel industry has shaped and has been shaped by information systems.

The case study concludes with a comparison of the impact of information technologies between the U.S. and European travel industries. It concludes that technology alone does not affect the roles of industry players, but the development of winning technologies exploits structural factors in the environment. Constant evolution of strategic information systems is critical to producing competitive advantage, but opportunism also plays a strong role.

BACKGROUND: THE USE OF INFORMATION TECHNOLOGY IN THE AIR TRAVEL INDUSTRY

In the 1960s, when air travel first became affordable for the individual, travel agents provided an essential service. A travel agent would find a suitable flight in the printed schedules published by individual airlines and telephone the airline-booking agent to make a reservation. At a later time, the airline booking agent would return the call to confirm the reservation, or to suggest an alternative flight if no seats were available. The airline paid the agent a flat commission fee for the booking. The structure of the air travel industry prior to computerization is shown in Figure 1. The airline industry was regulated, so most routes were served by a single airline. Travel agents mainly served the individual travel market, while corporate travel was booked directly with an airline, to achieve corporate discounts (Clemons & Hann, 1999). The role of the travel agent was to advise clients on travel destinations and to act as an intermediary in the complicated process of arranging travel bookings.

The discussion below presents a case study of how the use of new technologies have affected the air travel industry, analyzing two waves of information technology that have had a major impact on the industry. The first of these is the development of direct reservation systems, such as the American Airlines SABRE system. The second is the development of online sales channels via the Internet.

SETTING THE STAGE: THE DEVELOPMENT OF THE AMERICAN AIRLINES SABRE SYSTEM

American Airlines is a division of AMR Corporation, employing over 128,000 people worldwide and reported net revenue in 2000 of 19.7 billion. One of the largest airlines in the world, AMR Corp. operates American Airlines, TWA and American Eagle. In August 2001, American Airlines announced a competitive alliance with British Airways, allowing them to codeshare (run a flight-schedule jointly, for a certain route) across the entire breadth of their respective global networks and opening up a completely new range of destinations to their customers.

SABRE (Semi-Automated Business Research Environment) was developed by American Airlines in conjunction with IBM. Launched in the early 1960s, SABRE was the first computerized airline reservation system, serving American Airlines reservation counters from coast to coast in the USA and from Canada to Mexico by 1964. SABRE was expensive to develop and, when it came on-line, competitors filed lawsuits claiming that it gave American Airlines (AA) an unfair advantage (mainly because AA flights were listed first by the system). Other airlines rushed to develop their own reservation systems: United Airlines' system created the Apollo system, TWA developed PARS (TWA is now owned by American Airlines), and Delta developed DATAS.

Over 90 percent of the 40,000+ travel agents in the U.S. now connect into various direct reservation systems, but as the learning curve is high for a new system and space is limited, each agent tends to be connected to only one system. Appendix 1 gives the ownership of the major direct reservation systems (now called Global Distribution Systems, or GDS) and the major online travel agencies. Different airlines' reservation systems communicate with one another in real time. An agent can access and book flights on other carriers via its primary system, allowing a travel agent, for example, to book an American Airline flight through Amadeus (the direct reservations system owned by Air France, Iberia and Lufthansa) or to book a Lufthansa flight through SABRE (the American Airlines system). The airline consortium that owns the reservation system receives a fee for each reservation made for a competing airline and the airline providing the agent's reservation system is more likely to receive bookings on its flights. Because of this, each airline tries to maximize the number of travel agents connected directly to its own system and minimizes bookings for its flights via other systems.

The initial competitive advantage provided by the SABRE system has continued to operate to the present day: approximately three out of five airline flight tickets are booked through SABRE (Hopper, 1990; SABRE, 2002). Thus, SABRE gave American Airlines a first-- mover competitive advantage that persisted, even after other airlines had developed their own computerized reservation systems. American Airlines made more money from SABRE than they did from flying passengers: revenue from the SABRE reservation system consistently accounted for more than 50 percent of the company's total revenues (Hopper, 1990; SABRE, 2002). In 1992, talking about legislation that would force American to divest itself of SABRE, American Airlines Chairman Robert Crandall said: "Ifyou told me I had to sell either the airline or the system, I'd probably sell the airline." However, in 2000, American Airlines completed the process that turned the Sabre Technology Group into its own company. Sabre is now an S&P 500 company and has a 70 percent stake in Travelocity, the online travel agent (SABRE, 2002).

It could be argued that the competitive advantage conferred by the SABRE system has persisted, but only because of continual technical and product innovation:

* Initially (in the 1960s), SABRE served only American Airlines ticket and reservations staff.

* In 1976, travel agents were first offered a direct, remote-access service; by year end the system was installed in 130 locations, serving 86 percent ofthe top 100 agency accounts (AMR, 2002; SABRE, 2002).

* In 1985, SABRE was the first system that allowed consumers to access airline, hotel and car rental reservations directly, using an IBM PC (the world's first business-oriented personal computer) (AMR, 2002; SABRE, 2002).

* By 1986, the SABRE system was extended to the United Kingdom, paving the way for widespread international expansion. SABRE also installed the airline industry's first automated yield management system in this year: this prices airline seats to yield the maximum revenue for each flight (SABRE, 2002).

* By 1987, SABRE had become the world's largest private real-time data-processing system, serving more than 10,000 travel agents worldwide (AMR, 2002).

* In 1990, SABRE had 40 percent of the air travel booking market. To quote Hopper (1990), "If SABRE doesn't do the job, another system will. SABRE's industry-leading market share of 40 percent means that rival systems account for three out of five airline bookings."

* In 1996, the SABRE Technology Group exploited the increasing popularity of the Internet by launching Travelocity.com, a leading online Business-to-Consumer (B2C) travel site.

* In 2001, SABRE connects more than 59,000 travel agents around the world, providing content from 450 airlines, 53,000 hotels, 54 car rental companies, eight cruise lines, 33 railroads and 228 tour operators (SABRE, 2002), making it the largest Global Distribution System (GDS) for travel services.

* New innovations include wireless connectivity via mobile consumer devices and the use of a hand-held device by American Airlines gate staff, to make seat assignments and print boarding passes, making it simple for airlines to accommodate passengers who have missed connecting flights.

Therefore, SABRE can be seen as an evolving set of systems, developed in response to business needs and technical opportunities. Continual evolution itself is not the success factor, it is continual evolution in combination with the opportunistic exploitation of opportunities offered by the industry environment. However, while airlines were developing information systems to exploit new technologies and structural changes in the competitive environment, travel agents were not in a position to do so.

CASE DESCRIPTION: THE IMPACT OF NEW TECHNOLOGIES ON THE AIR TRAVEL INDUSTRY

The Advent of Global Distribution Systems

In the mid-1970s, airlines began to offer travel agents access to direct, computerized reservation systems (see the discussion ofthe SABRE system, below) and in 1978, the airline industry was deregulated, leading to more price and service competition between airlines on the same route. Providers of computerized reservation systems provided access for travel agents via dialup telephone connections (and eventually permanent or broadband connections). This changed the way in which travel agents completed a transaction and gave them faster and better information about price and availability, compared with the previous, asynchronous process of booking direct with the airline. Travel agents were still essential to the process of booking a flight, as access to the specialized technology required to obtain this knowledge was unavailable to the consumer. Although unavailable for direct consumer use, computerized reservation systems allowed travel agents to provide a more effective service. The travel agent could confirm the booking in real time and seek alternatives if a flight was full, while the customer waited. A real time booking with an airline-booking agent was better than relying on an asynchronous transaction, conducted over several hours or days. The travel market became segmented, as travel agents increasingly targeted corporate customers, providing value-added services like negotiation of bulk fares and arranging complex itineraries (Clemons & Hann, 1999).

Direct reservation system terminals and connections were often offered free to travel agents, as airlines competed for market share with travel agents. A travel agent would normally not use more than one direct reservation system, since they took a great deal of time and training to use. Not all systems initially carried all airlines, but this changed as direct reservation systems became ubiquitous. However, a particular airline's direct reservation system would usually display that airline's flights first, giving them an advantage. Airlines also had to pay a fee to have their flights included in a competitor's reservation system, which would add to the cost of booking with that airline through a travel agent who used a competitor's reservation system. Over a period, direct reservation systems became more prevalent and encompassed a wider range of products and services, to become Global Distribution Systems (GDS).

GDS enabled travel and service providers (such as hotels and car-hire) the ability to market to customers in remote locations. The role of the travel agent changed as time went on, from knowledgeable travel and destination expert, to an intermediary, who saved the customer time and effort in booking a whole package of travel-related products and services. Another development in the 1980s was the emergence of consolidators: companies who purchased blocks of unsold seats from airlines and so were able to sell direct to the customer at a lower price than the Travel Agent could offer using GDS pricing. This trend fragmented the market, to some extent. Customers became aware of the differential pricing strategies used by airlines and became more price-sensitive as a result.

By the mid-1990s, the market had changed and travel agents became less buoyant. The airlines engaged in price wars and margins were reduced - the airlines sought to cap or to cut commission in an attempt to remain profitable. Although some of the larger agents had replaced dialup connections with broadband or permanently connected links, they were still relying on third-party providers for their information and level of service (the various airline reservation systems). The technology employed (direct access terminals) was becoming outdated, often having cumbersome, text-based interfaces, with difficult-to-negotiate menus and user-interfaces. Most travel agents relied on the same type of local knowledge that they had always used, to differentiate their value to the consumer.

Travel agents that focused on corporate customers could use information systems to provide better fare-search and point-of-sales tools such as ticket printing and this gave them some short-term competitive advantage during the 1990s. However, travel agents still faced two significant threats to their competitiveness during this period (Clemons & Hann, 1999): rebating (commission-sharing with corporate customers), by competitor travel agents, and commission caps and cuts by the airlines.

Internet Technologies

More recently, travel agents have faced additional threats to their profitability, enabled by the widespread use of the Internet. The first is disintermediation (cutting out the middleman) by the airlines and the computer-reservation system operators. The economics of individual transaction processing have been turned on their head by the ubiquity of internet access: it is now justifiable even for the airlines to serve individual customers, as the cost of processing an electronic transaction is so low, compared to the cost of processing a purchase transaction performed by a human salesperson. Airlines are attracted even more by the profitability of corporate electronic transactions. With sophisticated information systems, it is now possible for airlines to offer complex discounts on bulk purchases across many different routes and classes of travel, for corporate customers. It is also possible for them to use data-mining techniques to target dynamic discounts and value-added service offerings at high-value corporate customers, increasing the business that they attract through using direct sales channels.

The second threat is competition from online travel agents whose overhead costs are much lower and who can achieve much wider economies of scale in processing large numbers of relatively low-margin purchase-transactions. Online travel agents use new technologies to access the direct reservation systems of multiple services in real time, allowing individual and corporate customers to directly coordinate flight, car hire, hotel and other services, as shown in Figure 3. However, there is a cost to using online travel booking services. The search cost can be high: air ticket prices may change from day-to-day or hour-to-hour. The time and effort involved in putting together a complex package of air and land travel services and hotel bookings is often too high for individual customers to contemplate. The online market may well be focused on the most price-sensitive segment of the air travel market: those willing to spend a disproportionate amount of time and effort in obtaining a low-cost ticket. Many customers may also visit an online travel agent's site to obtain information and then book elsewhere.

Following e-commerce developments, the travel industry is segmented between:

1. Traditional (brick and mortar) travel agents serving an increasingly smaller pool of individual customers who do not wish to spend the time and effort in searching for lower-priced travel.

2. Traditional travel agents serving the corporate market, whose margins are increasingly eroded by competition on customer rebates and by commission-limiting strategies on the part of airlines and other travel providers.

3. Consolidators whose business is increasingly threatened by the dynamic pricing strategies of online and direct sales channels.

4. Online travel agents who serve the corporate market and price-sensitive individuals.

5. Travel providers selling directly to companies and individuals, all of whom are price-- sensitive and have excellent information about alternatives.

A Competitive Analysis of Changes in the Air Travel Industry

This section uses Porter's five-force model to analyze the impact of new technologies on competition in the air travel industry (Porter & Millar, 1985). This model analyzes the relative competitive pressures exerted on a firm (or type of firm, in this case) by five different industry "forces": direct competitors, new market entrants, substitute products/services, suppliers and customers ofthe firm. The most significant threats to the firm are then analyzed to determine how information technology can be used to reduce or sidestep the pressure.

Initially, the search time and cost that an individual would have to incur, in telephoning to discover information about alternative flights and airfares far outweighed the inconvenience of visiting a travel agent. The commission fees paid to travel agents were also applied to direct bookings made by individuals, so there was no cost or convenience advantage in not using a travel agent. Travel agents only competed with each other on service rather than cost. The service element mainly consisted of local knowledge about which airlines offered the best schedule from local airports to a particular destination and which airline's price structure was most attractive. The role of specialized system knowledge and local knowledge about airline schedules and pricing structures gave individual agents an advantage over other agents.

The use of direct reservation systems by travel agents raised the barriers to entry for those agents who were not early adopters of these systems. As airlines were competing with each other, to achieve market penetration, direct reservation system terminals and connections were often installed free of charge by the airlines. However, the investment required in training was high and late adopters of the new technology struggled to keep up. Once a critical mass of directly connected travel agents was achieved and flights could be entered in multiple systems, airlines were able to offer dynamic pricing, raising fares during periods of high demand and lowering fares during periods of low demand. Local knowledge on the part of travel agents became less important, as it rapidly became out of date and travel agents could only compete on the level of personal service that they offered. Exploiting their power, in the 1980s, the airlines began to adopt differential pricing, favoring travel agents purchasing more than a certain value of flights from in a month. Many small agents lost business as a result and had to introduce an additional fee to consumers, making them even more uncompetitive. Consumers lost out, as there was an incentive for larger agents to place as much business as possible with a preferred airline, whether or not this airline offered the best deal for the consumer. However, direct reservations were still not available to consumers, so consumers remained uninformed about choices and locked in to travel agents.

Two recent trends have affected the air travel product-market. An IS application that has radically changed the market for travel agents is the emergence of Global Distribution Systems (GDS), which serve as the main channel for airline ticket distribution in the USA. The evolution of SABRE from a direct reservation system for airline tickets into a GDS serving airlines, hotels, car rental, rail travel and cruise lines is one example. Many other GDSs are in operation today, lowering the costs of entry into the travel agent market immensely, although the subscription and booking fees are now more significant for small companies (Elias, 1999). The advent of GDS has changed the balance of power and the main players in the air travel industry and diversified travel agents into selling multiple products, all of which can be reserved in real time. As shown in Appendix 1, most of the major Global Distribution Systems are owned by consortia of airlines, allowing them to specialize in dynamic pricing over a subset of travel providers.

The second development is an increasing familiarity with Internet technology, on the part of consumers. The second is the replacement of traditional travel agents with online travel agents. As an initial response to use of the Internet by consumers, airlines attempted disintermediation (cutting out the middleman). By selling direct to the consumer, airlines were able to offer prices and value-added services unavailable to travel agents. Nevertheless, while dis-intermediation offers cost and value-added benefits to the consumer, it does not add a great deal of convenience. Online travel agents, such as Travelocity (a vertical integration venture by the SABRE Technology Group), Expedia and Orbitz emerged to fill the void. The specialized technology required to make direct bookings is now available to the consumer, often at lower cost (in terms of time and effort) than booking through a traditional travel agent. However, an examination of the major online travel agents and Global Distribution Systems shows that airlines are once again consolidating their ownership of the major distribution channels, to the probably disadvantage of bricks and mortar travel agents.

A Tale of Two Markets: How Local Environments Affect the Strategic Impact of IS

It is interesting to examine the differences in e-commerce impact between the USA and Europe. The single derivation of most USA Telcos (local telephony providers, which mainly originated from the demerger of the Bell Corp group of companies) meant that they adopted a homogenization of charging structures. USA telephony charging structures earn revenue mainly through the provision of long distance and value-added services. The provision of local telephony services has, until recently, been seen as a base cost of providing access to the network and has been charged accordingly, leading to essential free (or very low cost) local telephone calls. In Europe, on the other hand, a multiplicity of small nations, each with different cultures and funding structures led to a telephony environment which was, until fairly recently, hostile to cross-company traffic. Revenue was therefore earned mainly through local (and local long-distance) calls, rather than long-distance traffic in the USA sense of the word. Peak-hour local calls in the USA average at about seven cents per call (of up to 24 hours). Peak-hour local calls in Europe can cost 50 cents a minute.

It is not surprising then that the uptake of Internet access has been much higher in the USA than in Europe. While most companies in the USA have a website and the majority of these conduct some sort of business via that website (even if not fully automated), most of the smaller companies in Europe are still trying to figure out how to install a website and what to do with it, once they have it. Consumers are relatively unsophisticated, compared to American consumers, with a commensurately lower level of trust in Internet transactions (IBM, 2000). The travel industry in Europe has not been affected by new information technologies to anywhere near the same extent as the USA travel industry. Internet-based travel sales constituted only $2.2 billion or 1.2 percent ofthe European market in the year 2000 (Marcussen, 1999,2001). However, this figure was an increase from 0.45 percent in 1999 and even the European bricks-and-mortar travel market is beginning to be described as "beleaguered." In contrast, USA Internet-based travel bookings are booming. In 1998, 2.08 percent of the travel market (by value) was transacted over the Internet. This figure is predicted to rise to 7.5 percent by 2003 (Elias, 1999). The winnings European travel agents will; be those who respond to changes in the market environment by employing newer technologies early in the game. As with the development of SABRE and the success of the online travel agent Orbitz (see the next section), exploiting market structures opportunistically through IT innovation leads to high rewards.

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

Trends in the Travel Industry

Influences on the air travel industry include increased competition through globalization, changing customer lifestyles, and the perception of risk that consumers attach to air travel. Some market trends include increased consumer knowledge about product offerings (driven by more direct marketing and also the ease of comparison that the Internet affords), higher customer expectations of convenience, added value through the customization of offerings, increased consumer affluence and the more intense exploitation of leisure time to "get away." All ofthese factors tend to increase consumer power, allowing consumers to exert more leverage on the industry in terms of pricing and choice. However, they also increase the total market size: sales in the first quarter of 2002 exceeded those in the first quarter of 2001 significantly (Jupiter, 2001). In 2000, leisure travelers (55 percent) outnumbered business travelers (37 percent)-the other 8 percent of travelers were those who combined business and pleasure (Heartland, 2001).

The bundling of a variety of products and services into an attractive package is made possible by the exploitation of preferential pricing to a value-added provider (normally a travel agent). The ability to access "value added" services has recently been offered to travel agents through a variety of real-time, online reservation systems. Travel agents who exploit online reservation systems do not have to sell their packages to consumers online, although they may have to strive to compete with the convenience of those who do. Bundling gives travel agents more power, as they can present the consumer with more attractively priced product bundles than if the consumer buys these services separately and may add value with items that the consumer would not have thought to add, such as a bottle of iced champagne waiting in the room!

Air travel bookings provide US travel agents with the majority of their revenue (Heartland, 2001). On average, 54 percent of travel agents' revenues accrue from air travel bookings. Cruises account for 19 percent of revenue (margins are higher on sale of cruises, but this also may be threatened as cruise operators increasingly employ direct sales channels). Hotel bookings provide 11 percent of revenue, car rentals 8 percent and sale of rail tickets and other services provide 8 percent. Hence, direct and online sales of air tickets represent a huge threat to the survival of most travel agents. Coupled with the year-on-year cuts in airline commission payments to travel agents, as a percentage of sales value, and a similar trend in other commissions, such as hotel bookings (Heartland, 2001), travel agents may well struggle to survive. Unless they can find a way to differentiate their products and services, the smaller travel agents will not survive for long.

Technology trends include the ever-increasing sophistication of data mining and customer relationship management software (providing detail on both patterns of purchases and hypotheses for the motivation behind purchases), increasingly seamless connectivity between systems and the ubiquitous availability of trustworthy, secure online purchasing. Such technological advances mostly benefit the airlines. Because of the amount of information that they can collect about their customers and the impact of various pricing and marketing strategies-all in real time and collated by geographical region and some demographics-airlines can leverage direct sales channels to a high degree. They can then exploit the brand recognition of their direct channel online sites and can offer differential pricing to preferred customers. Airline direct channel sales could well offer a challenge to online travel agents, in the future, particularly when catering to frequent flier consumers. This may cause tension between the preference and price structures allocated to indirect sales channels (Travel Agents) and direct sales channels (their own online reservation systems), as there is obviously more profit in disintermediation. There has been a recent trend of airline mergers, which effectively combine multiple travel routes and result in less competition on any particular route. Airlines have significantly increased their direct sales, and in some cases doubling these sales between 2000 and 2001 (Heartland, 2001). Effective customer relationship management systems may now permit airlines to lock customers into using their airlines, through frequent flier programs, an element that has been missing in the industry until now, since most frequent fliers belong to several airline schemes.

The Challenge for E-Commerce Transactions

Individual e-commerce customers are demanding and often unforgiving. They expect page downloads in less than eight seconds and expect to complete the shopping process in less than ten minutes from when they open the retailer's homepage. They demand convenience, speed and a seamless buying experience. Nearly a quarter of online shoppers stop using the site after a failed transaction. In fact, failure has a serious impact - ten percent never shop online again (BCG, 2000).

The challenge for airlines, in common with other businesses, will be to offer a consistent customer experience across channels. Customers shopping on an airline website expect the same level of service that they would get through a travel agent. Customers buying airline tickets via a third-party website, such as Travelocity, expect the same sort of treatment, including recognition of frequent flier privileges. In an increasingly connected world, online customers expect a consistent experience via Palm devices and mobile phones. There may well be a role in the future for e-commerce wireless portals, connecting consumers to online travel agents, direct channel sales and perhaps even allowing the consumer to customize their own, value-added bundle of travel products. If travel agents are proactive in their use of online technologies, they may survive and even remain competitive. However, the corporate market is more susceptible to disintermediation by the airlines, which see the development of business-to-business markets as the most significant of their long-term strategies (IBM, 2000). It is ironic that the industry that originally limited direct sales to corporate customers because the cost-overhead of dealing with individual customers could more profitably be mediated by travel agents is now returning to that position once again.

A consequence of e-commerce purchasing is the commoditization of products and services sold via e-commerce direct distribution channels (Kalakota & Whinston, 1996). With increasing information about product and service features and pricing, consumers tend to treat direct channel products and services as interchangeable. This is particularly true for online services, such as travel bookings, where the service provider is acting as an intermediary for third-party products and services. Consumers will increasingly see both online and traditional service-providers as interchangeable, as their experience of comparing online prices increases. The theory is that consumers select their service-provider based on price. However, Gallaugher (199) argues that both product and service brands are significant in reducing the impact of commoditization. Users have difficulty locating product and service information on the Internet and so rely on known brands to reduce the effort in locating a trustworthy purchase. This presents a way for travel agents to reduce the threat from direct sales by airlines. However, the challenge for travel agents is to differentiate their offering. Some ways of achieving this are by building a strong agency brand, by identifying a less price-- sensitive niche target market segment (e.g. affluent senior citizens) whose needs they anticipate better than competitors, or by reducing search time and effort. Analysts at Jupiter (2001) found that poor customer service in the travel industry disproportionately affected consumer perceptions of a travel agency or airline brand. Seventy-nine percent of consumers said they would be less likely to buy airline tickets online a second time from a company with which they had a poor experience and 54 percent said that the experience would adversely affect their future off-line relationship with that company. Most consumers appear to prioritize communication about delays and cancellations - this is a differentiated service opportunity for the right travel agent.

Increasingly, we see online travel agents attempting to differentiate their service from that oftheir competitors. Expedia promotes their service on the basis ofa powerful information system search capability that allows users to find more combinations on pricing and schedules than their competitors; users can sort flights by price, flight duration and departure times. Travelocity has responded by revamping its information systems to provide innovative search facilities - for example, a user can select a flight based on destination and fare, and then view a three-month calendar of the flight's availability. This echoes the lesson learned from SABRE: branding is not enough to provide competitive advantage in a high-rivalry, turbulent product-market characterized by rapid technological change. However, most of the online travel agents are owned by, or have very close ties to, a major Global Distribution System company (GDS are global, computer reservation systems). The exception to the dominance ofa few major GDS companies is provided by Orbitz (see Appendix for ownership), who have created their own GDS software. GDS fees accounted for 4.72 percent of an air ticket's cost, in 2000 (Kasper, 2000). Orbitz created their own software in response to their perception that there are flaws in the major GDS software packages that eliminate "the overwhelming majority of itineraries from consideration before they are checked for prices" (Kasper, 2000). Coupled with the high concentration of the market between the major players (see Appendix 1 for the year 2000 online travel market share figures), the major GDS companies dominate the market and bias the competitive offerings (Kasper, 2000). Orbitz strategy is to offer access to all airfares - including the very small percentage of fares offered only by airlines directly through their own websites (as airlines pay no GDS fees on these fares, direct-- booking fares may be significantly lower). In return for providing Orbitz with all fares that they offer, the airline receives a significant discount on the booking fees that a carrier pays for bookings through an online travel agent such as Travelocity or Expedia. Complaints from competitors, accusing them of giving preference to major airlines, resulted in a DOT audit of Orbitz that concluded that they had spurred competition in the market. However, this innovative technology may not change the face of competition and lower prices for consumers in the long term. Orbitz introduced a booking fee for customers in December 2001. It is debatable whether this is because of low online sales margins (a consequence of highly price-sensitive customers) or an experiment on the part of the major airlines that own Orbitz (see Appendix), to test the market's willingness to pay for online bookings.

It can be seen, then, that an effective information system platform is the basis for success in this market, whether the service provider is a brick and mortar travel agent, an online agent or a direct-channel airline provider. Successful companies need to evolve a set of systems, developed in response to business needs and technical opportunities. Continual evolution alone is not the success factor, but continual evolution in combination with the opportunistic exploitation of opportunities offered by the industry environment. As we saw in the comparison of the European market with that of the USA, differences in the structure of the local market environment require different technical responses.

The Future of the Air Travel Industry

All is not doom and gloom: brick and mortar travel agents are beginning to exploit the new technologies, to add value and information services to their basic service package. To this factor is attributed the rise of travel agent revenues in the USA, which rose 25 percent in 1998 (Kellendar, 1999). A report by Heartland (2001) argues that smaller travel agents are becoming increasingly uncompetitive, given squeezed margins, reducing commissions and cherry picking of higher-value custom by online travel agents and by airlines. The question is, to whom is the increased business going?

In the individual consumer market, are sales going to the traditional travel agent, hampered by older technology in booking flights and tinkering at the margins? Alternatively, are they going to the new, online travel agents, establishing radical brand images and innovative ways of obtaining a low-cost, high-quality package?

In the corporate travel market, are sales going to the traditional travel agent, who reduce the search time and effort of corporate travel buyers, but whose profit margins are squeezed at both ends: by corporate rebate negotiations and by airline commission reductions? Are they going to the online travel agents, whose economies of scale can support radical discount strategies? On the other hand, are they going to the airlines, whose direct sales channels can offer dynamic bulk pricing and who have the ability to squeeze out indirect channel service providers by limiting availability andby employing differential pricing? The major airlines see corporate direct sales as their most strategic market opportunity, long-term. Given the airlines' ownership of the major online travel agencies and their ability to set commission levels for their competitors, this strategy may well be highly successful.

Footnote

ENDNOTES

Footnote

1 Year 2000 online travel sales market share figures, obtained from Kasper (2000).

2 Year 2000 GDS bookings market share figures, derived from Sabre investor relations section on corporate website.

3 American turned Sabre into an independent company in March 2000.

4 The market share figure given is that of CheapTickets.com, another brand used by the same company.

Footnote

5 Terra Lycos is the world's third largest Internet portal (according to the Amadeus corporate website).

6 Worldspan is a key strategic business partner of Expedia.com, but not owner.

7 USA Networks Inc., a Microsoft business partner, acquired Expedia from Microsoft in July 2001.

Footnote

8 Source: Priceline.com corporate website

9 Rosenbluth is a large bricks-and-mortar travel agent.

References

REFERENCES

References

AMR. (2002). History section from corporate website, Retrieved from the World Wide Web: http://www.amrcorp.com.

BCG. (2000). Winning the Online Consumer. Consultancy Report by Boston Consulting Group, March.

Clemons, E. K. & Hann, I-H. (1999). Rosenbluth international: Strategic transformation ofa successful enterprise. Journal of Management Information Systems, 16 (2) 9-28. Elias, E. (1999). Internet commerce: Transforming the travel industry. SRI Consulting, Business Report.

References

Gallaugher, J. M. (1999). Internet commerce strategies: Challenging the new conventional wisdom. Communications ofthe ACM, 42(7) 27-29.

Heartland. (2001). E-commerce's impact on the air travel industry. Heartland Information Research Inc., Report SBAHQ-00-M-0797, prepared for US Govt. Small Business Administration, Washington DC.

Hopper, M.D. (1990). Rattling SABRE-New ways to compete on information. Harvard Business Review, 90(3), May-June, 118-125.

IBM. (2000). eBusiness: Is Europe Ready? Consultancy Report commissioned jointly with The Economist journal.

Jupiter. (2001). Relationship management in the travel industry: Improving customer retention cost-effectively through proactive alerts. Jupiter Media Metrix Consultancy Report, Dec.

References

Kalakota, R. & Whinston, A. (1996). Frontiers of Electronic Commerce. Reading, MA: Addison Wesley.

Kasper, D. (2000). The Competitive Significance of Orbitz. WhitePaper by LECG Consulting, available at Orbitz corporate website.

Kellendar, P. (1999). E-Travel: The future takes flight. Computing Japan, 6(1). Marcussen, C. H. (1999). Internet distribution of European travel and tourism services. Report for Research Centre of Bornholm, Denmark.

Marcussen, C. H. (2001). Quantifying trends in European Internet distribution. Report for Research Centre of Bornholm, Denmark (March/May 2000; updated March 2001)

Porter, M.E. & Millar, V.E. (1985). How information gives you competitive advantage. Harvard Business Review, July-August.

SABRE. (2002). History section from corporate website. Retrieved from the World Wide Web on http://www.sabre.com.

AuthorAffiliation

Susan Gasson

Drexel University, USA

AuthorAffiliation

BIOGRAPHICAL SKETCH

AuthorAffiliation

Susan Gasson is an assistant professor in the College of Information Science and Technology at Drexel University, USA. Following a career in data communications systems design and consultancy, she earned an MBA and a PhD from Warwick Business School in the UK. Dr. Gasson's research interests include agile IS supportfor competitive organizations and collaboration in cross-functional IS requirements analysis and design.

Subject: Studies; Electronic commerce; Air transportation industry; Technological change; Impact analysis; Travel agencies

Classification: 9130: Experimental/theoretical; 5250: Telecommunications systems & Internet communications; 8350: Transportation & travel industry

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 234-249

Number of pages: 16

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198679793

Document URL: http://search.proquest.com/docview/198679793?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 81 of 100

Information systems development and business fit in dynamic environments

Author: Kanellis, Panagiotis; Papadopoulou, Peggy; Martakos, Drakoulis

ProQuest document link

Abstract:

This case describes the effects of privatization on a large industrial organization and sets the context for illustrating the vulnerability of information systems in turbulent environments. The case presents a detailed chronology of the events that lead to an increased awareness of the importance of information systems flexibility. The case examines the difficulties faced by an organization when its information systems were incapable of dealing with frantic changes in environmental contingencies. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

This teaching case describes the effects of privatization on a large industrial organization and sets the context for illustrating the vulnerability of information systems in turbulent environments. Upon privatization, the company put in place a number of business information systems that crippled them with respect to their initial purpose. At the same time, the policy of the company gave users almost complete autonomy and freedom with respect to meeting their own systems and informational needs. Using this freedom, business unit users developed their own small applications, and cannibalized the overarching systems to give themselves a system that worked by adapting it to their needs. The case presents a detailed, factually accurate chronology of the events, raising awareness to the issue of information systems flexibility by detailing the ensuing repercussions on an organization whose information systems were incapable of dealing with a frantic pace of environmental contingencies.

BACKGROUND: THE INDUSTRY

Being an electrical utility in the United Kingdom (UK) was not so long ago a peaceful affair. Total regulation and high barriers to entry (high costs associated with building coal-- fired or nuclear power stations) were protecting electricity utilities that were producing and distributing power without any competition. However, in the late' 80s, three factors marked the end ofthis era and the beginning ofa new one where cut-throat competition and immense uncertainty still define the sector today. The first factor was the over-expansion of the natural-- gas industry, leaving producers with surplus capacity. Those producers, who once relied solely on production, were faced with a price of gas below the cost of production, and had for the first time to make up for lost profits through marketing and distribution. The second change factor came in the face of newer and much cheaper power-generation technologies. Small gas-turbine generators cost a fraction of the price of old-fashioned power stations, and could produce electricity at about half the cost. As a result, many utilities had been left with large, uneconomical power plants-and the debt taken on to build them. Arguably, however, the largest shock to the power industry came with deregulation.

Before the privatization initiatives, the Central Electricity Generating Board (CEGB), a public corporation with its own pricing policies and financial targets, carried out the generation and bulk transmission of electricity at wholesale prices. Although CEGB's wholesale price structure-known as the Bulk Supply Tariff (BST)-was the main driving factor for the industry's prices, the CEGB did not set the prices for the main consuming markets of residential, commercial and industrial customers. Only a very few large-scale industrial users (such as British Rail) used to buy electricity directly from the CEGB. The bulk of production output was delivered through the national transmission system, the National Grid (NG), to 12 regional distribution authorities, the Area Boards (ABs).

The overriding philosophy of the privatization program had three main objectives: to widen the ownership of shares amongst the UK population, to reduce to the absolute minimum the level of state funding, and to stimulate the internal or operational efficiency of the industries themselves (Weyman-Jones, 1989). The industrial restructuring and privatization program, which began in 1990, saw the non-nuclear part of the generation industry split into the effective duopoly of two companies, who were jointly given 75 percent of the market. During this initial stage of privatization, the British Government divested 60 percent of its shareholding in each company, and floated the remaining 40 percent in March 1991. Thus, created from the break-up of the CEGB, these two major electricity companies found themselves supplying power to the NG, in competition with other suppliers such as Electricite de France and others (Figure 1). NG was jointly owned and operated by the then also privatized twelve ABs who in turn sold electricity to their local industrial, commercial and residential customers,

The structure of this post-privatization electricity market was centered on a spot-market known as the Pool (Thomas, 1991). The mechanics of the Pool were thus: each power station was like a casual worker who quoted a price for his labor according to parameters such as the price of fuel, internal economics, and so forth. Each quote covered half an hour's generation. The NG-whose job was to manage the Pool-listed the quotations for each half-hour throughout the day in order of increasing cost and the cheapest bidder on the list was called upon to deliver electricity. With increasing demand, the NG called on the next most expensive power station to contribute.

Perhaps a glimpse of future as far as competition was concerned was given by the government's commitment to nuclear power as the main form of energy. A fixed percentage (close to 25 percent) of UK power had to be supplied from nuclear sources by the year 2000 with the ABs required to take this percentage from nuclear stations by that year. In short, the privatization initiatives resulted in a fundamental reorganization ofthe electricity market and supply chain that the industry had not seen in at least 40 years.

THE COMPANY: "ELECTRIC POWER PLC"

"Electric Power Plc" (EP) was born from the ashes ofthe CEGB on the 30th of March 1990. Even as early as 1991, EP was regarded as one ofthe world's largest international contenders in the fast-growing independent power market and the biggest in the UK (supplying about 50 percent of the non-nuclear energy in England and Wales with 35 power stations and over L4 billion turnover). Having to come to terms with the radically new market structure centered on the Pool, the challenge to the company was the transformation ofa `public-sector' culture rooted in an engineering-led ethos, to a more commercial one in tune with private sector disciplines.

Hence, in common with many post-privatization companies, EP saw several significant restructuring phases. In 1991, which saw the flotation ofthe company on the stock exchange, cost reduction, UK asset renewal, and efficiency improvement programs were introduced as a response to the new and increasingly competitive market. For this first year as an independent company, EP reported pre-tax profits of f479m, ahead of forecast, on a turnover of L4,378m. Since price was the only differentiating factor between EP's electricity and that produced by any other company or source, the company was forced in 1992 to set new and clear objectives, with a focus on generating electricity at the lowest possible cost. This required a rapid and radical reorganization to become more flexible and efficient, streamlining operations and applying best practices to the design of business processes. The initiatives resulted in increases in plant availability and manpower productivity by 3 percent and 23 percent respectively. At the same time, charges to consumers were reduced in real terms by 23 percent for a typical industrial customer, 8 percent for domestic and small users and 4 percent for very large contract customers.

With domestic competition increasing, 1993 saw the company experiencing another reorganization that culminated in the launch of a major international initiative. At the same time, involvement with partners in a range of associated ventures was sought, mainly in combined heat and power schemes, commercial wind power development, and gas acquisition and trading. For 1993, pre-tax profits were up by 13 percent, earnings per share were up by 15 percent, and dividends up 16 percent on a turnover of L4,348m. In 1994, prices to customers fell by a further 7 percent, and the cost associated with UK operations were down by 21 percent to their lowest level ever.

In the period of five years from 1991-1995 following privatization, EP had managed to secure a leading position as a major player in the international independent power sector. In summary, privatization led the company to:

* cut costs and improve efficiency to compete successfully

* apply the world's best practice to its operations

* improve thermal efficiency and availability, to match the world leaders for plant type

* become experienced in rapid and successful organizational and cultural change to meet commercial market needs

* simplify the company structure, leading to progressive improvements in productivity

* become involved in the design and establishment of competitive electricity trading arrangements

At the end ofthe '90s, EP realized that the only word that could best describe the future was `uncertainty.' Competition was flourishing in generation with around 20 generators engaging in tactical battles each year to secure a segment of the market at a certain price. The increasing competition in the production of electricity had seen the market share of EP in England and Wales fall from 50 percent when it was privatized, to around 30 percent in 1996. Regarding the supply side, in addition to the 12 regional electricity companies that bought most of the generated electricity there were more than 20 other intermediaries, which together sold electricity to around 23 million customers.

SETTING THE STAGE: EP'S STRUCTURE, CULTURE AND INFORMATION SYSTEMS

Upon its formation EP started by having a hierarchical organizational structure. During 1992-1993, a decision was made in favor of devolving the business activities to power stations and giving them the authority to operate as independent business units with minimal centralized control. All business units across the five main divisions (see Figure 2) were given almost total autonomy. This move was an effort to increase the overall flexibility and competitiveness of the company by enabling decisions to be made closer to the operational level. However, a lack of experience and knowledge with respect to certain business functions such as planning had delayed the introduction of formal mechanisms. Thus, numerous critical functions were performed on an ad hoc basis. Additionally, various change initiatives had attempted to make EP a project and process-oriented organization as opposed to structure-- based by trying to assign groups of people assembled from a number of different business units to the various development efforts. This `project-oriented' attitude seemed to work, providing the company with a level of flexibility at the unit level, but at the same time this very flexibility was constrained by senior managers and executives.

These disparities at the unit and organizational levels were related to EP's culture: receptive and open to changes at one end, but at the same time a great lack of trust and territorialism at the other end. When a change occurred, for example, there was an aggressive/ defensive stand rather than a co-operative one-exactly when co-operation was most needed. CEGB, from which EP came into being, was a hierarchical organization. Teamwork did not happen at all and managers referred to it as a `patch-protected' organization, where in a sense no one was allowed to infringe on what you did. The culture promoted in the new organization was a strikingly different one. Innovation was encouraged, and so was individuality and devolution of responsibilities, resulting in intense competition at the individual and business unit levels. The coexistence of these two opposite cultural dimensions had given rise to a deadlock situation that seemed to plague the organization. On the one end, there was almost total autonomy and freedom with respect to performing any task or activities one saw fit with the prospect of adding value to the company. At the other end, the culture brought by the same people based on the history of the CEGB made them unwilling to take a macro view past the boundaries of their own business units.

As far as information technology was concerned, the company was a `green field' upon its establishment in 1990. A major consulting firm who adopted the classic `big-bang' approach for their development undertook the task of putting the information systems in place. At the same time, the company had the opportunity to invest in an infrastructure-- an organization-wide network that aimed to streamline communications between the various geographically dispersed locations facilitating faster decision-making, providing immediate access to key and up-to-date information and improving the quality of power station operations. One of the past main objectives, namely to produce electricity cheaply, had been in a way reflected by the information systems in the company which were developed to serve this objective faithfully, and be as rigid and dependable as possible. The main information systems in the company were the following:

* Plant Reliability-Integrated System for Management (PRISM): In broad terms, this was a work management system monitoring and reporting on parts that were required for scheduled works on the various power stations. PRISM directly interfaced with the financial systems.

* Integrated Labor Management/Electronic Dispatch Line (ILM/EDL): This system was fundamental to the company on a day-to-day basis. EP was required by the NG to generate a particular electricity profile. For example, a profile might to start generation at 6:00 a.m. producing 200 MW, rising to 540 MW by 12:00 a.m., running at that level until 4:00p.m. and dropping down to 300 MW by 6:00 p.m. There were rules around that profile by which the company was penalized if it failed to deliver according to the rules. What ILM/EDL did was to put some parameter boundaries around this, which allowed the operator to see what this output was doing. A whole list of other parameters was also provided by the system that could be manipulated and controlled to alter this output. ILM/EDL provided an electronic link to the NG, and interfaced with the Energy Management Center systems.

* The Energy Management Center Systems (EMC): The EMC systems were built for decision support and the analysis section of the EMC, responsible for satisfying MIS-- type requirements, led the initiative. The business issue behind the development of the EMC systems was quite simply the vast amounts of data the company was receiving from the NG. The unit was finding it too difficult or almost impossible to query the data which was needed for many purposes-for example, to answer the questions that the industry regulator would ask concerning price or volume variations from month to month, or from year to year. The EMC systems were thus vital to the company as they provided the link to the outside world; communicating on a daily basis with the NG and trying to optimize the company's trading position.

* Finance Systems: This pool of systems was centered around a software package called Walker, which catered for the General Ledger, Procurement, Accounts Payable, Accounts Receivable, etc. The finance systems had become very sophisticated with lots of interfaces to every other system that was in operation. The EMC systems, the applications at the Sales and Marketing unit (S&M), PRISM-all took financial information and statistics from the finance systems, processed it and then threw it back again.

CASE DESCRIPTION: INFORMATION SYSTEMS AND CHANGE

The spectrum of change that EP was experiencing affected both systems currently in place as well as ongoing development efforts. It gave rise to a managerial challenge that could best be defined as a question; what could be the best development strategy for information systems where requirements seem to change on a day-to-day basis? It is easy to understand the challenge if one looks into the devastating effects that internally and externally induced changes had on EP's main information systems.

There were three major types of information systems misfits being experienced at EP. The first type reflected a change in the organizational structure that the information system had not been able to follow. A second type of misfit was due to the inability of a system to keep providing the same level of service to a business process that had changed. Finally, the third type was caused by a change in technology itself that made existing systems obsolete and cumbersome in the eyes of the users. Things had changed at EP during 1990-- 1997 while systems had not; and people had to adapt to the way the systems worked, rather than the other way round. A manager from Research and Engineering remarked:

"There are two points to the question `how well doI think my information systems fit my business now?' How well does the IS fit with what we do, and how well we have to fit with what they do."

At EP, there were two types of systems: what managers called 'intellectual' systems, usually referring to Management Information Systems (MIS) and Decision Support Systems (DSS) such as the EMC and certain systems at Sales and Marketing, and the operational systems such as the Finance and PRISM systems. The first type of misfit seemed to address predominantly the operational systems, whereas the second type of misfit, the 'intellectual' systems. The level of the third type of misfit seemed to apply to both types of systems.

As far as the operational systems were concerned, these were built around the structure of the company as it emerged from the CEGB, and either just after they were implemented or at the point that they were implemented, the company changed. A review was carried out in the three months to February 1992 of the suitability of the information systems to operate following the devolution of business activities to power stations. The systems in question were mainly the Finance and PRISM systems. The findings of the review were that the systems available were suitable for devolved use with some minor modifications. Those modifications represented only those aspects of the systems that could directly prevent devolution. It was also recognized that as those systems were designed prior to devolution, other changes could be usefully made to enhance effectiveness or efficiency. In a time space of almost three and a half years (February 1992 to May 1995) where another review sought to examine how well they systems were faring in supporting business operations, one would expect that the modifications would have been completed successfully, resulting to no misalignment at all. However, this was not the case. The process of devolution made demands on the systems that could not be satisfied by simply maintaining them.

"The finance systems we put in, we set up for a particular structure, culture-- whatever you want to say and that changed in the last couple ofyears tremendously. It was like trying to fit a square in a rounded hole, and the number of changes requests to the systems increased, and have been coming non-stop ever since. "

Procurement for example, was a central activity that had specialist people dedicated to this task. Devolution meant that this task was now undertaken `part-time' by non-specialist personnel, as people were required to be more flexible and to work on different job aspects. This meant that the task was now only four or five hours a week of an employee's time, resulting in a negative perception about the systems as being geared towards professionals, and hence too complicated and difficult to use.

"In the early days, we regretted some of the assumptions that we made, as we used to design systems to particularly reflect the structure of the organization, or the way people worked, and while it may have been true at the time, it wasn't always true in the longer term... and I think one of the major problem areas was in the procurement side of things, and still is... "

Another example of this type of misfit was the very clear division of the organization into distinct business units. The systems were designed to fit this structure, but in time, the business cycle had come to cross all the function areas; the systems fit the functional breakdown, but they did not fit the organization as one entity. In addition, systems were perceived as being too 'big' for what the organization needed for what it did. A senior developer explained:

"You cannot shrink the business continually and expect those projects of that size to remain unchallenged. So far as the changes concerned, the threat is that if the operation is reduced, we get to a particular financial level where the IS activity becomes disproportionately large in terms of operation. I think that is perhaps the single area where the greatest threat is. "

At the process level, it would not be an exaggeration to say that no process had remained the same since the early stages of privatization; processes had not only changed, but they had kept on changing. Information systems that supported these kinds of business processes were the most vulnerable to change as they dealt with voluminous and complicated data at the half-hour level. The systems at the EMC had to be scrapped altogether and a new breed of systems had to be developed to account for the changed processes. A senior manager commented:

"The part of the systems that you can define-that you know it has to be a deliverable-your interfaces, getting the data from the power stations and into your offer file-that is the easy part. What it is, it is the analysis of all that-the kind of thinking-the strategy point of view. It is all around the main deliverable for the EMC-that's what is continually changing. It is impossible to define or specify in advance a deliverable. It changes every day!"

Such misfit was also evident with other business units such as Fuel:

"I have seen a couple of instances where management information systems have failed to cope with the pace of change and have caused the organization to make inappropriate decisions as a result, and we then had to run to catch up with the circumstances. "

The so-called 'operational' systems, which were expected to be stable, were equally vulnerable to change. For example, the process ofwork management, although it might have seemed stable, had changed in the way the work was done much differently at the power stations. There was not the same number of personnel that used to be available at one time, and there were no planning departments, which there were before. There was a much greater emphasis on cost-benefit that determined the maintenance philosophy in deciding to change processes or operations. A manager from Generation said:

"Some of the changes were never at the outset envisaged as being as extensive as they actually were, which resulted in us making more changes to the systems that we have otherwise had anticipated. It also meant that some of the more refined facilities of the systems have become less used. So yes, they have been inflexible in the sense that it would require a large amount of effort to change or add some functionality. "

Technological advancements seemed to affect all the main systems at EP as they were character-based and with busy screen representation. In the sense of usability, they were perceived as not being up to current practice standards. This meant that in order to use the systems, users had to get familiar with them for some time, and this was not always possible under the current situation-few employees, many tasks, little time. Users had to be able to switch from one system to another and perform various tasks at the same time-something that their systems were not allowing them to do.

In summary, these types of misalignment had caused the following problems at EP, as its information systems had not been designed to provide for change:

* The quality ofinformation provided limited the purpose, which particular systems were, designed to serve.

* Accessing the information was difficult; users were asking for a lot of information but they did not know how to get at it.

* Users needed the information in different ways and at the same time, the number of users who needed this information was increasing; this demanded a level of sophistication that existing systems could not provide.

* The level of integration between the systems hardly approximated the one required; as a result, the information flows suffered considerably.

* Management information had been neglected; attempts to provide for it by combining systems or building on top of operational systems had produced ones that were over-- complicated and under-utilized.

The following remark sums up the situation, coming from aproject manager responsible for the development of applications for the Sales and Marketing and Strategy and Financial Planning units:

"If everything is changing which it does do, then one thing that I have found is that it is actually quite difficult to alter the scope of an application whilst under development. You tend to fix your scope at the beginning, and you refine it into more and more detail, and by that stage it is quite difficult to stick your head above the parapet and see if you are still at the same place. Then you show it to the users for acceptance test, and they say "Oh! But that was all very well then-we do things differently now!"

However, and as far as information technology was concerned, the company's four main business systems-PRISM, ILM/EDL, EMC and the Finance Systems-painted only half of the picture. In true entrepreneurial spirit and in order to remain `state-of-the-art' EP encouraged the consideration of alternative approaches to the development of systems and it was constantly assessing the viability of new roadmaps. As such, bespoke application development painted the other half of the picture. Following the decision to devolve, the emergent autonomous business units were given complete freedom regarding the development of bespoke applications that suited their own particular needs. The ITSP unit (see Figure 2) was formed to provide strategic technological directions and act as a buffer between the units and the management of the company. However, its recommendations were most of the time largely ignored and scoffed at by the units who approached it as an `ivory tower', in safe distance from operations and the heat of the battle.

The above situation gave rise to the existence of two parallel but contrasting worlds that can be summed up by the two following development scenarios:

* Business requirements were identified, and a system was designed, built, and tested to those requirements (the 'classic,' formal approach to development by which the four main enterprise information systems were put into place).

* The user, when given tools, created added value to the business in the form of some kind of 'informal' application. Other users viewed this and requested to use the result, upon where the application was then used as a multi-user system (an alternative, informal approach to development which gave rise to a multitude of applications serving individual requirements at the business unit level).

Some managers from ITSP looking at this phenomenon from a macro perspective believed that any information system should fit into the overall business strategy of the company and therefore development should be totally driven by the latter. However, there were contrasting opinions. Managers from Group Finance (GF), for example, were in favor of the view to disregard the long term and instead concentrate on the short term by putting in place the application that they thought would suit the business needs of the moment. One manager commented:

"I tend to think these days that if you are looking at the long term fit at the application level, you are wasting your time because the business is changing. In the short term, the benefits are that you produce something very quickly, very cheaply, and you get reasonable user satisfaction because they get what they want quickly. But you are going to have problems in the long run because these systems run out of date, they are not cohesive, and they are going to loose this fit, and you will have a much bigger problem in replacing all these diverse elements. "

EPILOGUE: THE CHALLENGE OF MANAGING CHANGE AND INFORMATION SYSTEMS DEVELOPMENT

A question that should be asked at this stage is thus: how, on one hand, is it possible for such a level of information system misfit to exist, and yet an organization as heavily dependent on its systems as EP, to be able to flex and adapt successfully to the continuous environmental contingencies? Although it can be safely said that there was a negative overall perception regarding the alignment ofthe systems, with a large percentage of those not being used as they were supposed to-user activities and tasks did not seem to be disrupted in any way. Paradoxically, users were not tied down by the systems. What explained this phenomenon is perhaps the simple rule of survival: threatened by adverse circumstances, one has no choice but to adapt. One manager from Group Finance commented: "You think that you have a financial accounting system, and you think you are producing the company's trading account, and one day you find that everybody is doing it in a different way by the spreadsheets. And you could say, "You shouldn't do that! It is all there. It is a waste of time! " But people do not waste their time for the sake of it, do they? It is obvious then that they are doing it because there is some great hole in there."

The same phenomenon was evident in what a manager from Generation said: Systems have fallen away and people are not using them as much as they should. And just about everybody, everywhere, is taking data out of the main systems, and either re-keying it in, or use whatever method is available to them to get data into little applications, so that they can then move the data around and use it the way they want to, because they see that the system they access-the PRISM system-is inflexible. What we are trying to do now is to recognize that this is a key requirement, and just deal with the data-not to deliver them any systems.

The Sales and Marketing business unit was a heavy user of the Finance systems, This is what a manager there said:

"As changes occur in the business world, if you cannot get to change the system because the money or the project team has gone-they do it with a spreadsheet-- they do not bother with the system that you have spend half of your life to develop-that's a hidden problem as well. I mean, we look at systems and say "Oh! We never change the system. It is a bloody success!" But really, what happens is that the buggers put a Lotus spreadsheet there to do their work with it. I mean our Finance systems are crap. IfI want to know how much money I have spent on contracts at the end of this month, 1 go and get a bloody spreadsheet. Walker cannot tell me-not in the way I want to say it. So people do bits and bobs around the edges, don't they?"

The ITSP unit had a name to describe this situation. They were calmly referring to it as the 'Lotus Cult. 'An appropriate name-'cult' signifying a kind of underground alliance-- for the groups of users who had a disregard for the formal information system imposed on them, and in a way had taken control of their own 'fate'. However, this underground activity had come to be seen as essential even by the 'authorities' themselves. One member of the ITSP team said that if one ever attempted to take this away, parts of EP would stop operating within a day, and the company would soon collapse. Hence, EP was facing an obvious challenge. What were the plans for future systems development in the light of this situation? The leader of the ITSP team said:

"Why don't we just build them a Lotus system that does all that? Well, the real reason is that they will not use it-they all got a slightly different view of what they want it to be. "

Such was the extent of the issue facing the company, that in late 1996, a new business unit called Business Systems Department (BSD) was established to address this seemingly problematic situation. Its objectives were clear: to scale down and maintain the complexity quotients of the infrastructure as low as possible, and create an integrated high-caliber UK business systems competency. Thus, having started from nothing in 1990, EP went through a period of major information technology investments, through a period of devolved budgeting and responsibility for development, and was heading towards one of more coordinated control, having as few products to be used to deliver bespoke applications as possible. The argument for that form of policy was that the liberty given to the business units with respect to developing their own applications had culminated in a highly complex, and hence difficult to manage infrastructure. A senior manager noted:

"One of the factors that has happened to EP, is that we are disintegrating, we are devolving in terms of development and as a result of that, we lost a lot of coordination, so department A is using one tool, and the department B is using another tool. I mean, if you give users a lot of autonomy, you should not be surprised that they use it. "

References

REFERENCES

References

Thomas, D. (1991, January 28). Management (privatisation): A powerful reckoning. Financial Times, 16.

References

Weyman-Jones, T.G. (1989). Electricity Privatisation. Aldershot, UK: Avebury/Gower Publishing Company.

AuthorAffiliation

Panagiotis Kanellis

National and Kapodistrian University of Athens, Greece

AuthorAffiliation

Peggy Papadopoulou

National and Kapodistrian University of Athens, Greece

AuthorAffiliation

Drakoulis Martakos

National and Kapodistrian University of Athens, Greece

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Panagiotis Kanellis (panagiotis.kanellis@gr.eyi.com, kanellis@di.uoa.gr) is a manager with Ernst & Young's Business and Technology Risk Services in Athens, Greece. He was educated at Western Intl. University (USA) in Business Administration (BSc), at the University of Ulster (UK) in Computing and Information Systems (Post-Graduate Diploma), and at Brunel University (UK) in Data Communication Systems (MSc) and Information Systems (PhD). His research interests revolve around information systems development and evaluation, information systems flexibility and organizational change and electronic commerce. He is a research fellow in the Department of Informatics and Telecommunications at the National and Kapodistrian University of Athens.

AuthorAffiliation

Peggy Papadopoulou (peggy@di.uoa.gr) is a doctoral candidate in the Department of Informatics and Telecommunications at the National and Kapodistrian University of Athens, Greece. She was educated at the same university in Computer Science (BSc) and at Heriot-Watt University (UK) in Distributed and Multimedia Information Systems (MSc). Her dissertation focuses on trust in electronic commerce and how agent and virtual reality technologies can be applied to aid its development in commercial relationships.

AuthorAffiliation

Drakoulis Martakos (martakos@di.uoa.gr) is an associate professor in the Department of Informatics and Telecommunications at the National and Kapodistrian University of Athens, Greece. He received his BSc in Physics, his MSc in Electronics and Radio Communications, and his PhD in Real-Time Computing from the same university. Professor Martakos is a consultant to public and private organizations and a project leader in numerous national and international projects. His current research interests include information systems, multimedia and hypermedia technologies multilingual environments, information retrieval, added-value networks, electronic certification, digital libraries and electronic publishing. He is author or co-author ofmore than 40 scientific publications and a number of technical reports and studies.

Subject: Studies; Privatization; Information systems; Technological change

Classification: 9130: Experimental/theoretical; 5240: Software & systems

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 250-261

Number of pages: 12

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198658987

Document URL: http://search.proquest.com/docview/198658987?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 82 of 100

Information technology & FDA compliance in the pharmaceutical industry

Author: Papp, Raymond

ProQuest document link

Abstract:

In response to a recent Food and Drug Administration mandate that all new drug applications be submitted in paperless form, this case study examines the potential benefits of using information technology to navigate and meet complex FDA requirements. This case study describes the steps pharmaceutical companies can and should be taking to assure that its use of information technology will allow it to not only meet FDA guidelines, but also to achieve its corporate goals of improved efficiency and reduced operating costs. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

Given the recent profitability of and demand for pharmaceuticals, from prescription antibiotics and analgesics like Ciproflaxin(TM) and OxyContin(TM) and men's health drugs such as Viagra(TM) and Vardenafil(TM) to over-the-counter Senokot(TM) laxatives and Betadine(TM) antiseptics, the rush to develop and market new pharmaceuticals has never been greater. The current process is complex and it often takes several years for a drug to reach the market due to the myriad of Food and Drug Administration (FDA) guidelines. Furthermore, the recent FDA guidelines mandating that all New Drug Applications (NDA) be submitted in electronic (paperless) format by the end of 2002 is a catalyst for change in the pharmaceutical industry (FDA Proposes First Requirement for Electronic Submission, 2002; New Drug Application (NDA), 2001). Bayer Pharmaceutical, like its competitors Purdue Pharma and Boots Healthcare, has begun to take steps to assure that its use of information technology will allow it to not only meet FDA guidelines, but achieve its corporate goals of improved efficiency and reduced operating costs.

BACKGROUND

The company has a long history, having been founded by Friedrich Bayer and Johann Friedrich Weskott in 1863 in Wuppertal, Germany. From its meager beginnings as a dyestuffs factory, Bayer has grown into a multi-billion dollar international chemical and health care company. Expansion took place rapidly for Bayer. In 1865, Bayer and Weskott entered the coal tar dye business in the United States and began exporting intermediates. Further growth was achieved in 1876 with the opening of another dyestuffs factory in Moscow with the descendents of Bayer establishing the joint stock company Farbenfabriken vorm. Friedr. Bayer & Company. Additional factories soon opened in France and in 1884, under the guidance of chemist Carl Duisberg, Bayer scientists began receiving recognition for their pioneering discoveries. With the establishment of the Pharmaceutical Department in 1888, the stage was set for the most famous and historical discovery yet for Bayer. Dr. Felix Hoffman first synthesized acetylsalicylic acid in a chemically pure and stable form in 1897. Aspirin was registered as a trademark two years later in 1899; it is still the world's most popular over-the-- counter pain medication. In 1925, Farbenfabriken vorm. Friedr. Bayer & Company merged with another company and became I.G. Farbenindustrie AG, which was later seized and broken up following the Second World War. Farbenfabriken Bayer AG was re-established in 1951, then changed its name to Bayer AG in 1972. The company remains Bayer AG; it reacquired the rights to the Bayer logo and trademark from Sterling Pharmaceuticals in 1986. Today, Bayer AG is ranked as the 117th largest company in the world with revenues topping $30 billion (see Appendix). With headquarters in Leverkusen, Germany and with about 350 affiliated companies worldwide, the Bayer Group is represented on every continent. Bayer AG's business organization includes healthcare, agriculture, chemicals and polymers. Within the healthcare segment, the North American Pharmaceutical Division headquartered in Pittsburgh, Pennsylvania, accounts for more than $10 billion in annual revenues. The division has also recently achieved many business milestones, including $1 billion in annual sales for its antibiotic Ciproflaxin(TM) in 1999 and 2000 and a growth rate of 23% in 2000, which easily outpaces the prescription drug industry as a whole (BAYER AG Homepage, 2002). Bayer's highly recognizable trademark logo will unify the individual Bayer divisions as the company will migrate to a new corporate structure on January 1, 2003, when Bayer will become a management holding company with four legally independent operating subsidiaries (A New Bayer-A New Bayer Cross, 2002).

SETTING THE STAGE

To better understand the scope of the changes Bayer must undergo to comply with the FDA's New Drug Application (NDA) process (FDA Proposes First Requirement for Electronic Submissions, 2002), a background in the FDA's role is important. The next section provides an overview of the process pharmaceutical firms must follow and the need to meet these guidelines.

New Drug Application Process

The Center for Drug Evaluation and Research (CDER) is a government agency whose job is to evaluate new drugs before they can be sold to the public. The CDER focuses on prescription and over-the-counter drugs, both brand name and generic, to ensure that they work correctly and that the health benefits outweigh the known risks. The information is also made available to doctors and patients to provide them with the information they need to use these medicines wisely.

The regulation and control ofnew drugs in the United States has been based on the New Drug Application (NDA). Each new drug has been subject to a NDA approval before it is allowed into the U.S. commercial market. Any data gathered during animal studies and human clinical trials become part of the NDA. (About CDER, 2002)

The Food & Drug Administration (FDA) has evolved considerably since its founding in 1938. When the Food, Drug, and Cosmetic Act (FD&C Act) was passed in 1938, NDAs were only required to contain information about an investigational drug's safety. In 1962, the Kefauver-Harris Amendments to the FD&C Act required NDAs to contain evidence that a new drug was effective for its intended use, and that the established benefits of the drug outweighed its known risks. In 1985, the FDA completed a comprehensive revision of the regulations pertaining to NDAs, commonly called the NDA Rewrite, whereby the modified content requirements restructured the way in which information and data are organized and presented in the NDA to expedite FDA reviews (Questions About CDER, 2002; Benefit vs. Risk: How FDA Approves New Drugs, 2002).

Pipeline Products and NDAs

There are many challenges to the FDA mandate. Continued growth and improved efficiency are strategic goals for Bayer. Efficiency remains one of the key factors to continued success and the Pharmaceutical Division has recently implemented many restructuring and cost saving measures to improve not only operating costs, but also the adeptness with which processes are executed. For example, by implementing SAP, an enterprise-wide software solution company-wide, Bayer is trying to improve efficiency by integrating many of its existing systems. The SAP project is a long-term undertaking for Bayer and the complex technological and organizational issues are daunting. Another way Bayer is using information technology is with paper-free workflows (Bayer continues expansion of e-commerce, 2001).

Bayer's New Drug Application (NDA) submission project involves such a paperless plan and the expected benefits of this system include faster submission of NDAs. Slated as a replacement for the outdated and overburdened manual document management system, the updated system will allow for the timely submission of new drugs since the extremely competitive nature of the pharmaceutical industry necessitate faster and more efficient ways of getting FDA approval for these "cash cow" drugs.

To maintain its position within the competitive pharmaceutical industry, it is important to consistently have new development products in the pipeline. Pipeline products are used as criteria for judging the overall status of a pharmaceutical company as much as currently marketed products. Bayer feels they have maintained the desired growth trend through partnerships with high-tech drug discovery companies such as Millennium pharmaceutical (Genomic technology pays off Bayer and Millennium expand research program, 2001) and most recently, with Aventis CropScience in its crop science division (Bayer acquires Aventis CropScience, 2001). Such partnerships will assist Bayer in reaching its goals for target compounds that may eventually become successful new drugs.

Together with the $ 1.1 billion in research and development expenditures and 3,880 pharmaceutical employees currently working on research and development for Bayer Corporation, the company is dedicated to building a productive pipeline and maintaining the growth trend of the past. In the near future, Bayer Pharmaceutical is planning on having a better alternative to Viagra(TM) all while continuing its promising work on early stage compounds that are being designed to combat cancer, asthma, osteoporosis, stroke and metabolic diseases (More blockbusters in the pipeline, 2001).

To its credit, Bayer Pharmaceutical has many successful and valuable FDA approved products on the market. These include Adalat(TM) and Baycol(TM) in the cardiovascular segment, Cipro(TM) and Avelox(TM) in the infectious disease segment, Glucobay(TM) for metabolic disorders, Nimotop(TM) for diseases of the central nervous system, and Kogenate(TM) to treat hemophilia. Combined, these products helped produce over $10 billion in revenues (see appendix) for Bayer Corporation. Incidentally, the recent bio-terrorist threats in late 2001 have seen the demand for one drug in particular, Cipro(TM) rise to unprecedented levels. The demand for similar drugs has never been greater and anything that can be done to speed up the NDA process is paramount. For example, as this case was being written, Bayer was in the process of obtaining FDA approval for Vardenafil(TM) a Viagra(TM) type drug with fewer side effects, smaller doses and quicker response time (Bayer files applications for Vardenafil in United States and Mexico, 2001). This drug may be the biggest development for Bayer since Ciproflaxin(TM) and Aspirin(TM) Thus, timely filing of the NDA is critical to Bayer to keep pace in the competitive pharmaceuticals industry.

Further complicating the issue is the use of this new electronic document submission system for the first time. While the benefits for management are unquestionable, implementing a system for the first time while compiling a top priority NDA is difficult. The reason for this risk is not strictly monetary, although it is estimated that for every day the NDA is delayed, it will cost the company millions in revenues. Strict version control and validation guidelines have been set by the Food and Drug Administration, and the manual method did not meet these requirements (New Drug Application (NDA) Process, 2001).

CASE DESCRIPTION

Due to the Food and Drug Administration's mandate that all New Drug Applications be submitted in the electronic or paperless format (FDA Proposes First Requirement For Electronic Submissions, 2002), many information technology changes are taking place within Bayer Pharmaceutical. While most ofthe expenditures for the pharmaceutical industry are in the form of scientific research and development, many companies are now being forced to focus more on information technology. Bayer Pharmaceutical is not unique and its neglected document management system is now of prime concern and focus. In fact, one of its major competitors, Purdue Pharmaceutical, has already begun using such a system for the submission of NDAs. According to Martin Zak, Director of Information Technology:

"Our goal at Purdue Pharma is to become one of the top ten pharmaceutical companies within the next ten years. One of the keys to achieving this goal is by using Documentum 4i eBusiness Platform to manage the content ofour company's strategic assets. With Documentum 4i, we will be able to streamline the approval process and speed products to market without sacrificing quality or safety. In this way, Documentum not only helps us but also helps the patients we ultimately serve." (Purdue Pharma L.P.: Speeding Time to Market with Documentum 4i, 2001)

Bayer faces many of the same challenges, yet there are different systems and procedures for each department within the company. Unfortunately, this autonomy is not productive and makes complying with government regulations virtually impossible, reduced efficiency and expanded cost notwithstanding. There are also multiple systems, many badly outdated, currently in use. Separate applications for storing documents electronically, archiving documents, compiling information for submissions, interacting with foreign databases, and retrieving statistical analysis all require valuable resources to maintain. Furthermore, most of these systems do not communicate well with one another or other departments such as statistics or project management.

Thus, Bayer's critical business challenges for the short term are to find new ways to implement its processes in light of the electronic NDAs. Its competitors, such as Purdue Pharma and Boots Healthcare, have already begun this process. They propose to use technology to:

* Foster high growth within a competitive marketplace and accelerate time-to-market for new products while adhering to stringent Food and Drug Administration (FDA) deadlines and compliance requirements necessary for approval.

* Virtually assemble content, securely and efficiently control the flow of content, authorize and verify recipients, and track changes involved for submissions to, and compliance with, regulatory agencies. A missed paperwork deadline can mean a six-- month delay in the approval process and impede time to market.

* Manage multiple forms of content from content owners at multiple sites throughout the world and publish to an internal Web site.

* Meet regulatory compliance for manufacturing, standard operating procedures, and training documents. Be able to produce documents on demand, decreasing potential future audits. (Purdue Pharma L.P.: Speeding Time to Market with Documentum 4i, 2001)

By using a validated system for document management such as Documentum (like Purdue Pharma and Boots Healthcare have done), Bayer will be able to comply with the new FDA regulations, something not possible with the manual legacy system. Without superior technical support for many of the legacy systems, downtime will increase. All these factors lead to a forced decision to update. While there has been talk of a new document management system for some time, only now is it becoming reality.

The new system is currently undergoing many new challenges. The validation process and changeover are taking place at the same time. Instead of having a system in place and then using it for submission purposes, Bayer is developing standard operating procedures and using these new procedures at the same time. Furthermore, the legacy system is not being phased out. In fact, it has been the central archive for so many years, yet it cannot properly communicate with the new system. While the large-scale use of this legacy system will eventually be discontinued, it is not certain if it will ever disappear completely. What adds to the problem is that the old system was designed and built in-house for specific functions. The long-term goal is to integrate the old and new systems to take advantage of the current technology's speed and power (Supporting pharmaceutical research and development, 2001).

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

With the onset of electronic submissions to the Food and Drug Administration and the need for paperless workflows to meet management goals of increased efficiency, many new information technology systems are being implemented at Bayer Pharmaceutical. This case will focus on the legacy system and the benefits the proposed electronic system will bring.

Complex Paper Trails

In the past, the compilation of NDAs was a difficult and complex undertaking. Copiers needed to be constantly maintained and even a truck rented to deliver the volumes of paper to the FDA. While it is still a complex process, the Regulatory Affairs department of Bayer Pharmaceutical handles all FDA contact for submitted drugs. Liaisons are designated for each drug and have complete access to reviewers. They are responsible for handling all review requests and maintaining FDA regulations for each of their assigned drugs. It is also

Regulatory Affairs' responsibility to submit all documents to the FDA, including NDAs. This is done through hard copies that trickle down to the corresponding people in charge of each drug. For example, an investigator in the field must be approved by an Investigational Review Board in order to start administering a proposed drug to human patients. This is usually done in the latter phase of the testing procedure. Once the review board approves the investigator for the protocol in which they wish to take part, the paper work is sent to various departments for signatures by assigned directors. The paper copy is then sent to the liaison in Regulatory Affairs who must then make sure all procedures have been followed to comply with regulations. The liaison submits the proper copy to the FDA while another copy is archived. The document is given an archival number, scanned into the electronic archival database as an image, and filed with millions of other documents. Every department that sees this document, however, keeps a copy. Many of these copies are stored in different and unrelated systems. The archival system in Regulatory Affairs is a legacy database that was developed almost a decade ago and stores millions of links to hard copies archived in the files. The medical groups (departments) store their copy of this document in a newer relational database. This system assigns numbers to the document in a similar way to the Regulatory Affairs' database, but works much better for electronic distribution. The problem with the database is that if changes need to be made, the current document becomes useless. It must be printed for any revisions and version control is almost non-existent. Then it must be created again, given another code, and sent to Regulatory Affairs for updating and storage in their database. This is just one example of how the current workflow is inefficient. While distribution can be done electronically with the system, it is far from paperless in terms of revisions or version control. Finally, a hard copy must be entered in the Regulatory Affairs' database since it is the final storage of all documents.

Compilation for large submissions, such as NDAs, is also done by Regulatory Affairs. It is handled by the submission group of the department and guided by a project leader. Yet again, different systems are used. The electronic images are stored by archive in an image database. This system stores every page of every document as a single image. Therefore, if a document is 5,000 pages long, it consists of 5,000 images, which are not accepted by the FDA. Thus, the submission group must compile all necessary documents for every submission. This was formerly done (and for some types of FDA correspondence is still done) with paper copies. However, for electronic submissions, special steps must be taken. Submission must use yet another system to convert and compile all needed documents. This is usually done by manually scanning each final version into PDF format, but can also be done by converting the image files to PDF. The FDA requires the PDF format for the final published document. The main drawback to converting the image files to PDF is that the validated conversion only allows 50 images (pages) to be converted at once. The sections for each of the submissions are then stored until they are ready to be published. Once this is done, the electronic medium of choice (digital tape ifthe submission totals more than five full compact disks) is selected; the relevant data is stored, and sent to the FDA (Supporting pharmaceutical research and development, 2001; Shortening Time to Market Through Innovation of Regulatory Approval Process, 2002).

Documentum and NDAs

Like its competitors, Purdue Pharmaceutical and Boots Healthcare, the implementation of Documentum, a validated system that allows for version control and audit functions, has been a complex and critical undertaking for Bayer Pharmaceutical. It is especially important in the integration of information technology and corporate goals. These goals include bringing compounds to market faster, improving Bayer's competitive advantage through time and cost savings, flexibility and management of content, global collaboration and improving the efficiency of the administrative aspects of the business. As stated earlier, the current systems used do not interact nor allow for the paperless workflow that is key to this desired efficiency. Documentum is a tool that handles all content management needs and allows compliance with the increasing demands of FDA requirements via its open standards-- based architecture that allows easy integration of content management with its SAP applications. In addition, Documentum supports XML (eXtensible Markup Language), allowing disparate systems to be linked together and facilitates the movement of information between them in an automated fashion. With the complete rollout of Documentum scheduled for early 2003, Bayer should realize greater efficiency. Documentum uses linked documents allowing the reader to view a reference to specific page by clicking on the link rather than manually finding the correct volume and page on which the reference is printed (Documentum in the Pharmaceuticals Industry, 2002).

The use of Adobe Acrobat and PDF files makes the process quick and easy. (U.S. Food & Drug Administration Speeds Review of New Drug Applications with Adobe Acrobat and PDF, 2002). The only problem occurs when the document is changed and the links and table of contents need to be updated. Thus, a paperless flow of information and a single powerful, integrated tool which replaces many independent systems is the direction that the Regulatory community needs to head in order to achieve success and increased efficiency. This is especially important since Bayer has only done one other electronic NDA, that being Avelox(TM) last year (NDA Approvals for Calendar Year 2001, 2001).

Since Documentum is a completely validated system, it meets the FDA's stringent auditing requirements. It offers version control and security attributes that current systems simply do not have. It will be possible to electronically log those who view and/or access the document, something the FDA requires be done. It will allow for an electronic environment throughout the entire Pharmaceutical division. For example, if the scenario described above were to occur in a Documentum environment, efficiency would be greatly increased. The investigator in the field would simply create his application using a standard template similar to the many paper variations used today. The Investigational Review Board could electronically approve this document. The research associate at the investigator's site could then place the document in Documentum, which would automatically give it an archive number. The document would then be routed automatically per standard operating procedure guidelines to the proper people. Electronic review and signatures would then be applied to the document. Simultaneously to this, the FDA liaison in Regulatory Affairs would be able to monitor the progress and view any revision until the point where the approved, completed document would be finalized by the liaison and readied for publishing. It is a streamlined, efficient process that will increase productivity and improve results. A list of everyone that revised or viewed the document can be generated electronically, replacing the cumbersome logbooks of the existing system (Shortening Time to Market Through Innovation of Regulatory Approval Process, 2002; also see Appendix B).

Logistical Challenges

There are many challenges in the achievement of this transformation. First, training all the users and making them comfortable with the new system is a large undertaking, especially within a company of Bayer's size. There are also many logistical problems and geographic concerns. It has taken the German-based organization quite some time to realize this fact, but it has finally taken action, not only by the American-based Bayer Corporation, but also by the entire health sciences division of Bayer AG. Getting the pharmaceutical counterpart in Europe to agree to this new system will also be a challenge, since Germany is currently much farther behind in electronic submissions. A global submissions group could alleviate any shortcomings the German counterparts are experiencing (Bayer's high-tech pharmaceutical research platform, 2001).

With the company-wide top priority being the timely submission of NDAs in a complete, validated and electronic format, the most current challenge facing information systems is implementation on the move. Since there is no time for trial and error, precise forward-thinking decisions must be made. There is still much to he learned because any unknown problems will have to be dealt with as they arise. Bayer's profitability and long-term survival is at stake.

References

REFERENCES

References

A New Bayer-ANew Bayer Cross. (2002). Retrived from the World Wide Web: 194.231.35.65/ en/bayerwelt/bayerkreuz/kreuzneu.php?id=0390302.

About CDER. (2002). Retrieved from the World Wide Web: www.fda.gov/cder/about. Bayer Acquires CropScience. (2001). Retrieved on Octboer 2, 2001, from the World Wide Web: www.press.bayer.com/news/news.nsf/ID/NT0000EOB6.

BAYER AG Homepage (2002). Retrieved from the World Wide Web: www.bayer.com. Bayer Continues Expansion of E-Commerce. (2001). Retrieved from the World Wide Web: press.bayer.com/News/news.nsf/ID/NT000079C2.

Bayer Files Applications for Vardenafil in United States and Mexico. (2001). Retrieved from the World Wide Web: news.bayer.com/news/news.nsf/ID/01-0281.

Bayer's High-Tech Pharmaceutical Research Platform. (2001). Retrieved from the World Wide Web: press.bayer.com/News/news.nsf/ID/NT00007936.

Benefit vs. Risk: How FDA Approves New Drugs. (2002). Retrieved from the World Wide Web: www.fda.gov/fdac/special/newdrug/benefits.html.

Documentum in the pharmaceuticals industry. (2002). Retrieved from the World Wide Web: www.documentum.com/products/industry/pharmaceuticals.html.

References

FDA proposes first requirement for electronic submissions. (2001). Retrieved from the World Wide Web: www.hhs.gov/news/press/2002pres/20020501b.html.

Genomic technology pays off Bayer and Millennium expand research program. (2001). Retrieved from the World Wide Web: news.bayer.com/news/news.nsf/ID/O 1-0272. Managing strategic assets and speeding time to market. (2002). Retrieved from the World Wide Web: www.documentum.com/products/customer/purdue.htm.

More blockbusters in the pipeline. (2001). Retrieved from the World Wide Web: bayer.com/ geschaeftsbericht2000//eng/index.html.

NDA Approvals for calendar year 2001. (2001). Retrieved from the World Wide Web: www.fda.gov/cder/rdmt/ndaaps0lcy.htm.

New drug application (NDA). (2001). Retrieved from the World Wide Web: www.fda.gov/ cder/foi/nda/.

New drug application (NDA) process. (2001). Retrieved from the World Wide Web: www.fda.gov/cder/regulatory/applications/nda.htm.

Purdue Pharma LP: Speeding time to market with documentum 4i. (2001). Retrieved from the

World Wide Web: www.documentum.com/products/customer/BP_purdue.html.

References

Questions about CDER. (2002). Retrieved from the World Wide Web: www.fda.gov/cder/ about/faq/default.htm.

Shortening time to market through innovation of regulatory approval process. (2002). Retrieved from the World Wide Web: www.documentum.com/products/customer/ boots-healthcare.htm.

Supporting pharmaceutical research and development. (2001). Retrieved from the World Wide Web: press.bayer.com/News/news.nsf/ID/NT0000795A.

U.S. Food & Drug Administration speeds review of new drug applications with Adobe Acrobat and PDF(2002). Retrieved from the World Wide Web: www.adobe.com/ aboutadobe/ pressroom/pressreleases/ 199910/19991006fda.html.

AuthorAffiliation

Raymond Papp

University of Tampa, USA

AuthorAffiliation

BIOGRAPHICAL SKETCH

AuthorAffiliation

Raymond Papp is an associate professor in the Sykes College of Business at the University of Tampa, USA. Dr. Papp completed his doctorate in Information Management at Stevens Institute of Technology. His research interests include Strategic Alignment, IT for Competitive Advantage, Distance Learning, and Pedagogical Issues in IT. His recent book Strategic Information Technology: Opportunities for Competitive Advantage (idea Group Publishing, 2001) highlights the use of information systems to achieve competitive advantage and contains numerous cases on strategic information systems. He has recently published in Annals of Cases on Information Technology, Communications of the AIS and Industrial Management and Data Systems as well as presented at numerous national and international conferences.

Subject: Studies; Information technology; Federal regulation; Pharmaceutical industry; Compliance

Company / organization: Name: Food & Drug Administration; NAICS: 922190; DUNS: 13-818-2175; Name: FDA; NAICS: 922190; DUNS: 13-818-2175

Classification: 9130: Experimental/theoretical; 5220: Information technology management; 4310: Regulation; 8641: Pharmaceuticals industry

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 262-273

Number of pages: 12

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references tables

ProQuest document ID: 198653476

Document URL: http://search.proquest.com/docview/198653476?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 83 of 100

Web-enabling for competitive advantage: A case study of Himalayan adventures

Author: Motiwalla, Luvai; Hashimi, Azim

ProQuest document link

Abstract:

This case explores an implementation of an electronic commerce application in a global travel company. The case describes how Web-enabled technologies can lead to an increase in customers. The case presents the Porter Electronic business model used by the business owner to analyze the market needs and to identify the appropriate information technology to use to gain a strategic advantage. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

This case emphasis is on the reduction of the logistical aspects of adventure travel and increase in the customer base by using the Web-enabling information technology resources. A global travel company, Himalayan Adventures (HA), based in Pakistan wants to build a one-stop electronic commerce store for its customers. Through this website, HA hopes to provide all of their travel services, visa details, health and safety insurance, weather information, flight reservations, police registration, currency exchange, travel itineraries, sale and purchase of equipment, souvenirs and communication requirements. To implement the online store for HA, the owner, Abdul Bari, is planning to utilize the Porter electronic business model in analyzing the market needs, and identifying the appropriate information technology to gain a strategic advantage. This project, once implemented, will compliment the already existing HA brick model with a bricks-and-clicks model. On the initial investment of $70,000 per year for three years, the incremental net present value created by the project is $174,079.

BACKGROUND

Abdul Bari, president of Himalayan Adventures (HA), sat in his office in central Gilgit bazaar looking at the sun set in the majestic Himalayan Mountains. The tourist season for 1998 in Northern Areas of Pakistan (NAP) had just ended. For the next seven months, until April 1999, the foreign or domestic tourists would not be visiting the NAP for climbing, trekking or hiking.

The 1998 season was a turbulent year for the Pakistani tourist industry in general and NAP's tourist industry in particular, which provides the developing country with more than 50% of its $14 billion tourism revenue. Although this turbulence was attributed to the overall decline in customer base after Pakistan and India tested their nuclear devices in summer of 1998, Abdul Bari thought otherwise. After talking to many of his clients, AB knew the real reason was the better logistical arrangements, customer service and lower costs that other foreign competitors were providing to their clients in HA's market segment, namely adventure tourism in the Himalayan and Karakorum mountain ranges of Central Asia. These competitors included the tour operators from Australia, England, Germany, India, Nepal and Bhutan.

As estimated in the World Bank Country Development Report (1999), the travel and tourism market provides Pakistan a total of annual revenue of $14 billion. Four ofthe 10 highest peaks in the world lie in the NAP, which houses the mountain ranges of Karakorum, Himalaya, Pamir and Hindu-Kush. The rugged beauty ofthe region, along with its unique culture, offers a potential tourist an experience that is enjoyable, challenging and enriching. The Pakistani Tourism Development Corporation estimates that foreign visitors to the country have explored only 20% of the NAP territories.

HA started as a partnership between a mountain climber and a business student in January of 1995. The main niche or specialty market of the company is trekking, bicycling and the cultural safari tour market, though the company has facilitated mountaineering expeditions in the past. During the tourist season, i.e., May to September, based on tours that have been reserved, the company hires porters and guides, who are then assigned to each visiting group and stay with the group for the duration of the tour. To achieve economies of scale, and for logistic and client safety reasons, the company has always focused on selling its packages to a group of five people. The average customer load per season for the company is between 130-160 customers, with an average profit margin per head at $500.

The Market

One-hundred percent ( 100%) of HA's customer base is of foreign origin. The breakdown in terms of nationalities is shown in Table 1.

Due to the nature of NAP (NAP as supposed to a province of the country, is a federal controlled territory under the supervision of Pakistani Army), all foreigners visiting the area have to appear for a personal interview at the Pakistani Embassy or Mission office in their respective countries before they can be given a permission to visit the NAP. This is often a cumbersome and expensive procedure for potential clients of the HA. In addition, there is often no updated information available to the potential clients on visa details, health immunizations and insurance, currency, weather conditions, baggage and fitness requirements. Furthermore, tourists have no quick way of finding information on the trip packages offered by HA or other travel operators. They often get this information via word of mouth from people who have visited the NAP. To further add to their woes, the marketing and information channels adopted by government departments are inadequate, outdated or incomprehensible. As it currently stands, customers have to refer to many different sources of information for planning their trip. This information is generally gathered in a piece-meal style from multiple Web resources, the Lonely Planet bookstore and other mass media resources.

Himalayan Adventure's Financials

The Profit & Loss statement, since its inception, is shown in Table 2 on the following page.

SETTING THE STAGE

The Northern Areas of Pakistan (NAP) attract two distinct groups of travelers. First, there are the thrill seekers, who come for the sheer challenge of navigating the challenging landscape of the area, and include the mountain climbers and trekkers. Second, there are groups comprising the mild natured-at least in terms of their adventure spirit-travelers who find less challenging ways to explore NAP, be it through biking, hiking, cultural safaris or just visiting the Gilgit, Hunza or Chitral valleys. Unlike major tour operators, who competed aggressively for mountain climbing parties sponsored by local companies, HA due to the limited marketing, logistical and budgetary constraints, competed only in the trekking, mountain biking and the cultural safari tour markets.

Climbing expeditions are contingent on two factors-cooperation of the Pakistani government in granting climbing passes and most importantly the availability of good climbing weather. Out of 12 years that he had been involved in this business, the first five ofthem as a guide for mountaineering expeditions, Abdul Bari surmised that the actual scaling rate1 for mountain climbers had been less than 5%. This statistic had a major role to play in turning people away from climbing towards the more rewarding trekking adventures, which are 14-day-plus hike-a-thons designed to take tourists to either one or more base camp sites around the mountain ranges and are less contingent on weather severities due to the low altitude exposure. Most of the trekking expeditions are carried out between the altitudes of 9,000 to 17,000 feet. Most importantly they are less expensive and, depending on the tourist demand for a particular Trek,2 economies of scale are achievable by merging two or more groups, hence reducing the cost for the trek. Seventy percent (70%) of HA's clients comprised this group, with the rest being in either the biking (two popular routes are the Karakorum Highway or the silk route ride, and the Gilgit-to-Chitral ride; both rides are in excess of 600 km) or the cultural safari category.3

Abdul Bari-The Indigenous Adventurer with an Entrepreneurial Dream

Born in a village in Astore valley, the oldest of seven siblings and made to work at his family's livestock rearing operation when he was just 10, Abdul Bari had little in terms of formal education. Just like many other teenagers in the villages ofNorthern Areas, he always wanted to work as a guide due to the attractiveness of the wages offered to porters or guides. (A porter can expect to earn $10-15 per day, and in one month can earn more than the average per capita income of the whole Northern Areas; guides generally earn twice the wages offered to porters.) As a result, when he was just 15 years old, Abdul Bari started working as a porter, then as a trekking guide and later as a climbing guide for visiting tourists. In just 10 years Abdul Bari had guided through almost every major trek in the Northern Areas and led climbing parties to K-2 (also known as Mount Godwin Austin-the second highest in the world), as well as Nanga Parbat (ninth highest mountain).

CASE DESCRIPTION

Realizing the immense potential that the seasonal adventure tourism offered, Bari took a loan of $20,000 from family members and in 1994 was looking for a business partner when he met Mohammed in January of 1994. Mohammed, who had come to work with an international infrastructure and agricultural development agency operating in the Northern Areas, had been born in Pakistan, but grew up in Europe and did his post-secondary education in Canada.

In 1994, advertising for travel operators was limited to informal referrals to potential customers in Japanese, European and Australian markets through satisfied clients, most of who had actually come to Pakistan and found their own way to Gilgit (570 kms away from a major international airport). Travel operators generally played a passive role in which the potential clients would come to them and negotiate the prices per trek. There was little or no formal line of communication in the pre-trip phases and as such no accurate measure of the demand that tour operators faced could be gauged. This resulted in a loss of potential clientele who would either select tour operators in other countries before they came to Pakistan (through better advertising tactics and security of pre-trip communications) or come to Pakistan's Northern Areas looking for favorable prices, and if the tour operators were overbooked with potential clients, a likely possibility, would end up forfeiting the trek. Abdul Bari wanted to capitalize on this opportunity by starting HA.

Mohammed was interested in Abdul Bari's idea and promised him that while he could not work a full-time position in the company due to his job commitments, he would invest $10,000 in HA for a 30% share and also help Bari start up his company. Thus, in January of 1995, Himalayan Adventures was formed with a start-up capital of $30,000. Their initial marketing strategy included contacting clientele who had visited the NAP, did a trek under Abdul Bari's guidance and had indicated that they knew friends or relatives who would be interested in similar treks, biking tours or safaris.

Operations of Himalayan Adventures

As the tourist season of 1995 began, HA operations comprised the following:

* a staff of three employees, Bari and two other guides;

* a leased Jeep for transporting guests in and out;

* an office space in central Gilgit Bazaar, and a rented guest lodge serving as a base of operations and as a transit place for trips from and to the airport.

In 1995, HA hosted a total of 13 groups-12 in trekking and a cultural safari-and the company registered a loss due to high start-up costs. The next years saw further increases in business activity and increase in profits, however well below the normal profit levels of other domestic competitors. In the summer of 1996, after working (assisting) at HA for two years, Mohammed left for the United States to pursue an MBA at a university in the Commonwealth of Massachusetts.

In 1998, Abdul Bari expected that, for the third straight year, HA would register a profit of around $10,000-an amount five times lower than its competitors in the domestic market. Abdul Bari would have to sit down and figure out a way to set a direction for his business and turn it into a more profitable venture. One option was an alliance with other tourist operators in NAP. Another option was collaborating with the Pakistan Tourism Development Corporation. A third option was expanding HA business via the Internet. Some of Bari's international clients had mentioned that Internet was becoming a useful business tool, and how they could use the Internet to speed up their pre-adventure planning and allow them to keep in touch with their contacts during their trip. Thus, Abdul Bari was considering which of these three options would be ideal for HA, as the official tourist season came to a close in the NAP.

In late 1998, after having returned from the U.S. only three weeks earlier, Mohammed's phone rang at his desk at the Marketing Division of Citibank in Islamabad, Pakistan. After the pleasantries were exchanged, Abdul Bari informed Mohammed about his concerns for Himalayan Adventures. The conversation is as follows:

Abdul Bari (AB) You know because of the security concerns and better logistics, a lot of tourists who could be our customers are choosing different destinations altogether. This is quite frustrating, and I have had talks with other Tourist Operators in NAP. Business is steadily declining, but HA is in real bad financial position.

Mohammed(M) I see. I am aware of the general decline in the tourist industry, but HA has always under priced its tours to gain competitive advantage.

AB That probably is not enough any longer. Tourists are getting frustrated and tired of the hassles they have to put up with just to get into Pakistan.

M I know your concern, but since I have been out for such a long time, can you perhaps explain to me what you mean. Give me an example ofthe hassles you have encountered.

AB Okay. You remember the first trek you went to; the Fairy Meadows Trek? You remember the group that went along with you?

M Yeah, there a couple from New Zealand, an Australian, a German and a Spaniard.

AB Right. Well this year that German, Ziegfried, referred us to his brother Hans and his girlfriend Petra, who wanted to do the trek to K-2 base camp (see Appendix B for more details).

M Interesting. I was thinking that perhaps we should no longer focus on lower prices. While I was in the U.S., I learned some new marketing and customer service techniques. Perhaps a better strategy might be to differentiate the tours of HA from others. One option I'm considering is using the Internet. This new technology could help us in marketing the tours worldwide, improve our service quality, and allow us to simplify the visa and permit process with the Pakistani government. What do you think, Abdul?

AB I think this is a good idea because I have heard about the Internet from our clients and the other travel firms in this area.

M Okay then, why don't you come over to Islamabad and I will try to explain a couple of ideas that I have for HA.

AB Okay, I will be there next week.

At the end of the conversation, Mohammed knew that the Internet held a place in adventure tourism and may be the key to salvaging HA. But, how? What e-business implementation strategy should he use? Mohammed had read a Harvard Business Review article in which he found there were two Internet strategies available for business: apure dotcom strategy or the brick & click strategy (see Appendix A for more details).

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

The Internet Approach

The Internet- (or Web-) based economic model is staggeringly more efficient at the transaction cost level (Wigand & Benjamin, 1995). For example, the cost of processing an airline ticket through traditional approach is $8, but is only $1 through the Web. Similarly, other efficiencies can be derived from marketing and advertisements, online information processing with forms that are electronically linked to databases and online customer support (Hoffman et al., 1995). Elimination of middleman in the distribution channel (or disintermediation) also can have a big impact on the market efficiency (Michalski, 1995). Other efficiencies are generated due to less or no inventory, storage or real-estate space, larger customer base and 24x7 access at no additional cost (Steinfield & Whitten, 1999). Marketing on the Web can result in additional unit sales at very low unit cost. In addition to the lower cost, the Web also enables a higher level of customization to the needs of individual clients (Choi & Winston, 2000). Auto manufacturers, such as Ford and GM, are experimenting with custom-designed cars that can be delivered in less than two weeks to a customer's home (White, 1999). Thus, Web-enabling business processes is particularly attractive in the new economy where product lifecycles are short and efficient, while the market for products and services is global.

The Web allows organizations to expand their business reach. One of the key benefits of the Web is access to and from global markets (Economist, 1997). The Web eliminates several geographical barriers for a corporation that wants to conduct global commerce. Political, trade and cultural barriers may still make it difficult to take true advantage of the global business environment.

While traditional commerce relied on value-added networks (VANs) or private networks, which were expensive and provided limited connectivity (Pyle, 1996), the Web makes electronic commerce (e-commerce) cheaper with extensive global connectivity. Businesses have been able to produce goods anywhere and deliver electronically or physically via couriers (Steinfield & Whitten, 1999). This enables an organization the flexibility to expand into different product lines and markets quickly, with low investments. Secondly, 240 availability, better communication with customers and sharing of the organizational knowledgebase allows an organization to provide better customer service. This can translate to better customer retention rates, as well as repeat orders.

Finally, the rich interactive media and database technology of the Web allows for unconstrained awareness, visibility and opportunity for an organization to promote its products and services (Seen, 2000). This enhances organizations' ability to attract new customers, thereby increasing their overall markets and profitability. Despite the recent dotcom failures (Francis, 2000), e-commerce has made tremendous in-roads in traditional corporations. Forrester Research in their survey found 90% ofthe firms plan to conduct some e-commerce, business-to-consumer (B2C) or business-to-business (B2B), and predicts ecommerce transactions will rise to about $6.9 trillion by 2004. As a result, the travel industry has started to believe in the Internet because of its ability to attract and retain more customers, reduce sales and distribution overheads, and increase global access to markets with an expectation of an increase in sales revenues, and higher profits.

Given the information needs of potential customers and to spawn new business growth, the Internet has been identified as a potential weapon and can be utilized to accomplish the following competitive advantages for HA (for an example of how a customer experience changes after HA invests in the Web, please refer to Appendix B):

In Existing Markets

* A website can help to expedite communication and also act as a marketing tool for HA, by creating a comprehensive customer database through which targeted promotional campaigns such as information newsletters, discounts, special deals, etc. are carried out.

* An information portal-with relevant links to all the relevant government authorities (such as through an extranet provision with these government agencies), as well as useful adventure tips and links to other adventure-related information.

* An online auction which brings sellers of used gear and buyers together as mountain/ trekking gear is very expensive and usually outside the monetary reach of the "onetime adventure seeker." Alternatively HA can have a referral program with outdoor equipment manufacturers who would offer discounts to HA customers.

* A chat room and discussion boards similar to the ones offered by Excite, Yahoo and Hotmail portals, to be used by adventure patrons and HA members to share their experience, selling second-hand gear, for group matching, etc. Discussion boards (such as the ones offered by Lonely Plant) can also be used to match like-minded groups with one another, and hence achieve the cost savings which are present in a group package (as compared to the high price individuals or couples pay, if they buy a package for less than three people).

* An FAQ section could be created on the website to answer basic questions that customers have on relevant topics.

In New Markets

Target the 10,000+ foreign nationals (ex-pats and foreign workers) currently residing in Pakistan at virtually little or not cost.

A new and emerging trend among the smaller business companies, especially those in the software market, is on building the group dynamic spirit. This idea, which is borrowed from military training ideology, is being capitalized upon by both Harvard and Columbia universities, which offer corporate team-spirit-building courses by taking the study group to a rugged outdoor surrounding and making them work together to build a team spirit. NAP offered a perfect surrounding for this kind of adventure, and HA could design a special targeted package for this kind of team-building adventure4 suited to the needs of domestic and international corporate sectors.

Website Development and Implementation Plan

It is anticipated that it would take HA at least three years to come up with funds and invest in the Web initiatives. As HA cannot afford a major investment at the onset of the project, it is proposed that the Internet investment should be done in a piece-meal fashion. A brief website development and implementation plan is as follows:

* Registering for a domain name for the website in the USA for a dot-com (top-level) domain.

* Creating a static website with links to relevant government agencies, bookstores, travel stores, etc.

* Creating an e-commerce website (B2C) for customer reservations and trip planning activities.

* Investing in back-end applications and a database, which is compatible with major Internet service providers (ISPs).

* Purchasing server hardware and PCs (this should be bought from corporate auctions within the country due to cheaper prices as compared to the international market prices).

* Accessing a secure Web server to transmit sensitive information via the 128-bit SSL encryption standard from the website.

* Setting up a merchant account for processing customer payments via credit cards, and other electronic cash and checking options.

* Developing a closed instant messaging or chat and discussion bulletin board for HA's clients and business partners.

* Choosing an e-commerce platform, like Microsoft's Site server, to quickly build shopping carts, search engines and order fulfillment systems.

* Choosing an automated booking system that can check for availability for tours and dates, and confirm a place to a potential customer.

* Developing a data mining system to analyze the profitability of various tours that HA offers and their popularity.

* Developing B2B extranets with relevant government agencies and other mountain gear vendors.

Website Implementation Issues

While implementing the website, HA's development team must select from among the various Web technologies. Although HTML is a standard protocol which works on all operating systems and browser platforms, several problems can occur in the implementation of dynamic HTML technologies. For example, the HA design team must decide very early whether their website will support both Netscape(TM) and Internet Explorer(TM) browsers. Also, what browser versions will be supported? The older versions of these browsers do not support the dynamic scripting languages such as VBScript and JavaScript. Finally, some of these scripting technologies work on Microsoft's WindowsTM but not on Unix, Linux or Apple's Macintosh(TM) operating systems. With more emerging Web platforms such as PDA devices and wireless phones, it would be advisable for the HA team to select a minimum operating standard for their development.

One option for developing the website with minimal budget is for HA to introduce a new hiring program for Web programmers. Under this program, HA would use its existing network of clients and offer one free trip, with all expenses paid, to a group of programmers who will assist HA in the areas of Web design and development. This is done due to cost considerations, and inviting our customer ensures that the final website design and outlook is reflective of HA and its customers' passion for the outdoors. Another implementation option would be to syndicate the website development with one of the major travel websites like Expedia.com or Travelocity.com, which provide syndicated content for small travel agencies that do not have the necessary resources.

Web Security Issues

The security in the Web environment is perhaps one of the most prominent concerns for businesses and customers alike. In this regard the proposed project in no way alters the payment policy that HA has adopted since its inception in the late '90s. As is the norm, the payment scheme will stay the same, with 50% of the tour price due at the beginning of the trip and 50% halfway through. HA, however, should still considering outsourcing it to TRUSTe.com or VeriSign.com security organizations to increase customer confidence. It should further explore the in-vogue merchant accounts for accepting payments via credit card, e-Cash (like PayPal.com) and e-Wallet.com. Mohammed thinks that due to the e-- payment method's popularity, 100% of similar business would be conducted through online payment systems by 2005.

Long-Term Considerations

Financial resources permitting, HA would like to incorporate the following features onto its website in addition to its current operations in the near future:

A strategic alliance with the Pakistan Tourist Development Corporation (PTDC) so as to have HA's Web link on the PTDC's Web page, which is generally the primary source of tourism information within Pakistan.

A comprehensive GIS system (database), with route and cost information, which allows customers to build their own trips by selecting the destinations (cities, mountain peaks, trails, etc.) they would like to visit. This obviously would require a very large capital investment. However, this vision of future adventure travel should be kept in mind when HA considers more IT strategic alternatives in the future.

Providing e-mail access at major check-in points to allow customers to stay in touch with their loved ones. Another option is the video SAT phones which can be bought second hand in domestic market at nominal prices. This equipment could be rented to customers to facilitate their needs. The provision for this equipment (three per year) has been allowed in the costs and benefits analysis section.

Costs and Benefits

Pre-Project Status (number of trips and customers are averages):

Post-Project Status (assumes that number of trips double in the first year and the number stays the same for the next three years; also there is an increase in the PM as HA takes advantage of technology):

After understanding the details provided by Mohammed, Abdul Bari has to make final decision on whether HA should opt for a pure dot-com approach, closing its office in Islamabad and investing all the money on the Web environment. Or should HA opt for a "brick & click" model using the Web environment to supplement its existing offices? Abdul Bari would like to see business growth, more operational efficiencies and an increase in his profit margins. But, he has to work within the technology, business, regulatory and societal environment of a developing country. In addition, Bari and Mohammed have to consider the various website development, implementation and security issues in making their final decision.

FURTHER READING

Article I. Web Enabling Strategy Supplement

A review of the Web-enabling strategy literature reveals two business models used by the e-business enterprises. One model highlighted by Mahadevan (2000) shows the different economic streams targeted by the pure-plays to succeed in the new Internet economy. Another model highlighted by Gulati and Garino (2000) shows how clicks-and-mortar firms have successfully integrated their online channels with their off-line, traditional ones.

Mahadevan's article, "Business Models for Internet-Based E-Commerce" (2000), focuses on classifying the business models as portals, market makers and product/service providers who rely on three economic streams for surviving in the new economy. They are value stream, revenue stream and logistical stream. To succeed, the dot-com companies must rely on some unique combination of each of the three streams. Although Mahadevan has done a good job in identifying the various revenue streams for the dot-com companies depending on their market structure, these economic streams may never materialize for companies. For example, free offerings do not always result in paid purchases by the customer. Both Pets.com and Petco gave away free advice to pet owners on care, wellness, behavior, etc., through their e-commerce websites. This counsel was not exclusive to these two companies, as similar information could be obtained from other non-commercial sites. Therefore this advice did not have the anticipated impact on potential customers. Nor does the amount of dollars spent on advertising compensate for all the expenses incurred trying to capture sales for the site. For example, eToys and Pets.com spent significant advertising dollars trying to steer customers to their websites. Some of these advertising contracts were upwards of $27 million.

Mahadevan (2000) also directly contradicts some of the core strategies that must be followed in order to succeed with any form of business as stated by Porter. Mahadevan states that giving the customer more and more choices with more suppliers available is in the best interest ofthe e-commerce firm. As we now know (with all dot-com failures), giving away too much bargaining power to the consumer has an adverse affect on the firm and the industry as a whole. Mahadevan also states that the pure-play has larger margins than the brick-andmortar firms do. This may have been true last summer, but now the pure-play margins are thinner or negative as opposed to margins for large brick-based establishments.

Gulati and Garino (2000) are proponents of integrating the e-commerce channel and Web presence with the core brick-and-mortar establishment. In their article titled, "Get the Right Mix of Bricks & Clicks," they discuss the values and advantages of being a fully integrated firm or at least tending to lean toward that end of the integration scale. They go on to evaluate four major strategies that firms can take when it comes to running an extension of their business channel on the Internet. This scale ranges from in-house division (high integration), to joint venture, to strategic partnership, to the other side, which is spin-off(high separation). They state that the benefits of being fully or partially integrated are greater than the advantages of independence as a pure-play Internet business.

The integrated business does seem to have a greater advantage over its pure-play counterpart. The only difference is that instead of solely concentrating on the clicks-andmortar approach, we want to investigate both sides of the coin. We believe that HA can still survive in today's economic conditions. However, its management must follow certain basic business strategies as outlined by Porter.

Porter's Model

The framework for our analysis is built upon the theories of Michael Porter's recent article, "Strategy and the Internet" (2001), in which he defines several business fundamentals that must be followed in order to be successful regardless of the type of firm. Porter outlines two major fundamentals that are influenced by the Internet to more of a degree than was once thought previously. They are industry structure and sustainable competitive advantage. Without at least acknowledging these essentials to be crucial to the profitable operation of the firm, a fight for survival will always exist.

The Internet has an inherent adverse or beneficial effect on each of the Porter fundamentals. An important aspect to note is that the Internet is based upon an open technological architecture. This architecture has the largest effect on these competitive elements. Since the technology platform is common, and little or no capital investment is required, anybody with minimal know-how can set up a website and start conducting ecommerce. Enterprising individuals that want to set up a side occupation can now have additional disposable income, thereby helping to fuel the economy. This also results in the barrier to entry being nearly non-existent in certain industries, not to mention that the number of competitors coming on board every month, or every day, is astronomical. This increases the rivalry that already exists between competitors, and even compounds it logarithmically.

The Internet has opened up the availability of the vast amount of information that can be acquired by potential buyers. This is great for buyers because they can perform in-depth research before buying the product. It seems that this would cut down the number of returns because the consumer would be more knowledgeable about the different features of a product. They can even get cost information that was not readily available to them before the emergence of the Internet. An example of this is, the actual invoice paid by a car dealer is now available at a buyer's mouse click. This puts bargaining power into the hands of the consumer and puts the dealer at a disadvantage. The consumer will get the deal of her choice or go elsewhere. The bad part of all of this is that the retailers (brick-and-mortar firms and pure-- plays) now compete solely on the basis of price, and switching costs are lowered, meaning that consumers can readily change vendors without penalty.

Because of the Internet, suppliers gain an increase in the number of potential customers causing the number of middlemen to be reduced. The ease in which these potential customers are reached means more direct sales are possible from large suppliers. This is good for suppliers, but has mixed results for consumers. The consumer has only one outlet for a certain product, such as a well-known brand of computer that he really wants, and he has to pay the exact price stated. There are no middleman-type companies to play off each other for a reduced price (haggling). On the other hand, the middlemen inflate the actual price in order to profit form the sale, so the supplier may realistically have a lower price.

The last competitive element is the threat of substitute products. The speed and organization of the Internet, with its database storage capabilities and set standards, has the ability to make industries more efficient and expand the industry. This expansion leads to more competitors and newer, better technologies that increase the threat of substitutions. As Internet technologies change rapidly and get cheaper, it gets easier and cost effective for customers to switch to a better product or service. If suppliers are not quick in their development, implementation and time to market, they will soon be filing for bankruptcy.

Operational effectiveness is described as offering the same product or service that your competitors do, except doing it better. This can refer to the speed at which something is done, the amount of customization that can be accomplished, the overall efficiency of operations or even the manner at which something is sold. Operational effectiveness is what many referred to as "Internet Speed"-how quickly can a company come up to speed to meet or exceed the operations of its competitors? As it turns out in the Internet world, duplicating a firm's operations is so easy to do that operational effectiveness becomes a non-issue. This is no strategic advantage because a firm's competitor can replicate its product and operation in a very short time. And with technology changing on a daily basis, the competitor could end up exceeding the baseline set by the original firm. The process becomes a vicious cycle.

The real advantage for sustainable competitive advantage comes from strategic positioning. The key to success is to provide something that a consumer or business needs and then be an exclusive provider for it. To accomplish this, the firm must offer something of high or inimitable value to the buyer, with no other competitor that can match this value. Sellers compete on providing unique services or offerings to buyers rather than competing on price, which can lead to failings in business. Please take a look at the challenges and problems faced by HA, and how the Porter model can be utilized by HA.

Footnote

ENDNOTES

Footnote

1 Defined as number of times at least one person from the whole climbing expedition had reached a summit. Most expeditions make it up to the third or the fourth (generally the last camp before the summit) base camps and have to abandon their attempts due to poor weather.

2 Treks can be customized to fit the needs of a particular group as well. However, most people opt for the standard 10 treks, which generally covered all the major mountain ranges. All of these were offered by Himalayan Adventures.

3 Cultural Safari's are generally 5+-day jeep rides to and from major tourist destinations in the Northern Areas and are customized for each group-generally no more than four people per group.

4 A company by the name of Adventure Tours Pakistan already offers this kind of adventure opportunity to the 1 st Battalion 51st Highland Rangers of UK Army by taking a 25-member team every summer to a 23-day 105km Baltoro Glacier Trek.

References

REFERENCES

References

Adventure Tours Pakistan. Website available at: http://www.atp.com.pk.

Choi, S. et al. (1997). The Economics of Electronic Commerce. Indianapolis, IN: Macmillan. Economist. (1997). Going digital: How new technology is changing our lives. Economist, (September). Also available on-line at: http://www.economist.com/editorial/freeforall/ 14-9-97/ec4.html.

Francis, D. (2000). Despite dotcom failures, e-tail's future is bright. Christian Science Monitor, November 20, 17.

Government of Pakistan. (1998). Census Results, Division of Statistics, Government of Pakistan.

Gulati, R. & Garino, J. (2000). Get the right mix of bicks and clicks. HarvardBusiness Review, May-June.

References

Hoffman, D., Novak, T., & Chatterjee, P. (1995). Commercial scenarios for the Web: Opportunities and challenges. Journal of Computer-Mediated Communications, 1(3).

Lonely Planet. Website available at: http://www.lonelyplanet.com.

Mahadevan, B. (2000). Business models for Internet-based e-commerce: An anatomy. California Management Review, 42(2), 55-69.

Michalski, et al. (1995). People are the killer APP. Forbes, 155(12),120-122. Pakistan Tourism Development Corporation. (1997). Report.

Porter, M.E. (2001). Strategy and the Internet. Harvard Business Review, 79(3), 63-80. Pyle, R. (1996). Commerce and the Internet. Communications of the ACM, 39(6), 23.

Senn, J. (2000). Business-to-business e-commerce. Information Systems Management, Spring, 23-32.

References

Steinfield, C. & Whitten, P. (1999). Community-level socio-economic impacts ofelectronic commerce. Journal of Computer-Mediated Communications, 5(2).

Turban, McLean, & Wetherbe. (2001). Information Technologyfor Management. New York: Prentice Hall.

White, G. (1999). How GM, Ford think Web can make a splash on the factory floor. Wall Street Journal, December 3, 1.

Wigand, R. & Benjamin, R. (1995). Electronic commerce: Effects on electronic markets.

References

Journal ofComputer Mediated Communication, 1(3). Also available on-line at: http:/ /www.ascusc.org/jcmc/voll/issue3/vol lno3.html.

World Bank Country Development. (1999). Report.

AuthorAffiliation

Luvai Motiwalla

University of Massachusetts, Lowell, USA

AuthorAffiliation

Azim Hashimi

University of Massachusetts, Lowell, USA

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Luvai Motiwalla is currently an associate professor of MIS in the College of Management at the University of Massachusetts, Lowell, USA. He has a PhD and MS in Management Information Systems from the University ofArizona and aBBA from Penn State University. He has published articles in several national and international journals including Journal of Internet & Higher Education, Information & Management, Information Resource Management Journal, Journal of Organizational Computing & e-Commerce, Journal of MIS and has also consulted or worked on research projects funded by Connecticut Department of Health Services, IBM, NCR and U.S. Army.

AuthorAffiliation

Azim Hashimi is currently an MBA student at the College of Management at the University of Massachusetts, Lowell, USA. He did his undergraduate studies at the Memorial University of Newfoundland, Canada. Prior to enrolling in the MBA program, he interned for the World Bank and worked in the fields of micro-credit and enterprise development at major NGOs in Pakistan and USA.

Subject: Studies; Competitive advantage; Electronic commerce; Web services

Classification: 9130: Experimental/theoretical; 5250: Telecommunications systems & Internet communications

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 274-289

Number of pages: 16

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

ProQuest document ID: 198659103

Document URL: http://search.proquest.com/docview/198659103?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 84 of 100

Balancing theoretical and practical goals in the delivery of a university-level data communications program

Author: Gutierrez, Jairo; Tawa, Koro

ProQuest document link

Abstract:

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

This case examines the experience of introducing the Cisco Networking Academy Program as part of two data communications courses taught in the School of Business and Economics at the University of Auckland. This case discusses the advantages and disadvantages encountered in the administration and delivery of the combined (traditional content plus the Cisco-based content) material. The case also analyses the impact of the program on the learning outcomes and objectives of the existing courses. The feedback presented was obtained informally through conversations with students and formally by using end-ofsemester surveys and by reviewing students' assignments and tests. The case describes how the program combined traditional "sage on the stage" lectures plus hands-on lab experiments as part of the educational experience. The availability of on-line curricula and testing is also considered as an important element in the learning process.

BACKGROUND

The University of Auckland was established in 1883 and it is New Zealand's largest research university with more than 28,000 students. It offers a comprehensive range of study programs attracting postgraduate and undergraduate students from over 50 countries. In 2000 the university was New Zealand's top-ranked institution inAsiaweekmagazine's annual survey of Asian and Australian universities (Bachelor of Commerce-The Undergraduate Handbook, 2002). The university has four campuses with seven faculties representing a number of disciplines: Architecture, Property, Planning and Fine Arts; Arts, Education and Music; Business and Economics (also known as the University of Auckland School of Business); Engineering; Law; Medical and Health Sciences; and Science. More than 4,000 students are enrolled for postgraduate studies (nondoctoral) and around 900 for doctorates. Some departments are associated with more than one faculty and various research centres cross disciplinary boundaries (Slattery, 2002).

The university's governing body is the Council, a mixture of elected staff, students and graduates, and outside appointees. The vice-chancellor, the university's chief academic and administrative officer, is also a member of Council. On academic matters the Council is bound to consult the Senate, which the vice-chancellor chairs. The Senate includes all the full professors, some nonprofessorial staff and student representatives. Each faculty is a subcommittee of the Senate and is headed by a dean who is responsible for overseeing the academic and research activities of individual departments and, in coordination with Registry and Senate committees, manages aspects related with staff appointments, research funding, time-tabling, etc. The Registry performs central administration, and it is divided into Information Technology Systems and Services (ITSS), Finance, Human Resources, Student Administration, and Property Services sections (Slattery, 2002). Financial information (university revenues and expenditures) for the year 2000 is included in Appendix 1.

The School of Business has over 200 academic staff and seven departments: Accounting and Finance, Commercial Law, Economics, International Business, Management and Employment Relations, Management Science and Information Systems, and Marketing. The school offers more than 350 courses in 15 major fields of study, and there are approximately 6,000 students currently enrolled in the faculty programs (Bachelor of Commerce-The Undergraduate Handbook, 2002).

SETTING THE STAGE

The courses studied in this case study, Data Communications and Advanced Data Communications, are taught on the second and third years of a three-year bachelor of commerce (BCom) degree in information systems. Students enrolled for the BCom degree have to follow a program that is equivalent to three full-time years and pass courses with a total value of at least 42 points. A typical one-semester course is worth two points. Of the 42 points required for this degree, a student must pass at least 22 points in course above Year I, and s/he must complete one or more majors, including at least six points in Year III in each major. A normal course load is comprised of 14 points per year. The maximum load per semester is nine points.

The data communications courses can also be taken by BSc (computer science) and BTech (information technology) students; however it is important to note here that the courses are optional and are not part of the mandatory core of any major approved for BCom, BSc or BTech students.

The second-year course typically has enrolments of approximately 360 students roughly distributed in three classes of about 120 students each. Around 120 students take the third-year course. In the past the material has been delivered by lecturing three hours per week (12 weeks per semester) and by making available to students one optional tutorial hour per week during eight weeks. The coursework assessment consisted of two tests, two research assignments, a laboratory assignment (running CACI's Comnet III networking simulation software), and a group design project. For the design project, For the design project students formed selfselected groups of four and produce a number of deliverables with staggered hand-in dates distributed throughout the semester. An outline of the contents of the course is found in Appendix 2.

The third-year course had enrolments of around 130 students in one stream during the second semester of each year. The course dealt with detailed descriptions of the seven layers of the OSI reference model, concentrating on the primitives used among the different layers and studying the object-oriented aspects of the standards. Students were formally introduced to the syntax notation used with this type of modelling, and the applications of these techniques were discussed. The coursework assessment consisted of two tests, two assignments, and an Abstract Syntax Notation One (ASN.1) project. An outline of the contents of the course is included in Appendix 3.

Anecdotal feedback from students had clearly identified that they found this course to be highly theoretical. Unlike the second-year course, there was no lab component or groupbased assignments.

CASE DESCRIPTION

In late 1999 a casual contact with the Cisco New Zealand country manager led the department of Management Science and Information Systems (MSIS) to consider the possibility of becoming a regional academy and of introducing the Cisco Networking Academy Program as part of the data communication courses. The networking academy is a Web-based program with curricula accessed through a Web browser and comprises significant practical experience carried out within a lab environment. On completion of the training, the students will be prepared to sit the Cisco Certified Networking Associate (CCNA) and Cisco Certified Networking Professional (CCNP) accreditation tests at any ofa number of independent testing centres (Cisco Systems, 2000).

The Cisco Networking Academy Program was launched in the United States in October 1997 and in the Asia Pacific region in September 1998. Today, there are more than 8,000 academies operating in 140 countries worldwide and some 270,000 students enrolled (Cisco Systems, 2002). The program supports instructors' needs by providing lab equipment, software (including automated grade books and course administration tools), lesson plans, technical support and access to a global community of fellow instructors. Students benefit from the use of an on-line curriculum that can be accessed (after proper authentication) from any browser-enabled device and from assessment facilities that provide timely learning feedback.

The Cisco program includes instruction in the following areas: safety, networking, network terminology and protocols, LANs, WANs, the OSI model, cabling, cabling tools, routers, router programming, network topologies, IP addressing, virtual LANs, network switching, network troubleshooting and network standards. Particular emphasis is given to the use of problem-solving techniques and design methodologies to solve networking problems. The course includes a threaded case study used to illustrate the most important issues associated with a large-scale networking design project.

Adapting the Cisco Networking Academy Program

The Networking Academy Program was aimed at high-school pupils studying the last two years of their secondary studies or/and to first- and second-year tertiary students. In many cases the curriculum is delivered exactly as suggested by Cisco without any changes or enhancements. The MSIS data communication courses have traditionally covered additional material, and several aspects ofthe subject area are treated at a higher level of detail. To preserve the integrity of the courses the department decided to integrate the Cisco curriculum as an additional practical component without sacrificing or reducing the core contents of the courses. This decision resulted in a "localisation" of the Networking Academy Program to fit the institution's goals. The main consequences of that decision are:

* The program is not delivered exactly as prescribed by Cisco,

* Some sections of the curriculum are not covered during the lectures or tutorials and students are advised to self-study that material, and

*Key lab activities are performed but some labs are not delivered.

The 280-hour, four-semester curriculum has been combined with three of the MSIS courses as follows:

Data Communications (second-year): three lecture hours and one tutorial hour per week (during 12 weeks). Nine labs (one hour each). Includes Semester 1 of the Cisco Networking Academy Program.

Advanced Data Communications (third-year): three lecture hours and one tutorial hour per week (during 12 weeks). 10 labs (one hour each). Includes Semester 2 of the Cisco Networking Academy Program.

Computer Networks (third-year): three lecture hours and one tutorial hour per week (during 12 weeks). 10 labs (one hour each). Includes Semesters 3 and 4 of the Cisco Networking Academy Program.

Advantages of the Program

The arrangement discussed in the previous section aims at achieving a combination of the "best of both worlds" by maintaining the core contents of the university courses while complementing them with the Web-based Cisco Networking Academy Program curriculum and the lab assignments. The curriculum has now been changed to accommodate different learning styles by employing multiple media to deliver content-text, audio, extensive graphics and movies. The learning takes place in three main steps:

1) Presentation and teaching of concepts,

2) Demonstration, clarification of issues and linking of concepts to a particular current task (use of examples and analogies), and

3) Hands-on lab experiments.

The students have access to the on-line material at any time and from any place; however the on-line tests and exams are conducted in a controlled environment.

Computer-aided instruction is used as one of a combination of teaching techniques (Alessi & Trollip, 1991), and student learning is improved through the adherence to a set of "best practices," which are contained in a document of the Cisco Networking Academy Program instructor support resources. Best practices are a broad set of activities that are intended to assist student learning. Examples of best practices include challenges, design activities, graphical organizers, group work,journals, kinesthetic activities, lab exams, minilectures, on-line study, oral exams, portfolios, presentations, rubrics, study guides, troubleshooting and Web research. To ensure that improved learning is taking place, instructor guidelines are presented that facilitate the matching of one or more best practices with the hierarchical framework for multiple levels of thinking associated with Bloom's taxonomy (1956). Bloom's taxonomy includes six levels of thinking starting from knowledge, working their way up through comprehension, application, analysis and synthesis, and ending with evaluation. Since the best practices provide a variety of opportunities to learn, the question becomes what is the best mix of activities, given current subject matter, goals (both organizational and student), and available resources, throughout the delivery of the course. It is the alignment of appropriate best practices with subject matter that is invaluable in ensuring a rewarding learning experience for students.

The network design project that was usually included as part of the second-year course has been postponed to the third-year and included in the last course of the program as a threaded case study. The objective of this change is to prepare the students for a complete year before they attempt the group project. Many of the concepts introduced and practiced during that year assist them in producing better results. In the past, students produced group project reports that were good, sometimes excellent, given the limited exposure to the subject area. With the addition ofthe Cisco Networking Academy Program components, the students were able to produce more professional results using their more detailed knowledge and applying a number of procedures, skills and techniques for the analysis, design, implementation and presentation of their case studies. This task provides the perfect example of a "synthesis" activity as discussed in Bloom's taxonomy. Students combine the theoretical knowledge acquired and the practical skills learned in the "putting together of elements and parts so as to form a whole" (Bloom, 1956).

The main weakness of the previous reports from group projects lay in the fact that many of the solutions proposed by the students were missing key components (for example: lack of adequate interfaces in the routers proposed or lack of security) or simply wouldn't have worked due to compatibility problems. These omissions were easier to spot when producing their case studies because by then students have been exposed to detailed information and practice (in the labs) about how to properly configure and design LANs and WANs. Their understanding of user and business requirements and how to integrate them into the design was also superior; even their writing and presentation skills (as last-semester students) have improved.

The synergy achieved by using the labs to provide hands-on learning and skill-set development as a complement to the theory delivered during the lecture hours was invaluable. Lecturers were able to maintain student interest by providing immediate links to lab activities. An otherwise dry and complicated explanation about link-state routing protocols, for instance, can be enlightened by hands-on tasks where students "see" the protocol operating and the routers exchanging information about the state of the links between them. The labs provided opportunities for students to engage their network troubleshooting skills and were an important instrument for the delivery of the higher- order educational outputs of criticalthinking and problem-solving abilities. This synergy produced many "Aha!" moments, whereby suddenly an abstract concept is finally grasped. Needless to say these moments were very satisfying for both learners and instructors.

Disadvantages of the Combined Program

The major disadvantage ofthe combined (Cisco Networking Academy Program plus the university's) program was the additional resources requirements. Lab facilities are essential, including room allocations, time-tabling for the different courses and streams, hardware, software and Internet connections. Additional staff was also needed to teach and supervise the lab sessions. It is not unusual for a typical class (three lecture hours per week) to require more than six one-hour lab sessions per week. This additional load cannot simply be added to the teaching workload ofthe course lecturer. Additionally, extra course coordination tasks were necessary; for example, the Cisco assessment system needs an administrator/user to add students to the system, activate chapter tests and exams, print certificates, etc.

Students' Evaluations

The Centre for Professional Development at the University of Auckland uses the Students' Evaluation of Educational Quality, or SEEQ, which is a well-tested instrument that generates a profile of teaching performance. It provides comprehensive feedback from students to support improvement related to each ofa number of factors, and it has been shown to improve the quality of teaching when feedback is combined with consultation.

Students were asked to respond to a number of questions using a rating scale. A fivepoint Likert scale was used from strongly agree to strongly disagree, with a neutral response category as well. For enhanced face validity, the numbers are converted as follows: I =0, 2=2.5, 3=5,4=7.5, and 5= 10. This gives a "mark out of 10." The SEEQ collects student perceptions of an individual lecturer's performance on 35 items across nine scales, data concerning difficulty and pace of the course, and qualitative data for feedback to the lecturer. Additionally there are two questions about overall ratings of the course and of the lecturer.

Tables 1 and 2 show a comparison of SEEQ results between the data communication courses. The six scales selected are course-related. The Group Interaction scale was not measured in 2001 for the Data Communications course and is therefore not shown in the first table. Lecturer-specific scales have been eliminated from this comparison. The 2000 offerings did not include the Cisco curriculum as the practical component of the courses.

All categories show improvements for 2001 and all categories are now located above faculty averages for the same year. Additional course feedback was also obtained by using the Course Feedback questionnaires included in the Cisco Networking Academy Program.

Some categories were not covered in the SEEQ instrument and are of special interest to this case study. Those results (converted to a 10-point scale to facilitate comparisons) for 2001 are shown in Tables 3 and 4.

CURRENT CHALLENGES FACING THE ORGANIZATION

The list of advantages for the delivery of a data communications course that contains the prevailing academic rigour of similar undergraduate courses delivered in the department, along with an emphasis of the acquirement of vocational hands-on skills that the Cisco Networking Academy Program desires, was sufficient to ensure the continuation of the program in its new form. It does however present the university with a number of challenges.

Implementation Issues

A set of challenges to the organization exists surrounding the centralized management of computing resources within the university. This function is provided by ITSS, which has been mentioned earlier and is a division of the university's central administration body, the Registry. Part of the Cisco Networking Academy Program requires students to become familiar with the operating system to the extent that they can configure a workstation for the proper settings in order to function on a network. This requires access and privileges that are not typically granted to either undergraduate or postgraduate students. A second problem relates to the requirement for the laboratories of approved Cisco training academies to provide a continuous and direct Internet connection. Students generally access the Internet as a controlled resource, whereupon they must pay funds into an account and the funds are deducted based on data volume accessed from the Internet. As the decision was made to allow all workstations in the lab unrestricted access to the Internet, it was necessary to manage access and usage of the lab. A final problem occurs based on the nature of some ofthe network equipment used in the Cisco Networking Academy Program labs. Specifically many of the labs from the second data communications course present tasks and activities that are derived from a simulated wide-area-network topology and this is facilitated through the interconnection of a number of routers. ITSS was clear in specifying that at no time could data from this network topology be allowed entry back onto the university network. This presents the problem of having a single lab that at times requires unrestricted access to the Internet through the university backbone and at other times needs to be isolated completely from the university backbone.

Another challenge is provided by parallel assessment information systems that result from the integration ofthe Cisco Networking Academy Program. Enrolment and assessment of university students are through a computerised facility with different levels of access for staff and students. Students can view the results of their assessment components as the course progresses. Enrolment and assessment of the Networking Academy Program are through the worldwide Cisco Network Academy Management System (CNAMS). Students see the immediate results from the standardized multi-choice testing system of the Cisco Networking Academy Program. As the Networking Academy Program contributes only 30% of the assessment to the course, it is possible for students to pass the Networking Academy Program and yet fail the total assessment requirement for the undergraduate data communications course. If a student fails a course, they might choose to sit it again in a subsequent semester. When the student resits the course, they are expected to complete the course as if it was their first attempt, and they are expected to repeat the assessment components as they are specified. A solution was required to address the fact that CNAMS does not allow a successful student to repeat stages.

An additional implementation issue deals with the way the Networking Academy Program in its original form becomes progressively more skills based. It is typical within the university to maintain a structure of three lecture hours and one tutorial hour per week per course. The problem of increased practical content delivery in the form of extra labs is representative of providing flexible components and units of content delivery. Examples of components include lectures, tutorials, laboratories and exams, and the unit for these is represented as time, which is often constrained to work with one-hour blocks.

Educational Issues

Innovative approaches are required to balance the teaching and learning goals of the respective organizations. For the university (University of Auckland, 2002), selected strategies of teaching and learning (from the complete list) include:

* "providing a student-focussed teaching and learning environment which encourages academic excellence, enjoyment of learning, critical reasoning and inquiry," and

* "retaining a core commitment to research-based teaching and enhancing scholarship through clearly linking research, professional practice and teaching. "

For the Networking Academy Program (CiscoNetworking Academy Program, 1998),the teaching and learning goals are stated as follows:

To train knowledgeable students who can achieve the entry-level CCNA certification (which requires passing a multiple-choice exam) AND to produce empowered students who can design, install, and maintain networks typical of schools.

While it is not a direct intention to attempt to reengineer traditional tertiary education (Berge, 2000), the two goals combine to represent an example of a degree/certification competency-based alternate model (Hanna, 1998) to traditional tertiary education. At issue is the need to ensure that the philosophical level of education that is provided is one of "transforming" students into autonomously capable professionals rather than teaching students to "conform" to employer direction (Bentley, Lowry, & Sandy, 1999).

A further set of challenges occurs when dealing with the treatment of assessment. For the Cisco Networking Academy Program, given its dual teaching and learning goals, the assessment goals (Cisco Networking Academy Program, 1998) are articulated as:

Dual assessment philosophy-a psychometrically-validated standardized multiple-choice testing system, and a spectrum of skills-based, lab-based, hands-on, troubleshooting, "authentic, " journal-and-portfolio-based assessments.

A decision was therefore required as to the contribution that skills exams make to a student's final grade. This is complicated by the fact that grading of skills exams within the traditional Cisco Networking Academy Program is conventionally set as either a pass or fail. An example is the successful construction of a CAT-5 data cable. In this environment, students must pass the skills exam as a prerequisite to completion of that stage ofthe program. Whatever the contribution that skills exams have in an undergraduate course, it is unlikely that it is significant. The current breakdown of assessment for both data communications courses is 50% for the external final exam, 20% for an internal midsemester course, and 30% that can be allocated to Cisco Networking Academy Program assessment components. The issue is that the skills can be perceived by students as an integral pathway to the attainment of employee-specific technical skills, and a balance is required between student perceptions of what employers want and what employers say they want in new graduates, which is often the ability of higher-order thinking. (Turner & Lowry, 1999)

It is difficult to find the proper balance between the introduction of general concepts and the teaching of more pragmatic skills that many students feel they need. This fact has been recognised for IT education (Banks, 2001; Bently et al., 1999; Turner& Lowry, 1999) and for tertiary students regardless of their discipline (Beyrouty, 2000; Shulman, 1997). It is equally challenging to pitch courses at a level that will keep students interested (Fallows & Ahmet, 1999). This paper presents a case where the combination of theoretical learning, lab experimentation, and group mini-projects (challenges) with traditional study techniques and testing was used with the goal of achieving a deeper level of understanding and learning.

References

REFERENCES

References

Alessi, S. M. & Trollip, S. R. (1991). Computer-BasedInstruction: Methods andDevelopment. Englewood Cliffs, NJ: Prentice Hall.

Bachelor of Commerce-The Undergraduate Handbook. (2002). University of Auckland Business School, Auckland, New Zealand.

References

Banks, D. (2001). Reflections on interpretivist teaching with positivist students. InA. Harriger (Ed.), Proceedings of the Informing Science 2001 Conference, Challenges to Informing Clients: A Transdisciplinary Approach (June 19-22, pp. 80-87) Krakow, Poland.

Bentley, J. F., Lowry, G. R., & Sandy, G. A. (1999). Towards the compleat information systems graduate: A problem based learning approach. In Proceedings of the I0th Australasian Conference on Information Systems (pp. 65-75).

Berge, Z. L. (2000). Why not reengineer traditional higher education. In L. A. Petrides (Ed.), Case Studies on Information Technology in Higher Education: Implications for Policy and Practice (pp. 209-216). Hershey, PA: Idea Group.

Beyrouty, C. (2000). Retrieved December 7,1999, from http://www.uark.edu/misc/tfscinfo/ TFSC.html.

References

Bloom, B. S. (ed.)(1956). Taxonomy of Educational Objectives: The Classification of Educational Goals: Handbook I, Cognitive Domain. New York: Longmans, Green.

Cisco Networking Academy Program. (1998). Assessment Pains. Retrieved January 15,2002, from http://cisco.netacad.net/cnacs/prot-doc/columns/otl/981108.html.

Cisco Systems. (2000). Training and Certifications. Retrieved February 16,2000, from http:/ /www.cisco.com/training/.

Cisco Systems. (2002). Cisco Networking Academy Program. Retrieved May 8,2002, from http://www.cisco.com/asiapac/academy/program.html.

Fallows, S. & Ahmet, K. (1999). Inspiring students: Case Studies in Motivating the Learner. London: Kogan Page.

Hanna, D. E. (1998). Higher education in an era of digital competition: Emerging organizational models. Journal of Asynchronous Learning Networks, 2(1), 66-95.

Shulman, L. (1997). Professing the liberal arts. In R. Orrill (Ed.), Education and Democracy: Reimagining Liberal Learning in America. College Board.

Slattery, K. (ed.)(2002). The University of Auckland 2002 Calendar. University of Auckland. Turner, R. & Lowry, G. (1999). The compleat business information systems graduate: What students think employers want and what employers say they want in new graduates. In Proceedings Pan-Pacific Conference XVI (pp. 272-274). Fiji: Pan-Pacific Business Association.

University of Auckland. (2002). The University of Auckland-Mission, Goals and Strategies. Retrieved January 15,2002, from http://www.auckland.ac.nz/docs/visitors/Mission.doc.

AuthorAffiliation

Jairo Gutierrez

University of Auckland, New Zealand

AuthorAffiliation

Koro Tawa

University of Auckland, New Zealand

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Jairo Gutierrez (j.gutierrez@auckland.ac.nz) is a senior lecturer in Information Systems at the University of Auckland, New Zealand. Previously he worked as an R&D manager, systems integration consultant, and information systems manager. He also conducted seminars on LAN/WAN technologies. He teaches data communications and computer networking. His current research topics are in network management systems, programmable networks, and high-speed computer networking. He received his Systems and Computer Engineering degree from The University of The Andes (Colombia, 1983), a master's degree in Computer Sciencefrom Texas A&M University (1985), and PhD (1997) in Information Systems from The University of Auckland (New Zealand).

AuthorAffiliation

Koro Tawa (k.tawa@auckland.ac.nz) is a lecturer in Information Systems at the University of Auckland, New Zealand He has worked as a consultant for a number of organisations in the area of Internet communications, and enterprise communications software. He teaches data communications and his research interests in data communications, distributed objects and digital commerce technologies. He received his Bachelor of Commerce degree in Information Systems from the University of Auckland (New Zealand) in 1999.

Subject: Studies; Communications networks; Educational materials; Colleges & universities

Classification: 9130: Experimental/theoretical; 8306: Schools and educational services; 5250: Telecommunications systems & Internet communications

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 290-301

Number of pages: 12

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references tables

ProQuest document ID: 198739666

Document URL: http://search.proquest.com/docview/198739666?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 85 of 100

ERP implementation in state government

Author: Watson, Ed; Vaught, Sylvia; Gutierrez, Dan; Rinks, Dan

ProQuest document link

Abstract:

This case study examines some of the benefits associated with the implementation of integrated systems in state government. Specifically, the case describes how the public sector has embraced enterprise resource planning (ERP) as the business standard for enterprise computing and how these same technologies can benefit public organizations. Private-sector organizations embraced this technology for varying reasons. This case looks at the challenges and opportunities faced by state government's ERP implementation. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

In the early 1990s, enterprise resource planning (ERP) emerged as the business standard for enterprise computing. The concepts associated with ERP, i.e., integration, standardization and process-centering, are indeed powerful and profound. Private sector organizations embraced this technology for varying reasons. ERP success or failure is determined in large part by how able and willing an organization is to undertake a radical business transformation process. At the dawn of the new century, ERP concepts are beginning to pervade public sector organizations, including state government. As with the private sector, each implementation brings with it unique challenges and opportunities. This case study takes a look at some of the exciting issues associated with the implementation of integrated systems in state government.

BACKGROUND

National Trends in Government

Federal, state and local governments, public authorities, and educational and nonprofit organizations in the United States are operating in a demanding and uniquely challenging environment. They must respond to an ever-growing need for social services and simultaneously manage scarce human and financial resources. In the public sector, quality and efficiency depend largely on the competence and productivity of employees. Similar to the private sector, the public sector must learn to continuously innovate in order to keep up with fluctuating market dynamics in an environment of accelerating change. An increasing shortage of public funds, which must finance both the growing demands of citizens and process improvement itself, is driving the public sector to evolve traditional organization structures and processes rapidly (Miranda, 1999; Rosen, 1993). The public sector's mandate is gradually being whittled down to its core competencies. Popular management techniques utilized to achieve a new, trim and agile form ofgovernment include privatization, outsourcing, and business process reengineering.

"Public authorities all over the world are undergoing extensive reorganizationa long overdue process. Inevitably this development is not being universally welcomed, critics maintaining that public authorities are by essence `completely different.' The specifically public nature of their mission supposedly justifies their patterns of behavior, which have ultimately proved appropriate to their function. This is why so many well-meant attempts at reform have come and gone. "Prof Heinrich Reinermann (SAPINFO focus, June 1997, p. 7, SAP AG, Walldorf Germany)

Bureaucracies that have expanded over the years in response to increasing demands have found it difficult to justify their traditional hierarchical organizational structures and units, their ineffective processes and activities, and their occasional irrational resource expenditure behavior. Politicians and administrators, frustrated by the lack of timely information, the high costs of running inefficient operations and their seeming loss of control, are themselves calling for new structures and processes. Meanwhile, public sector confidence in the ability of government officials to arrive at innovative solutions to these complex problems is at an all-time low.

Mandate for Change

The political system in state government is complex. A noteworthy characteristic ofthe American political system is the degree to which power is fragmented. Two basic principles, sharing ofpower and separation ofpower, working together but against one another, create this situation. The bottom line is a political reward system that encourages doing nothing. As observed by a change management expert from a large systems integration consulting firm, in "state government everyone has the power to veto a change or progress initiative, but no one is empowered to move change or progress initiatives forward." Hence, a government official who finds ways to reduce resources necessary to continue operating effectively is not necessarily rewarded, but instead he/she can expect the reallocation of funds to cover the overruns of less productive departments and a subsequent reduction to their department in the next budget cycle. This environment results in skepticism and resistance towards change initiatives (Rosen, 1993).

ERP systems hold high potential to streamline inefficient or disparate processes and enable integrated, real-time reporting needs. But state government officials have three major concerns related to ERP implementations: the expectations ofthese information systems are very high; technology diffusion in state government agencies is not uniform; and ERP implementation implies standardization and many state agencies have traditionally been relatively autonomous.

Louisiana state government is composed of the executive branch, judicial branch and legislative branch. The executive branch consists of 20 major state departments (see Exhibit 1) in addition to the governor's office and lieutenant governor's office. Within these departments, there are approximately 300 agencies. There are also numerous boards, commissions, ports, levees, authorities and quasi-state agencies. Clearly, the challenges of coordinating information sharing, consolidation and reporting between so many organizations are daunting. The information needs of all branches of government are rapidly increasing. Public entities and state legislators are no longer tolerant of slow and inaccurate response to information and reporting needs. New legislation at the state and federal levels places administrators under severe pressure to redefine business practice and to implement innovative technology solutions in order to better serve the public and the leadership in all branches of government.

In his 1996 inauguration speech, Louisiana Governor Michael Foster presented a vision for the year 2020 (www.state.la.us/doa/effect.pdf, "The FOSTER Effect: Institutionalizing Change, 1996-1999"). In this vision, he described the current state ofbusiness in Louisiana as "today's structure is burdened by many impediments to success including ... a bureaucratic organizational model that doesn't respond `at the speed ofbusiness. "' The government's action plan incorporated many radical elements.

SETTING THE STAGE

Integrated Systems in the State of Louisiana

The promise of enterprise system (ES) software is compelling-to enable an organization to integrate the data used throughout its entire organization. A central database is at the heart of an ES, drawing data from and feeding data into applications supporting the diverse functions of the organization. With a single database, the flow of information throughout the organization should be dramatically improved compared to fragmented legacy systems. But implementing an ES also allows, even forces, an organization to streamline its management structures. For some organizations, this means imposing more structure than existed before implementing an enterprise system; while for some organizations, the result is to break down existing hierarchical structures, freeing employees to be more flexible (Davenport, 1998).

The state encountered both successes and failures with early attempts at integrated systems. By the end of the 1980s, the state owned many disparate legacy systems located in various departments, each having little budget for support, maintenance, training, or documentation. Compounding the problem was the state's budgeting process and legislature's role in allocating funds. As Whit Kling, deputy undersecretary at the Division of Administration, explained, "We decided we should move forward on integrated financial planning systems in 1990. At the time, the steering committee determined that replacing the Human Resource systems should be our first objective, but legislature was not able to allocate the funds required to make this happen. We went back to the board in an attempt to promote a more comprehensive approach and we returned with a proposal for a comprehensive financial package (including, for example, general ledger, account payables and receivables, purchasing, and contracts). This was approved by state legislatures, but at funding levels lower than originally proposed."

In 1991, the state began the formal process to replace its existing legacy systems. As a result oftheir planning process, the state embarked on the journey to develop and implement the Integrated Statewide Information Systems (ISIS). ISIS represents a comprehensive financial information system that meets the common accounting, management and information needs of all departments and branches of state government, including the central fiscal control agencies. Deputy Undersecretary Kling added, "As was envisioned in the 1970s, ISIS will substantially expand the amount, timeliness and credibility of financial information available to all end users."

The Integrated Statewide Information System (ISIS) is composed of multifunctional applications; it is the umbrella under which the applications are maintained. The ISIS umbrella consists of an advanced government purchasing system, advantage financial system, contract financial management system, budget development system, travel management system, and human resources and payroll processing systems.

The state elected to implement ISIS in seven phases, each phase representing a logical grouping of work to be accomplished. As of the writing of this case study, the first three phases have been completed and completion of Phase IV, Human Resources and Payroll, is near.

Phase I: AGPS (purchasing) and CFMS (contract management) interacting with the state's existing system (FACS)

Phase II: GFS implementation including Consumable Inventory Management, AGPS and CFMS converted to interact with GFS

Phase III: Budget Development (BDS), Executive Information System (EIS), Decision Support System (DSS), and Financial History

Phase IV: Human Resources and Payroll

Phase V: Advanced Receivables Management

Phase VI: Debt Management and Investment Management

Phase VII: Moveable Property Inventory

Surviving the first three phases required tremendous change in the organization. Previously, for instance, there was no interface between purchasing, contracts, payroll and the financial system. With ISIS, people from different parts of the organization were forced to talk to each other and to understand each other's business. In general, this was not a very popular concept.

The state of Louisiana purchased the SAP R/3 System Human Resources suite of modules including Employee Self-Service and the Accounts Payable module for payroll payables. The ISIS HR System was targeted to replace four central legacy systems: personnel (CS02), position-control (AM45), time entry (UPS) and the payroll (UPPY). The benefits anticipated from the new system included:

* Standardization of Best Business Processes and Data Integration

* Improve Data Access

* Improve Real-Time Data and Business Analysis

As stated in the ISIS HR Project Vision, "Louisiana has chosen to implement a cuttingedge human resources system that would improve the way government agencies and departments do business. This technology will allow State Government to transform its current payroll, personnel and position management systems into a single, integrated system that will propel the employee administration process into the future" (www.state.la.us/osis/ hr/index.htm).

The state elected to split ISIS HR (Phase IV) into two major parts. Part I included HR organizational management and personnel administration. Part 2 included HR time management, payroll payables, compensation management, benefits management, and employee self-service.

CASE DESCRIPTION

ISIS HR Project Scope and Management

The new ISIS HR system is operated, managed and centrally hosted on RS-6000 servers at the Division of Administration (DOA) in Baton Rouge. Exhibit 2 illustrates the organizational structure for the DOA. The users of the system reside in approximately 764 different agency-location sites across the state. It is estimated that these 764 distinct agency-location sites are physically located in approximately 184 different building facilities throughout the state. While the scope of the project covers 100,000 classified and unclassified employees/ positions for personnel purposes, of greatest concern are the approximately 55,000 within the executive branch for whom payroll functions will be maintained.

The state, through a competitive request for proposal process (RFP), selected Nichols Research as their implementation partner. Nichols Research had just acquired the smaller firm Nichols-Holland, and it was the Nichols-Holland staff that was proposed. Also, as part of the Nichols Research proposal, a change management firm, Holland & Davis, was brought in as a subcontractor.

Together, the state's implementation team and their implementation partner jointly decided to utilize the ASAP implementation methodology available through SAP. This methodology offers a five-phase structured approach (project preparation, business blueprint, realization, final preparation, and go live and support) to SAP R/3 implementation. This methodology, for instance, led to the ISIS project team framework illustrated in Exhibit 3. The functional team consisted of roughly 15 state subject matter experts (SMEs) from each agency including the Division ofAdministration, 14 CSC systems integration consultants, 2 Holland & Davis change management specialists, and a team of training experts. The technical team consists of six state employees and four CSC system consultants.

Project management and program management are both critical components of success for an implementation and they are important to distinguish. Project management involves the day-to-day management of the project work plan and project resources to complete the project deliverables and successfully reach the project milestones. This was a particularly challenging task as, characteristic of state government, this project was quite large, touching all agencies and all employees. Program management, on the other hand, addresses different issues. First, program management is concerned with making sure that the project is set up for success: gaining executive sponsorship and selecting the right team members, for instance. Second, program management involves managing the external aspects and factors that are not within the scope of the project, but that can nonetheless affect the outcome of the project. The ISIS HR project organization included: Dr. Allen Doescher, assistant commissioner ofthe DOA (a breakdown ofthe DOA offices is provided in Exhibit 5); Mr. Whit Kling, deputy undersecretary ofthe DOA; and Anne Soileau, deputy director of Civil Services (the organizational structure for the Civil Services Department is illustrated in Exhibit 4).

Migrating from a Legacy System

Each of the existing legacy systems (AM45, CS02, UPS, and UPPY) were running on different platforms with different databases. This presented a conversion nightmare. The ISIS HR project utilized a five-system landscape, with development (DEV), test (QAS), training (TRN), technical sandbox (TEK) and production (PRD) systems. The five-system landscape is maintained on an IBM System 390 mainframe. The S390 is divided into six LPARs, ofwhich three will be used for the R/3 systems. One will be used for DEV, QAS and TRN, one for PRD, and one for TEK to test upgrades, hot fixes, and patches to the operating systems or the database. (An LPAR refers to a logical partition of a mainframe processor. That is, one mainframe can be sliced into different processors and can run different systems on these different partitions.) There area total ofeight RS/6000 application servers running AIX 4.2.3. Five RS/6000s are used for the PRD environment, and one each for DEV, QAS and TRN.

CURRENT CHALLENGES FACING THE ORGANIZATION

The challenges facing this organization, as with most organizations implementing ERP, are tremendous. A few of the issues that presented key challenges for the project team are outlined below.

Taking Ownership of Problems

At about the same time that the functional project team completed the business blueprint phase (i.e., Phase II ofthe ASAP implementation methodology), the technical team was accepting shipment of equipment and software required as part of the technology infrastructure that would drive the ERP system. Shortly after the components were assembled and the switch turned on, the issue of problem "ownership" surfaced. With ERP systems you may have many folks involved to ensure the system is running at top performance: hardware vendors (e.g., Compaq, IBM, HP), operating system vendors (e.g., Red Hat, Microsoft, IBM, HP), database vendors (e.g., Microsoft, Oracle, IBM), database administrators focused on optimizing database performance, and application specialists on the user side who focus on ease-of-use and response time issues. The state was dealing with IBM as the hardware, operating system and database vendor, SAP as the application vendor, state employees as the database specialists (IBM db2), and the implementation consultants as the application experts. Still, when the project team became aware ofa major performance issue (e.g., 20 hours required to run payroll, in contrast to the four-hour run time required by the legacy payroll system), it was not necessarily clear as to who "owned" the problem: Is it the hardware vendor, the operating system vendor, the database vendor, the application vendor, or the project team experts who are responsible for tuning the system?

Instituting change in any organization is difficult. Change in state government is particularly challenging since there is no single point of authority (e.g., CEO equivalent). On this implementation, the commissioner ofthe Department ofAdministration and the director of Civil Services serve as executive sponsors. As indicated in Exhibit 1, not all departments are under the direct control of the governor, so it is difficult to enforce implementation decisions across these departments. The director of Civil Services, for instance, does not report to the governor but instead to the Civil Services Commission. The Civil Services Commission is appointed by an independent body; i.e., a seven-member body that has final authority over the classified workforce. Six of the members are appointed by the governor; the seventh member is an employee representative elected by fellow state employees. Each member serves a six year term. When choosing an appointed member, the governor must select from a list ofthree people nominated by the president ofone of the state's major private universities (e.g., Zavier, Loyola, Tulane, Louisiana College, Centenary and Dillard). The net result was the existence of various, often inconsistent, human resource processes across the different departments and agencies in the state.

Prior to the SAP implementation, each department and agency had control over their own internal processes. For example, an agency could have had many levels of testing and many levels of approval before someone was hired (i.e., a hire action). Others, like the Department of Corrections, may have had fewer levels. Someone could have actually started their job before all the formal approvals were in the system. The person who started could have been entered in the legacy system (Uniform Payroll System), but they might not have been immediately in the personnel system until all approvals were made. There was no central control over these processes at the agencies, and this led to much confusion and excessive paperwork.

Lack of Technology Standards-Agency Certification

It may be difficult to truly appreciate the role ofthe Chief Information Office (CIO) unless you have experienced a technology environment without one. The state's ERP implementation started during an era when ERP technology and Internet awareness was low. The concept of running a standard ERP package statewide introduced a big problem: how to ensure that each agency and each workstation was capable of simply running the ERP application from their desktops? The answer was simple. Every agency, every workstation, and the network connecting them to the system would need to be assessed, upgraded if necessary, and eventually certified.

The purpose of the network assessment is to assess the current network and computer infrastructure of Louisiana state government (in the context of ISIS HR project requirements). The goals of this network assessment are:

1. To establish a documented baseline of the existing network infrastructure that currently supports the designated ISIS HR users.

2. To determine the minimum recommended network enhancements required for the successful operation of the new ISIS HR system at each of the facilities.

3. To recommend a plan of action to ensure optimum near and long-term network access to the ISIS HR applications.

This project focused on assessing the current network system architecture, technologies and capabilities, defining and evaluating needs, and analyzing current and expected traffic. Upon completion of the data collection, assessment, and analysis work, recommendations were included in the final report for improving the overall network. Included with this is a summary of the current network architecture, existing workstation configurations, SAP network requirements, and an overview of any applicable new technology that would address the state of Louisiana requirements.

The distribution of the graphical user interface (GUI) to each workstation was unnecessarily burdensome. Compact disks had to be sent to each agency, with detailed installation instructions and an adequately staffed help desk to deal with problems. Alternatively, if the state could enforce the utilization oftheir statewide network backbone (LaNET), then the GUI upgrade process (involving each workstation) could be simply automated through LaNET. A more attractive alternative, one becoming increasingly popular, is to utilize a Web-based front end, thus requiring no software installation on the client side.

FRICE-Forms, Reports, Interfaces, Conversions, and Enhancements

With every ERP implementation one must determine how many resources and how much effort will be required to develop all of the necessary (f)orms, (r)eports, (i)nterfaces, (c)onversions, and (e)nhancements (FRICE). A form is a collection of fields from one or more Infotypes that are displayed on the screen either together or on consecutive views to solicit input from a user. A report is the output of the database query. Reports can either be one of the hundreds included in SAP or can be custom designed to meet the needs of the client. An interface is a software program, usually developed from scratch or modified from an existing program, that can translate data from one system into a format that can be recognized by another system (SAP R/3) and back again. Conversions are also software programs, either custom written or modified, that are used to transport large amounts of data from the legacy systems) into the SAP system. Enhancements to the core (SAP R/3) code provide advanced functionality and must be developed in SAP's proprietary ABAP coding language. The biggest issues related to the state's implementation involved reports, interfaces and conversions.

Reports: The state legacy system had over 400 payroll, benefits, and civil service reports. These were identified for analysis during the realization phase to determine priority and necessity of conversion. SAP delivers much of the reporting functionality required, so many of the current state reports were replaced by standard reports. Required reports not replaceable by SAP standard delivered reports were prioritized and scheduled for custom programming.

Interfaces: Interface requirements include such items as: Bank One Payroll Interface, Department of Public Safety Time Interface, FI/HR to AFS Interface, Great Western Life of CO-Deferred Compensation Interface, Group Benefits Interface, LASERS Interface, LSU Medical Interface, Object Update from AFS, and Savings Bond Purchases Interface.

The Savings Bond Purchases Interface, for instance, is used to pass payroll savings bond contributions to the savings bond purchasing TPA. The state requested that functionality be introduced to support the purchase of the new series I savings bonds.

Conversions: "Data conversion problems require a lot of asking ... instead of telling. ... We are at the mercy of the agencies to provide us with accurate and complete data. If they fix it ... great ... if not, a bunch of folks may not get paid ... but everyone will point to the implementation team and the software vendor to assign blame."

This problem is complicated by the fact that the legacy data comes from three different systems. Also, the R/3 system requires certain data fields to be filled with meaningful data. In one case, "positions" were being forced, people were being loaded into these positions, and these people would therefore inherit incorrect information from the positions that were incorrectly assigned. Forcing questionable data into the system and bypassing standard integrity checks would result in an erroneous database. Garbage in, garbage out.

In summary, the data in the legacy systems was in bad shape. The state did not proactively cleanse the data. "We started the data conversion too late in the process to realize how poor the data in the legacy system was and how it would affect the new ISIS HR system. We have gone live and data problems are still the number one issue." The legacy system was not an effective information process mechanism. It could not, for instance, identify those employees that were actually working two jobs (dual employment occurred but is illegal in Louisiana). "With an R/3 system all the information is there in front ofyou. ... You can easily detect dual employment ... on the payroll side. Before, you could not run reports and get information that easily ... but with R/3, everything is in front of you!"

Training Dilemma

Early in the blueprinting phase, one of the project team members stated, "I have a major concern that there is not adequate time to allow the agencies to learn how to use the system properly and especially to understand the integration and the new relationships that the user must learn in order to enter and manage information correctly." The technical director added, "Imagine the sheer logistics of training 3,200 people on a system that is changing daily. You get the training done and then they send a software upgrade. We must put addendums in training manuals that are only a couple days off the press. We only have six classrooms to boot. Our schedule is packed, and we had an instructor call in sick for the week. We had to push training into the post-go-live period. And we are finding folks that were trained in October, then retire in November, knowing dam well at the time of their training that they would be retiring."

From a content perspective, the training team put together an outstanding package. "The training is wonderful. The reviews are excellent. The on-line material is superb. But people have to use it. Building it is one thing. Getting them to use it is an entirely different game." There is also the issue of training delivery. "It is like when we were kids and we had to memorize the alphabet table. We learned by rote memory without really understanding it. The folks in training have to learn the mechanics. Then, later, when they are in their workplace, they will gain the understanding behind why the system does what it does in the manner that it does."

Performance

System performance can be looked at as something as basic as How long does it take to run payroll? During the early stages of testing, the answer to this question was 37 hours. Totally unacceptable. The legacy payroll system only took 4 hours. It is precisely at these times that those high-priced technical consultants "with an attitude" begin to earn their pay. How does one approach this problem? Performance tuning is always an interactive process. The journey begins when all the components are connected and all the performance parameters are set to the default. "We start by trying to tune the application side ... the sequel statements, the buffering allocations, and things of those nature. ... Then we continue to the database level and look at buffer mechanisms and table utilization. We may, for instance, move heavily utilized tables to their own disks. All of this usually accounts for 80% of the performance improvements. ... Then you look at everything else. ... The operating system itself does not provide much room for improvement... once you set it up it is usually ready to go. ... The biggest magic bullet we have had so far was a misconfigured parameter at the DB2 level that significantly affected performance." In summary, the following were found to be key performance improvement fixes:

1. Poorly written sequel statements attributed to inexperienced ABAP programmers. Some SAP code is just not as efficient as it could be. Some code was designed to bring entire tables into memory instead of just the records that are needed.

2. Poor indexing on database tables. For instance, we found sequel statements that would search entire tables sequentially instead of by indexing. To a smaller extent, you may expect sequel statements to execute a little differently on different platforms. There is sometimes room for improvements by fine-tuning these statements.

3. Finally, the database (i.e., DB2) parameters related to buffering the locking mechanism required tuning.

It is arguably human nature to "choose the path of least resistance." This mind-set is common in traditional work environments and it was also apparent on the ISIS HR implementation. "Instead of looking for ways to make their jobs easier, people would just do what they were told and that was it. People are there to pickup their paycheck." This is perceived often as being more prevalent in the public sector but perhaps this is because these organizations are very large. The ERP implementation forces major change issues on project team members who where previously not empowered to dictate and enforce these changes. Failure of project team members to make decisions they were empowered to make generally result in undesirable circumstances.

In a specific situation, unacceptable system performance was driving the technical staff crazy. To solve this problem in a system that is as integrated as SAP requires close collaboration between the database administrators and the application developers. "It is like the old adage, the right hand knowing what the left hand is doing." Early on in the project these teams did much communication using e-mail. But it just was not enough. "There is no replacement for meeting in person. When we sit together and talk through the problems we tend to come up with fairly elegant solutions. We also tend to build a special trusting relationship. We won't bend over backwards for each other unless we trust each other and unless we agree that we are in this together and we have joint ownership of the problem."

The management and collaboration of the diverse groups involved (i.e., state project team members; state change agents; implementation consultants; change management consultants; training and documentation consultants; application software vendor SAP; hardware, operating system, and database vendor IBM; and different functional and technical project team members) were perhaps the most difficult aspects of this implementation.

References

REFERENCES

References

Davenport, T. H. (1998, July/August). Putting the enterprise into the enterprise system. Harvard Business Review, 121-131.

References

Miranda, R. (1999, August). The rise of ERP technology in the public sector. Government Finance Review, 9-17.

Rosen, E. D. (1993).Improving public sector productivity: Concepts and practices. California: Sage.

AuthorAffiliation

Ed Watson

Louisiana State University, USA

AuthorAffiliation

Sylvia Vaught

State of Louisiana, USA

AuthorAffiliation

Dan Gutierrez

Computer Sciences Corporation, USA

AuthorAffiliation

Dan Rinks

Louisiana State University, USA

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Ed Watson is E.J. Ourso professor ofBusiness Analysis in the department of information Systems and Decision Sciences at Louisiana State University, USA. He serves also as director of the Enterprise Systems and Process Performance Program at LSU. Through 2002, Ed reported to SAP America as Manager of the University Alliance Program for the US. At this capacity he has been involved with developing plans for integrating SAP ERP and E-Business solutions into Business and Engineering programs, as well as pursuing research and outreach opportunities for the academic membership. Dr. Watson's doctoral and master's degrees are in Industrial Engineering from Penn State, and his BS in Industrial Engineering and Operations Research is from Syracuse University. He has published articles in various academic journals such as Decision Sciences, Decision Support Systems, IEEE on Computers, International Journal of Production Research, and Interfaces. He had been involved with AIS, DSI, INFORMS, and POMS.

AuthorAffiliation

Sylvia Vaught graduated from Louisiana State University with a BS in Physics. She began working for Louisiana State Government, USA, as a computer programmer, and except for a three and one half year stint with Texas Instruments in Dallas, has been working in data processing for the same agency, the Office ofInformation Services (OIS), Division ofAdministration, for 17 years. Sylvia became director of OIS in 1982 and the state project director for the Integrated Statewide Information Systems (ISIS) project in January, 1994. As ISIS Project Director she was responsible for the State's overall implementation of all ISIS systems: AGPS (Purchasing), GFS/AFS (Financial); BDS Capital Outlay and Human Resources (SAP) in conjunction with the consultant business partners. In July 2001, she became director of the newly reorganized OIS and is responsible for all application services for the Division of Administration, including the Louisiana State Government enterprise applications.

AuthorAffiliation

Dan Gutierrez graduated from Louisiana State University in 1989 with a BS in Industrial Engineering. He began his career at Andersen Consulting working there for five years, the last two with the SAP Competency Group. In 1995, Dan left Andersen to work for DSM Copolymer as the Systems Development Manager responsible for implementing SAP R/3. In 1995 while at DSM, Dan helped to create Holland Technology Group, a new SAP Consulting firm. Dan then helped build Holland Technology Group into a 100-person consulting firm filling roles of project manager, business developer, solution architect and consulting director. In 1999, Nichols Research purchased Holland Technology Group to form Nichols Holland. Later in 1999, Nichols Research merged into CSC and Dan became a partner in the Global SAP practice focused on delivering large programs in the Chemical and Public Sector industries. In addition to the role of program manager for the State of Louisiana, USA, SAP HR/Payroll Implementation, Dan has played key roles in SAP implementations at the following clients: US Department of Energy - Strategic Petroleum Reserve, Uniroyal Chemical, US Postal Service. Currently, Dan is the deputy program

AuthorAffiliation

manager responsible for Solution Development on the Wholesale Logistics Modernization Program (WLMP) for the US Army (www. wimp. com).

AuthorAffiliation

Dan Rinks is a professor of Operations Management in the Information Systems and Decision Sciences Department at Louisiana State University, USA. He earned his PhD in Business Administration (Quantitative Management Science) at the University of Houston. Dr. Rinks is a member ofthe Institute for Operations Research and the Management Sciences (INFORMS), the Decision Sciences Institute (DSI), and the Production and Operations Management Society (POMS). His teaching/research areas include production planning and scheduling, supply chain management, project management, and operations strategy. His research has been published in Management Science, European Journal of Operational Research, Transportation Research, International Journal ofProduction Economics, Journal of Quality Technology, Journal of the Operational Research Society, as well as other journals.

Subject: Studies; Enterprise resource planning; Advantages; Systems integration; State government

Classification: 9130: Experimental/theoretical; 5240: Software & systems; 9550: Public sector

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 302-218

Number of pages: 17

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198721150

Document URL: http://search.proquest.com/docview/198721150?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 87 of 100

Globe telecom: Succeeding in the Philippine telecommunications economy

Author: LaBrie, Ryan C; Vinze, Ajay S

ProQuest document link

Abstract:

This case examines the role and implications of deregulation in the telecommunications sector on an IT-based services organization in the Philippines. This case study specifically examines the actions of Globe Telecom from just prior to the 1993 Philippine deregulation through the present. This case examines the steps taken by Globe that have allowed it to continue to succeed despite the competition against the Philippine Long Distance Telephone Company, which at one time, controlled over 90% of the telephone lines in the Philippines. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

This case examines the role and implications of deregulation in the telecommunications sector on an IT-based services organization in the Philippines. Reports from international lending institutions suggest that investments in the telecommunications sector typically produce up to a 30-fold impact on the economy. Predictions like these have caused several of the emerging economies throughout the world to deregulate their telecommunications infrastructure in an attempt to leverage this economic potential. This case study specifically examines the actions of Globe Telecom from just prior to the 1993 Philippine deregulation through the present. Globe has continued to succeed despite the competition against the Philippine Long Distance Telephone Company, which at one time controlled over 90% ofthe telephone lines in the Philippines. Globe has been able to do this through strategic partnerships, mergers, and acquisitions. Furthermore, Globe has developed into a leading wireless provider by its effective use of modern information technology.

SETTING THE STAGE

"Consider Fe Reyes. The resident of Quezon City, Manila's biggest residential district, waited nearly three decades for the nation's monopoly telephone service, Philippine Long Distance Telephone Co., to reach her doorstep. But last year, thanks to 1993's deregulation that allowed rival companies to start offering phone service, she gota new company to install a line injust three days."1

The telecommunications sector in the Philippines was deregulated in 1993. Prior to the deregulation, the government-sponsored Philippine Long Distance Telephone Company (PLDT) handled the infrastructure and services requirements related to telecommunications. For most practical purposes, PLDT was commonly viewed as an operational arm of the government's Department of Transportation and Communications. Since the deregulation of 1993, over 150 new telecommunications infrastructure providers have been formed. Five players have now emerged as the leading keepers of telecommunications for the Philippines. This change has had a significant impact for the Philippines and for the Southeast Asian region in general. This new environment raises a variety of economic and technological issues that organizations need to recognize as they operate in the Philippines. With its geographical compositions of over 7,100 islands, the Philippines provides some unique challenges for information technologies and telecommunications. This case examines the current status of investments in the Philippines telecommunications infrastructure and their implications. Using a single representative organization-Globe Telecom-financial, competitive, regulatory, and technology pressures and opportunities are examined in light of a recently deregulated telecommunications sector. Using Globe Telecom as a focus organization, this case includes a macro perspective and provides insights and information that illustrate the impacts from a national and regional (Southeast Asia) perspective.

The pervasive utilization of information technology throughout the telecommunications sector inherently makes it ideally suited to study. Furthermore, economically speaking, the international investment banking sector has suggested that investments in the telecommunications sector typically produce a 30-fold return on investment for a host nation's economy. At a macro level, telecommunications can be viewed as an indicator ofa country's development status. At an organizational level, telecommunications can be a source of competitive advantage (Clemons & McFarlan, 1986).

Understanding the Philippines

The Philippines unique geographical composition makes it an excellent case for a telecommunications study. Composed of over 7,100 islands, the Philippines is located in Southeast Asia offthe coasts of China, Vietnam, and Malaysia, between the South China Sea and the Philippine Sea (see Exhibit 1). The nation encompasses an area of approximately 300,000 sq. km., comparable to the size of Arizona. There are roughly 80 million inhabitants of the Philippines, and approximately 11 million of those are located in metro Manila. Quezon City, within metro Manila, is the seat ofthe country's capital, while Makati is metro Manila's financial district. The Philippines has two official languages: Filipino and English. In fact, the Philippines is the third largest English-speaking country in the world, maintaining a 95% literacy rate. The Philippines gained their independences from the United States in 1946. Since that time, they have slowly moved toward a democracy, finally ratifying their new Constitution on February 2, 1987.

The Philippines is a member of the United Nations and the Association of South East Asian Nations (ASEAN). ASEAN plays a key role in the region and is comprised of the following countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The functional goals of ASEAN is to accelerate the economic growth, social progress and cultural development in the region through joint endeavors in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian nations. They also aim to promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter. The ASEAN region has a population of approximately 500 million, a total area of 4.5 million square kilometers, a combined gross domestic product of US$737 billion, and a total trade of US$ 720 billion.2

In 1998, the Philippine economy-a mixture of agriculture, light industry, and supporting services - deteriorated as a result of spillover from the Asian financial crisis and poor weather conditions. Growth fell from 5% in 1997 to approximately -0.5% in 1998, but since has recovered to roughly 3% in 1999 and 3.6% in 2000. The government has promised to continue its economic reforms to help the Philippines match the pace of development in the newly industrialized countries of East Asia. This strategy includes improving infrastructure, overhauling the tax system to bolster government revenues, moving toward further deregulation and privatization ofthe economy, and increasing trade integration with the region.3 In 2000, the inflation rate was estimated to be 5%, the unemployment rate 10%, national debt US$52 billion, and GDP US$76.7 billion.

The monetary unit of the Philippines is the Philippine Peso. Over the past few years, the Philippine pesos per U.S. dollar has devaluated quite dramatically due in large part to the economic phenomenon known as the "Asian Flu." This economic downturn was widespread and lasted throughout much of the late 1990s. Figure 1 shows the Philippine Peso dropping approximately 50% in five years, from almost US$0.04 to just under US$0.02 in value. During the first two years of the new millennium, the Philippine Peso has stopped its decline and has stabilized against the US dollar.

The Philippine government has gone through a number of changes in the recent years. In January 2001, President Estrada was found unable to rule by the Philippine Supreme Court due to the large number of resignations in key cabinet positions. Vice President Gloria Macapagal-Arroyo assumed the presidency for the remainder of the term. The next presidential elections will be held May 2004. Prior to the Estrada presidency, other presidential reigns included Ferdinand Marcos (1965-1986), Corazon Aquinos (1986-1992), and Fidel Ramos (1992-1998).

History of Telecommunications in the Philippines

Until 1993, the Philippine telecommunications sector was completely dominated by a single, privately-owned company. Philippine Long Distance Telephone Company (PLDT) provided 95% of all telephone service in the Philippines. Their record of poor service and even worse investment left the nation with just 1. 1 phone lines per 100 residents, and a backlog of over 800,000 requests with as much as a five-year wait. Consider the following story reported in the Asian Wall Street Journal.

"Bella Tan had just given birth to her first-born son when she and her husband applied for a phone line. Her son is now 17 years old. A daughter, now 11, has been added to the family. The phone line still hasn't arrived."4 In 1990, investment in the Philippines telecommunications sector was approximately 1% of GDP-about one fourth of other Asian countries (World Bank, 2000).

In 1993, President Ramos signed two executive orders (Executive Order 59 and 109), in an attempt to spur competition in this sector. Executive Order 59 (see Exhibit 2) required PLDT to interoperate with other carriers, forcing them to share in the lucrative long distances market and to provide access to its subscribers. Executive Order 109 (see Exhibit 3) awarded local exchange licenses to other operators. In exchange for offering cellular or international gateways, the government also required the installation of landlines by those operators. For each license granted, a cellular company was required to build 400,000 landlines by 1998. Similarly, for each international gateway operator, 300,000 local lines were required to be added. The target of 4,000,000 new phone lines set under Executive Order 109 were met and even exceeded; with PLDT's contribution of over 1,250,000 lines, the total count of lines exceeded 5,250,000. Table 1 shows the number of lines committed and installed under the Basic Telephone program.

Table 2 shows the current status of telephone line distribution per region, including the actual number of lines installed and number of lines subscribed to. This table gives two teledensity numbers, one of capacity and one of subscription. While 9.05 is a substantial increase over the 1.1 teledensity previously provided by PLDT, and meets the goals the Philippine government set for the telecommunications sector for the year 2000, it is rather misleading in that a large number ofthose lines go unused. It is suspected that a large number ofthose lines run into business/office buildings and are not fully utilized, whereas those living in rural areas, and, in some cases, many who live in metro areas still go without. Investigating the actual subscription rates tells a whole different story. Subscribed teledensity shows that only four individuals out of every 100 have a telephone line, as compared to nearly 11 out of every 100 people for the rest of Asia and just over 17 per 100 people for the entire world's average.

A Tale of Two Regions

The telecommunications sector in the Philippines is really a tale of two regions, metro Manila and the rest of the Philippines. NCR is the National Capital Region, which includes metro Manila. Outside of NCR and Region IV, no other region even remotely nears the Philippine national teledensity average. With those two exceptions all other regions fall significantly below the national teledensity average.

Telecommunications is more than just "plain old telephone service" (POTS). Like any country, the Philippines telecommunications industry is a mixture of a number of different services, some of which have remained relatively constant over that past several years, and some that have grown rapidly. Table 3 breaks down the Philippine telecommunication industry per the governmental recognized categories.

BACKGROUND5

In 1993, Globe Telecom was one of the first two companies granted licenses under Executive Order 109. At this time, Globe began its long uphill crusade against the goliath Philippines Long Distance Telephone Company. Prior to 1993, Globe Telecom was an international data carrier allowing it to offer telephone and telegram services. Globe Telecom traces its roots back to the 1920s, descending directly from Dollaradio, a ship-to-shore radio and telegraph company later renamed Globe Wireless Limited (GWL). Globe is also heir to Philippine Press Wireless, Inc. (PREWI), founded to advocate independence in the Commonwealth era, and Clavecilla Radio System (CRS). A merger between GWL, PREWI, and Mackay Radio Telegraph established Globe-Mackay Cable and Radio Corporation (GMCR) in 1930. When GMCR sold 60% of its stocks to then Ayala and Co. in 1974, it had already been strengthened by this colorful history of partnerships. In the 1990s, GMCR and CRS merged to form GMCR, Inc., later renamed Globe Telecom, a leading telecommunications company offering domestic and international services.6

In 1993, Globe Telecom partnered Singapore Telecom International (SingTel). This partnership gave SingTel a 40% ownership in Globe Telecom (maximum allowed by Philippine law) and gave Globe Telecom the capital and expertise to grow in the burgeoning Philippine telecommunication environment.

In March 2001, Globe Telecom acquired Islacom as a wholly owned subsidiary. This acquisition brought many benefits to Globe Telecom including a new global partnerDeutsche Telekom, access to additional frequency spectrum, enlarged geographic landline access, and economies of scale cost savings capabilities. With this acquisition, the current capital structure of Globe Telecom is shown in Figure 2.

Where AC is the Ayala Corporation, STI is Singapore Telecommunication International, DT is Deutsche Telekom, and Public is the remaining shares available to public investors.

Globe is now a full-service telecommunications company offering cellular mobile telephone system (CMTS), fixed telephone and international communications services, International Private Leased (IPL) lines, Internet access, VSAT (Very Small Aperture Terminal) service, Inter-Exchange Carrier service, Frame Relay, Value-added Network Services (VANS) and other domestic data communications services.

Like any modern corporation, Globe Telecom is driven by a vision. Globe's vision draws upon its mission and value statements. It stresses their desire to be viewed as a solutions company that is best in its class. The full text of Globe Telecom's vision, mission and values statements can be found in the appendix (see Exhibit 4). Globe's mission statement supports their vision by suggesting what is important to them. Their goal is to improve the quality of life to the following identified key stakeholders: customers, shareholders, employees, community, and government. While many companies create vision and mission statements, few make them publicly available. Globe has made these principal statements as well as their core value statements available via their Internet Web site. Their value statements help to keep them focused on a few set of core competencies that include commitments to customers, employees, integrity, excellence, teamwork, society, and the environment.

The managing structure of Globe Telecom is congruent with any modern corporation. They are lead by aboard of directors and a balanced executive management team (see Exhibit 5). Globe's achievements in recent years have prompted the company, during its 2001 annual stockholders meeting, to request that the Board of Directors be increased from the present 11 to a total of 15. Growth in boards is typically due to successful growth of the company; as a company grows, diversifies, and enters new markets additional board member are usually brought on for their insights. More recently, in the December 27,2001-January 3,2002 issue of Far East Economic Review, Globe Telecom made its debut appearance in the top ten best businesses, landing at number six in both leadership and quality.

Globe's primary revenue generator is their wireless product division. Wireless sales made up 82% of its 2001 revenue, followed by their wireline division and their carrier service. Figure 3 shows the breakdown of Globe Telecom's revenues between its three major divisions.

In 1999, Globe Telecom quadrupled their wireless subscription base. In 2000, Globe continued rapid wireless growth and nearly tripled its numbers of subscribers to more than 2.5 million users. This rapid pace continued as Globe nearly doubled its wireless subscription in 2001. Globe Telecom's wireless subscription base for the previous six years is shown in Figure 4.

Figure 5 shows that, despite the Asian Flu, Globe Telecom has been able to double its revenue consistently for the past five years, largely due to its growth in its wireless offerings. This increase in revenue has led to a share value increase of 27% for fiscal year 2000, even as the Philippine Stock Exchange Index declined by 30%.

CASE DESCRIPTION

The evolving story of Globe Telecom within the context of the telecommunications sector of the Philippines needs be examined at multiple levels. At a macro level, the story of Globe Telecom is analogous to the biblical story of David versus Goliath. Compared to PLDT, Globe Telecom is a rather small firm; however, it has firmly established itself as the number two telecommunications firm in the Philippines. At an organizational level, Globe Telecom has improved its position through strategic partnerships, mergers, and acquisitions. Finally, at a micro level, Globe has continued to use advances in information technology to provide innovations such as 100% digital wireless offerings, text messaging, and a host of other valueadded offerings that you would come to expect from any modern telecommunications firm. Each of these levels is discussed in greater detail in the next section.

Deregulation Provides Opportunity for the Small Firm

In 1993, Globe Telecom was basically along distance provider. It was in the initial phases of developing a cellular business, but it had no subscribers. The Philippine Long Distance Telephone Company (PLDT) completely monopolized the wireline market, controlling over 90% of all telephone service in the Philippines. Globe Telecom understood that it could not complete in the telecommunications market head to head with PLDT if its strategy was to provide additional wireline telephone service for the Filipino people. It had to differentiate itself, and it did that by providing an all-digital network infrastructure, thus laying the foundation for high quality wireline, wireless cellular, and wireless text messaging offering for its customers. Fast forward to 2000, while PLDT still maintains an 80% hold on the wireline market Globe Telecom has a majority of the digital wireless offering, garnering a 48% market share.

Partnerships, Mergers, and Acquisitions

Being a relatively small firm, Globe Telecom needed to find regional and global partners in order to survive the telecommunications shakedown of the past decade. As noted previously, prior to 1993, PLDT was the dominant telecommunications firm in the Philippines. With the liberalization of the telecommunications sector in 1993 by President Ramos, a host of smaller firms, Globe Telecom included, each attempted to carve out their own piece of the telecommunications pie. The Philippines went from a single player to 11 additional players within the span of four, short years. As the telecommunications sector matures in the Philippines, consolidation is taking place, leading to just a handful of major players left competing. Most analysts now agree that Globe has firmly established itself as the number two telecommunications firm in the Philippines. It can be argued that this ranking is due in part to Globe's choices in strategic partnering. Very early on, the Ayala Corporation recognized that it needed a strong regional partner with expertise in world-leading telecommunications operations. Singapore Telecommunications International (SingTel) was the perfect partner to provide this leadership and established Globe as a serious contender against PLDT. Not to remain stagnate during the consolidation period beginning in the very late 1990s and the early part of 200s, Globe Telecom acquired Islacom in 2001; this acquisition not only brought increased market share within the Philippines, but added a global partner in Deutsche Telekom. This acquisition could not have been timelier in the respect that just one year earlier PLDT had acquired Smart Communications, the second leading wireless communications firm in the Philippines to add to its previous wireless subsidiary, Pilipino Telephone Company (PilTel).

Wireless: The Enabling Technology of the Philippines

The Philippines telecommunications industry is a classical example of an emerging economy that has taken advantage of what has been described as a "leapfrog effect" in technology diffusion. The leapfrog effect is defined as when an old technology is largely bypassed in favor ofa newer technology in a developing nation. Historically, it has been quite a challenge to lay landlines in the Philippines. Even after the liberalization of the telecommunications sector in 1993, landline subscription has only risen from 1.1% teledensity to 4% teledensity. Teledensity is defined as the number of subscribed phone lines per 100 inhabitants. While this is nearly a 400% increase in less than a decade, it still woefully trails the rest ofthe world's teledensity average of 16% and Europe's, Oceania's, and the America's teledensity averages of 35-40%. Figure 6 shows ASEAN national landline teledensity for the prior four years, as well as graphically displaying the Philippine landline teledensity against the ASEAN, Asian, and World landline teledensity averages.

Figure 6 shows that the Philippines clearly trails the ASEAN regional average. Furthermore, it shows that the Philippines has less than halfof the number of telephone lines as the rest of Asia and less than one fourth the average number of subscribed lines per inhabitant as the rest of the world.

From Lagging to Leading

However, examining the cellular teledensity numbers quite a different story unfolds; one in which the Philippines, as a nation, is a leader rather than a laggard. From 1999 to 2000, cellular growth went from approximately 2.9 million to 6.5 million or an increase of 3.6 million. This is compared to landline growth from approximately 2.9 million to 3.1 million for a total increase ofa mere 169,000. Figure 7 graphically depicts this rapid pace of cellular subscription growth rate in the Philippines.

This phenomenal growth has easily outpaced the other ASEAN nations, the rest of Asia, and nearly matches world as shown in Figure 8.

Another way to examine this data is to compare cellular subscribers to traditional landline subscribers as a percentage of usage (see Figure 9). Comparing landlines against cellular lines, it is shown that in 1999 cellular use was equal to landline use in the Philippines and by 2000 it had doubled landline use. Philippine cellular service increased from 41 % to 77% in four years (and at the time 41 % was an extremely high cellular to landline percentage). Figure 9 illustrates these comparisons.

Here it is interesting to note that as a percentage of total phone subscribers the Philippines lead all the regional and world averages. This demonstrates how the leapfrog effect has taken place in the telecommunications sector of the Philippines. All of this shows that Filipinos who choose to communicate have a greater opportunity with wireless options than with traditional landlines.

The Philippine Text Messaging Craze

Another phenomenon that is worthy of mentioning is the Philippines leads the world in text messaging usage. A recent Asian Wall Street Journal8 article reports that text messaging is in the neighborhood of 70 million messages a day as compared with an estimated 30 million messages a day in all of Europe. Other reports note that text messaging may be hitting 100 million messages a day in the Philippines. To illustrate the power of text messaging in the Philippines, the same article examines how the mobile text messaging network was utilized to mobilize hundreds of thousands of demonstrators to protest against former President Estrada. These protests eventually led to the ousting of Mr. Estrada in favor of the more telecommunications friendly Ms. Arroyo, the Philippines current president.

CURRENT CHALLENGES

The Philippines still struggles with getting landlines to many of its residents. This is a challenge not only for Globe Telecom, but also for the Philippine telecommunications sector as a whole. It is going to take additional work by all of the telecommunications firms and the Philippine government to address this problem adequately.

The Philippines are still in the midst of an economic slow down that hit all of Asia during the decade of the 1990s. This Asian Flu has devalued the Philippine Peso by over 50% in the course of five years. The unemployment rate still hovers around 10%, and the average income is only US$3,800 per year. This sort ofeconomic environment is challenging for any company to exist in, let alone succeed in. It is interesting to note that even the recent September 11, 2001, World Trade Center tragedy made it into Globe Telecoms third-quarter 2001 report as a negative economic effect.

Another serious challenge Globe Telecom is facing is that of customer retention. As in the United States and much of the rest of the world, the cellular telecommunications firms are providing strong incentives to switch from competitors. As Globe Telecom seeks to maintain, and even grow, in this particular market, it needs to seek out new and innovative ways of maintaining customer loyalty and continue to market aggressively for new subscribers, either as competition converts or first-time cellular users. A recent story noted a major blow to Globe's cellular subscriber base when a long time contract with the Philippine government was not renewed. The new contract was awarded to Smart Communications, which as you might have guessed, is a wholly owned subsidiary of PLDT.

Related to both the hard economic times and customer retention, Globe Telecom faces an equally tough challenge in maintaining a quality revenue stream. Pricing structures in this competitive market are leading to narrower margins. While providing free text messaging is a huge benefit to its customers and a direct pressure to its competitors, it is not conducive to providing value to the shareholders. Globe Telecom needs to continue finding appropriate ways to maintain and grow its revenue stream. This will require a combination of new valueadded product offerings as well as growing its subscription base.

Globe Telecom and other telecommunications companies within the Philippines need to continue various partnerships in building additional high quality, cost-effective networks across the country. They need to lessen their dependence on the PLDT network where they must share revenue. Seamless interconnection is necessary for subscribers from both sides; however, less reliance on PLDT will increase profits and enhance customer satisfaction.

CONCLUSIONS

"Development--social and economic--without telecommunications is not possible; but neither is telecommunications in a country without development. It will take more than afew telephone wires to break out of this vicious circle. " (Ure, 1995, p. 65)

While the Philippines have made significant progress since 1993, the country has a long way to go to be considered on par with the rest of the industrialized world with respects to telecommunications. The challenges faced in the Philippines are so large that no single telecommunications firm can solely alleviate them by themselves. It will take continuing commitments from the Philippine government, Philippine telecommunications companies like Globe Telecom, and a host of international partners to provide adequate telecommunications to the Philippine people.

Globe Telecom has demonstrated that an innovative firm can compete and survive in a industry that at one time was monopolistically dominated by a single player. Attempting to compete with PLDT directly in landlines would have caused almost certain failure for Globe. However, by focusing on a differentiated strategy offering long distance, landline, and wireless communications, Globe was able to compete successfully in several different areas of telecommunications. This diversity has lead Globe Telecom to become a leader in digital wireless communications in the Philippines.

Strong alliances with Singapore Telecommunications International, and more recently Deutsche Telekom, have allowed Globe to remain competitive and boost its recognition as a worldwide telecommunications company. With the strategic acquisition of Islacom, Globe was able to expand its holdings in the Philippines, acquiring additional bandwidth and subscribers, all while maintaining profitability.

It can be argued that Globe Telecom has been successful due in part to their aggressive use of information technology. While the telecommunications industry in general is highly dependent on technology, Globe Telecom has captured and maintained competitive advantage through their dedication early on to a 100% digital infrastructure. This decision has enabled them to provide superior wireless communications quality and services. Furthermore, it has allowed Globe to lead the Philippines in text messaging, a communication format so vital in the Philippines that they lead the world in its usage. As shown in Exhibit 6 Globe Telecom continues to reap rewards due to the innovational offerings it is able to provide to its customers based on its advanced digital informational technology infrastructure.

This case sheds light on the difficulties of telecommunications in the Philippines. From the lack of infrastructure-four lines per 100 inhabitants, to the geographical challenges of an island nation with some 7,100 islands. Despite these and a variety of other challenges, Globe Telecom has grown into one of the leading telecommunications providers in the Philippines. Strategic decisions by Globe Telecom have resulted in their recognized leadership in customer-service quality. By being the first to develop a 100% digital wireless network, they were able to lead the way in text messaging, used more in the Philippines than anywhere else in the world. Their commitment to innovation through technology provides another example of how Globe Telecom uses its resources to maintain a competitive advantage. Globe Telecom is now a leading business in the Philippines, and a worldwide example of how a telecommunications firm can succeed in an emerging economy.

Footnote

ENDNOTES

Footnote

1 Asian Wall Street Journal, June 10, 1997.

2 ASEAN Objectives, found at http://www.aseansec.org.

3 Information obtained from the World Factbook 2001 at http://www.cia.gov. Asian Wall Street Journal, April 15, 1996.

Footnote

4 All data used in this case came from publicly available sources and the management

5 team of Globe Telecom has not been consulted for the analysis or conclusions stated in this case study.

6 http://www.globe.com.ph.

7 http://www.itu.org.

8 Asian Wall Street Journal, March 8, 2001.

References

REFERENCES

References

Clemons, E.K. & McFarlan, F.W. (1986). Telecom: Hook Up or Lose Out. Harvard Business Review, July-August, 91-97.

Clifford, M. (1994, October 6). Talk is Cheap. Far Eastern Economic Review, 78-80.

Hookway, J. (2001, December 27). Review 200/Philippines: Bon Appetit. Far Eastern Economic Review.

References

Liden, J. & Reyes, R. (1996, April 15). Asian Infrastructure: TelecommunicationsPhilippines: Aggressive Marketing Pushes Prices Lower. Asian Wall Street Journal, SIR

Lopez, L. (2001, March 8). Manila Picks Up Reform Pace-New Government Pledges to Enhance Telecommunications Industry Competition-Popular Mobile Networks Support People Power, Attract Foreign Interest. Asian Wall Street Journal, N2.

National Telecommunications Commission Republic of the Philippines. http:// www.ntc.gov.ph/ last accessed May 31, 2002.

References

Reyes, R. & Liden, J. (1997, June 10). Asian Infrastructure: TelecommunicationsPhilippines: A Vast and Speedy Deregulation Has Made This Country A Test Caseand a Basket Case. Asian Wall Street Journal, S3.

Riedinger, J. (1994). The Philippines in 1993: Halting Steps toward Liberalization. Asian Survey, 34(2),139-146.

Smith, P.L. & Staple, G. (1994). Telecommunications Sector Reform in Asia: Toward a New Pragmatism. Washington, DC: The World Bank.

References

Ure, J. (1995). Telecommunications in Asia: Policy, Planning and Development. Hong Kong: Hong Kong University Press.

Weiss, E. (1994). Privatization and Growth in South East Asia. Telecommunications, 28(5), 95-101.

World Bank. (2000). Private Solutions for lnfrastructure: Opportunitiesfor the Philippines. Washington, DC: The World Bank.

The World Factbook. (2001). http://www.cia.gov/cia/publications/factbook/index.html.

AuthorAffiliation

Ryan C. LaBrie

Arizona State University, USA

AuthorAffiliation

Ajay S. Vinze

Arizona State University, USA

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Ryan C. LaBrie is currently completing his doctoral studies in Information Systems at Arizona State University, USA. Prior to starting his doctoral program Mr. LaBrie worked at the Microsoft Corporation for 10 years, most recently as a program manager in the Enterprise Knowledge Management organization. He has been involved with instructing at the university and corporate levels in the US and internationally including Australia, France, Indonesia, Japan, Malaysia, Singapore, Thailand, and the UK. His teaching and research interests include: international information technology issues, database and data warehousing, and information ethics. Mr. LaBrie holds an MS in Information Systems and a BS in Computer Science from Seattle Pacific University.

AuthorAffiliation

Ajay S. Vinze is the Davis distinguished professor of Information Management at Arizona State University, USA. He received his PhD in MIS from the University ofArizona. Dr. Vinze's research, teaching and consulting interests focus on both IS strategy and technology issues. He has worked on topics related to decision support and business intelligence, computer supported collaborative work and applications of artificial intelligence technology for business problem solving. His publications have appeared in many of the leading MIS journals. Before joining the academic environment, he was an IT consultant based in Southeast Asia. He is presently active with the business community in the US with organizations like NASA, IBM, Motorola and internationally in Argentina, Australia, India, Mexico, New Zealand, Peru, Philippines, and Russia.

Subject: Studies; Telecommunications industry; Deregulation; Information technology; Impact analysis

Location: Philippines

Classification: 9130: Experimental/theoretical; 9179: Asia & the Pacific; 8330: Broadcasting & telecommunications industry; 4310: Regulation

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 333-357

Number of pages: 25

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198653660

Document URL: http://search.proquest.com/docview/198653660?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 88 of 100

Modeling back office operations at Greenfield Online's Digital Consumer Store

Author: Campbell, Gerard M; Huntley, Christopher L; Anderson, Michael R

ProQuest document link

Abstract:

This case explores Greenfield Online, the first online market research company. Their core business involves developing and implementing customized market research studies. This case uses three modeling techniques - process mapping, data flow diagramming, and entity - relationship diagramming - to specially examine operations at Greenfield Online's Digital Consumer Store. This case is a useful study in comparing manually performed back-office processes with their technological counterparts. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

Greenfield Online, the first online market research company, is an example of an ebusiness that has continued to be successful despite recent retrenchments in the Internet sector. Their core business involves developing and implementing customized market research studies. At the time of this case, they also sold "off-the-shelf" reports related to online shopping trends for specific groups of products. This case describes operations at Greenfield Online's "Digital Consumer Store" using three modeling techniques-process mapping, data flow diagramming, and entity-relationship diagramming. The simultaneous use of these techniques illustrates how they relate to each other, and demonstrates their applicability within an e-business environment. After the descriptive models set the stage, the economics of manually-performed back office processes are evaluated through a present value analysis of labor costs. The organization is left with open questions regarding how to improve the Digital Consumer Store's back office operations.

BACKGROUND

While the benefits of gathering market data over the Internet may seem obvious today, the practice was quite novel in 1993. The idea came to Greenfield Online founder Hugh Davis when he was a sophomore studying economics at Fairfield University in Fairfield, Connecticut. As a student paying his way through college, Hugh responded to a campus ad offering students $10/hour to call people to recruit them for marketing studies being conducted by the Greenfield Consulting Group. For one study requiring input from college students, Hugh sent an e-mail message to about 15 of his friends, asking them to respond and then forward the survey to others. The next morning he had over 100 responses. When Hugh reported this to Andy Greenfield, Andy wanted to know how Hugh had accomplished the data collection so quickly. Once Hugh explained what e-mail was and how much it cost (i.e., nothing), its potential was clear to Mr. Greenfield.

Andy Greenfield then began providing financial support for Hugh Davis to develop the concept of online market research data collection. Hugh started working full-time while continuing his college studies. When he graduated in 1995, Hugh and teammates Steve Cook and Paul Jacobson were well beyond proof-of-concept. Greenfield's online market research had proven to be very profitable, and by 1996 the company had grown to 14 people.

To continue to fuel this tremendous growth, Andy Greenfield invested several million dollars of his own money, and outside funding was also attracted. Rudy Nadilo was brought in as CEO, and the company grew to 48 people by mid- 1999. At that point, with $20 million in venture capital funding, the seven-person management team bought the company from Hugh Davis, Andy Greenfield and Rudy Nadilo. Michael Dell of Dell Computers, Compaq Computer and other sources then invested additional capital. In the early part of the year 2000, Greenfield Online filed to go public, but withdrew the proposed IPO later that year when it was clear that stock-market conditions were unfavorable.

Through the early part of 2001, Greenfield Online continued to experience rapid growth. Staff members had developed and conducted studies for more than 500 clients, including many Fortune 100 firms. A key to their business model was the acquisition and development of people to participate in their studies. This participation took the form of an "online community" where members called "panelists" were invited by email and paid an incentive to participate in targeted marketing studies. As of February 2001, over 2.2 million people had volunteered to join Greenfield's online panel.

Panelists enjoy a variety of perks for being members and participating in surveys. Members provide detailed demographic and lifestyle profiles, filling in a total of more than 70 fields ofinformation. Greenfield zealously guards their privacy, providing only aggregated information to clients. A key component to Greenfield's success is the efficient way they manage the online community. Greenfield tailors each individual email invitation, and they track and record the email messages that each member receives.

With its large, diverse set of panelists responding from home, Greenfield has capabilities that cannot be matched by firms using traditional, off-line methods. For example, a survey for a cold remedy product can be conducted using a large sample ofpeople who are currently home sick with a cold. Online focus groups can also be conducted, with at-home privacy enabling franker and richer responses. Products, websites and video clips can be shown to participants online, and data is available to clients immediately at the end of a focus group session. On-line data gathering dramatically reduces the time and cost of conducting a market research study. Using Greenfield's "QuickTake" system, customers could develop and implement a survey themselves in a day for as little as $1000. Most customers elect for full service, however. The typical study conducted by Greenfield Online, including questionnaire development and results analysis services, cost a client approximately $35,000 in early 2001. The average study took 2-4 weeks to complete, which is significantly less than the four to eight weeks required to perform a comparable study off-line.

The Digital Consumer Store was an off-shoot of the company's mainline business. The DCS followed a typical e-business "storefront" model, whereas Greenfield's online community, with its membership perks, had elements of a "free products and services" model (see Chapter 2 of Deitel, Deitel and Steinbuhler (2001) for a discussion of e-business models). Tracking study results, each providing data for a particular topic or industry, were available as downloadable products through the DCS.

The reports available through Greenfield's DCS were part of their syndicated data services, which as a whole accounted for approximately 6% of corporate revenues in early 2001. An example of a DCS product is a report entitled "Cruising for Cars," which analyzed responses from 2,000 panelists who had shopped for a vehicle on the Internet in the 12 months prior to August 2000. DCS reports such as this were available as off-the-shelf items at a cost of $999 each.

While the customer interface for the DCS reflected state-of-the-art technology (see Figure 1), the "back office" operations behind this interface were relatively archaic. Greenfield staff members manually recorded each order, and several people had to follow up to ensure receipt of payment. In February 2001, Greenfield's management believed there was room for improvement, but they were not sure that the volume of orders received through the DCS could justify the cost of automating the manual parts of the process. Tricia Rosen, Product Development Manager, was asked to evaluate possibilities for streamlining DCS back office operations.

SETTING THE STAGE

Figure 2 is a process map showing how customers typically proceeded through the DCS website. Anyone who has shopped on the Internet will recognize that this process is similar to that used by many online stores. Figures 1, 3, 4, and 5 show screenshots corresponding to the four steps highlighted in Figure 2.

Figures 6 and 7 show Data Flow Diagrams (DFDs) of the order fulfillment and billing processes. The Level 0 Context Diagram in Figure 6 represents data flows between the DCS and three external entities - i.e., the customer, the market research department, and the credit card company. Note that flows to and from the customer in the DFD correspond to a subset of the activities shown on the process map in Figure 2.

To see back office operations in more detail, the inner workings ofthe high level process bubble from the Level 0 DFD are presented in the Level 1 DFD shown in Figure 7. Figure 7 breaks the DCS process bubble in Figure 6 into subprocesses and data stores. The Level 1 DFD includes the same external entities (rectangles) and flows to and from those entities that are shown in the Level 0 DFD. The bubbles in the Level 1 DFD represent back office subprocesses, and the three-sided rectangles are data stores. If additional detail were needed (e.g., by a software developer), a Level 2 DFD could be produced for any of the subprocesses shown in Figure 7. With the different levels of detail provided by this hierarchical modeling technique, the DFDs are useful for communications between managerial and technical personnel who are concerned with different aspects of system design and performance.

CASE DESCRIPTION

As part of her streamlining efforts, Tricia Rosen chose to focus on the "Project Authorization" and "Record and Collect Payment" subprocesses shown in Figure 7, both of which were largely manual processes that operated somewhat independently of the report downloading process. The Appendix shows the Project Authorization Form (PAF) that Tricia filled out for each order received through the DCS. This took her an average of about 15 minutes per order. Other manual operations performed for each order included:

* Information Technology Department sent credit card data: 10 minutes,

* Accounting Department collected payment: 10 minutes, and

* Sales Department recorded the sale: 10 minutes.

Labor costs for the professionals involved in the subprocesses were estimated at approximately $70 per hour.

To fill out a PAF, Tricia had to receive customer and order information from the data stores shown in Figure 7. These data stores were implemented as tables in a relational database maintained by Greenfield Online. This database was organized according to the Entity-Relationship Diagram (ERD) shown in Figure 8. Fora more comprehensive discussion of databases designed to support online stores, see Chapter 14 of Rob and Coronel (2002).

Notes:

* An Order is represented as a relationship (diamond) between a Customer and a Report

* Data fields are listed in italics for each entity (rounded rectangle)

* The Ms on either side of the diamond indicate a many-to-many relationship between customers and reports-i.e., many different customers can order each report, and each customer can order many different reports.

While the Digital Consumer Store's back office operations were thoroughly documented and well understood, they were obviously not as streamlined as they could be. Tricia Rosen decided to focus on the possibility of reengineering and/or automating the manual Project Authorization and Payment Collection subprocesses. As part of her preliminary investigation, she performed a present value (PV) analysis of the costs associated with the manual operations. For the analysis, she was advised to assume a 10% cost of capital. Sales had been averaging approximately six reports per month, and sales volume was expected to increase at an annual rate of approximately 20% for the next three years. While three years may seem like a short time horizon for a PV analysis, Tricia realized that in their e-business environment three years was an eternity; any alternative requiring more than three years to profitability was certain to be rejected by her management. For similarly pragmatic reasons, she chose to ignore any possible intangible benefits, instead basing her analysis solely on the labor cost of processing an order. The following spreadsheet shows a breakdown of the labor cost for the manual system:

A major assumption underlying the PV analysis is that labor costs are variable-i.e., it assumes that if the subprocesses were automated, the labor costs would be eliminated. However, it was not obvious that this would be the case because all employees involved in the operations were on fixed salaries. In other words, it was not clear that processing one or two DCS orders a week was actually resulting in any out-of-pocket costs.

Even if labor costs were viewed as variable, the cost of automating the subprocesses (estimated by Tricia at $25,000) would be more than the PV ofthe manual system's costs. This would have also been true under assumptions of growth rates much higher than 20%. If she had had more time, Tricia thought it would have been useful to perform sensitivity analysis, including determination of the sales volume growth rate that would justify full automation based on the PV of labor costs.

Tricia also realized that other issues besides costs had to be taken into account, such as potential effects of back office automation on the integrity of DCS purchase and delivery processes. Automation might also have intangible effects that would be harder to quantify. For example, by reducing the administrative burden of those currently involved in the process, it might allow them to focus more attention on mainline business functions.

Despite these potential benefits, from the preliminary analysis it appeared to Tricia that full automation could not be justified. In deciding not to pursue full automation, Tricia was also very aware that there were many other projects competing for the attention of Green field Online's management. The DCS back office was not a high priority within the organization.

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

With high growth and profit targets expected by financial backers, Greenfield Online was constantly under pressure to expand the business. Because the DCS accounted for a relatively small portion of revenues, it was not on the front-burner for allocation of limited resources. If Tricia wanted to streamline the DCS back office, she had to come up with something that was relatively easy to develop and implement.

Tricia felt that the most backward aspect of the DCS back office was the manually completed Project Authorization Form (as shown in the Appendix). Since customer and order information was being kept in a database, she thought that perhaps the PAF could be filled in on computer as a form tied directly to the database system. Because three other departments would be affected by such a change, she had to get their input to develop the concept more completely before proposing it to upper management. As part of her analysis, she thought it would be useful to develop a process map for the DCS that included both customer flow and back office operations, separated by a "line of visibility" [as described in Shostack (1984), and Fitzsimmons and Fitzsimmons (1997)]. Although all the processes are included in Figures 2 and 7, the integrated process map would enable a better view ofthe "big picture," which would help in her communications with upper management.

Sitting at her desk pondering DCS back office operations, Tricia was keenly aware that the DCS was just a small blip on upper management's radar screen. Nevertheless, she felt responsible for eliminating the apparent process inefficiencies. The $25,000 investment in full automation was definitely out of the question, but less expensive options appeared viable. In late February 2001, Tricia's open questions included the following:

1) Should she spend time developing a semi-automated back office solution?

2) What would be the nature of the solution? and,

3) How could she best present any proposed modifications for upper management's approval?

References

REFERENCES

References

Deitel, H.M., Deitel, P.J., & Steinbuhler, K. (2001). e-Business and e-Commerce for Managers. Upper Saddle River, NJ: Prentice-Hall.

Fitzsimmons, J.A. & Fitzsimmons, M.A. (1997). Service Management: Operations, Strategy, and Information Technology. Boston, MA: Irwin/McGraw-Hill.

Rob, P. & Coronel, C. (2002). Database Systems: Design, Implementation, and Management, (5th ed.). Boston, MA: Course Technology/Thomson Learning.

Shostack, G.L. (1984). Designing Services that Deliver. Harvard Business Review, JanuaryFebruary, 133-139.

Yourdon, E. (1989). Modern Structured Analysis. NJ: Prentice-Hall.

AuthorAffiliation

Gerard M. Campbell

Fairfield University, USA

AuthorAffiliation

Christopher L. Huntley

Fairfield University, USA

AuthorAffiliation

Michael R. Anderson

Fairfield University, USA

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Gerard M. Campbell is an associate professor of Information Systems and Operations Management at Fairfield University's Charles F. Dolan School of Business, USA. His research interests include: workforce scheduling, facility location, and supply chain applications of information systems. Dr. Campbell has published in a variety of refereed journals, including: Management Science, Decision Sciences, and European Journal of Operational Research. He has recently begun a three-year term as the Decision Sciences Institute's placement services coordinator. Dr. Campbell holds a PhD in Business from Indiana University in Bloomington, and he recently completed an MS in Computer Science at Rensselaer Polytechnic Institute.

AuthorAffiliation

Christopher L. Huntley is an assistant professor of Information Systems and Operations Research in the Charles F. Dolan School ofBusiness at Fairfield University, USA. His research and teaching interests include organizational learning, software development processes, and metaheuristic search applications in system design. He has published articles in various refereed journals, including Interfaces, Computers & Operations

AuthorAffiliation

Research, and IEEE Computer. Dr. Huntley holds a PhD in Systems Engineering from the University of Virginia. Prior to completing his PhD he worked in the Information Systems and Service Design departments at Conrail, a Class I railroad in Philadelphia.

AuthorAffiliation

Michael R. Anderson is director of Undergraduate Internships for Fairfield University's Charles F. Dolan School of Business, USA. Michael is also assistant coach for Fairfield's Division I Men's ice hockey team and is an active member of Fairfield's President's Circle. Prior to joining Fairfield University in 2000, Michael was a broker at Quick and Reilly in New York City for seven years where he held various positions, most recently as senior financial consultant. Michael holds a BS from Fairfield University in Mathematics and is currently pursuing an MBA from Fairfield University in Finance and International Business.

Subject: Studies; Models; Market research; Web services; Processes

Classification: 9130: Experimental/theoretical; 8331: Internet services industry; 5250: Telecommunications systems & Internet communications; 7100: Market research

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 358-369

Number of pages: 12

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case, Market Research

Document feature: references

ProQuest document ID: 198721716

Document URL: http://search.proquest.com/docview/198721716?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 89 of 100

Using asynchronous computer conferencing to support the teaching of computing and ethics

Author: Jefferies, Pat; Rogerson, Simon

ProQuest document link

Abstract:

This case addresses the challenges educators face in attempting to incorporate appropriate new technologies and facilitate awareness among their students of the ethical and legal issues related to their use. Specifically, the case addresses the development of a computer ethics course at a higher education institution. This case study explores some of the techniques that were employed in seeking to support this course in a pedagogically sound and ethically aware manner. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

Currently, there is tremendous impetus for using Information Communication Technologies (ICT) in education. Such impetus may be perceived to be being driven by both the "technological pull" and "political push" currently prevalent in initiatives to support lifelong learning. As such, students and tutors may access vast information resources, may communicate with experts in many fields, and may work collaboratively with others regardless of time or place. The challenge for educators is, it seems, not only to be aware of the appropriate use of the new technologies but also to facilitate awareness among their students of the ethical and legal issues related to their use. As such, many higher education (HE) institutions are now introducing computer ethics (CE) modules into the curriculum within certain relevant departments. This case study explores some of the techniques that were employed in seeking to deliver such a module in a pedagogically sound and ethically aware manner.

BACKGROUND

The organization concerned is one of Britain's largest universities having centres in three towns in the Midlands as well as being supplemented by an internationally dispersed Associate and Linked College Network. Arrangements with other institutions mean that some of the programmes of study are delivered overseas, such as in Asia, Europe and the Middle East. Students are normally based at one of the university's centres for the duration of their programme, though they benefit from the facilities of the whole university. In total, there are approximately 30,000 students, most of whom are undergraduates.

The range of academic and vocational opportunities that the university offers within each of its faculties is extensive with subjects ranging from law and engineering to agriculture and the arts (see Appendix A). Study options include full-time, part-time and sandwich programmes. Increasingly, there are opportunities to study or undertake work placements abroad. Many subjects are also offered in joint and combined honours routes, enabling students to pursue more than one area of interest.

A number of national issues that impact upon all universities as well as local issues specific to the university have to be addressed in order to continue expansion and development. Some of these include: an over-supply of student places, which has made the sector intensely competitive; the expectations of fee-paying students, who are demanding facilities and resources ofthe highest quality; decreasing income from the Higher Education Funding Council for England (HEFCE); and a growth in the number of performance indicators evident in national league tables which have a significant impact upon every institution's reputation. Strategically, the university is now seeking to provide fewer things in fewer places to even higher quality and so acquire a growing reputation as a great place to study, work and live.

The case study relates to delivery of the Computing and Ethics module that is offered to undergraduate students within the Faculty of Computing Sciences and Engineering. The Faculty is responsible for more than 3,000 students based in several locations around the world. In 2000/2001, the Faculty generated L3.3 million through a mix of external income activities including research, consultancy, training, conferences and technology transfer. The responsibility for curriculum development and delivery of the degree programmes lies with specialist subject groups. Degrees comprise a number of mandatory and optional modules at each stage. Many modules are shared across programmes. Each degree programme has an academic manager and several year managers. Each module has an academic leader. It is the role of these managers and leaders to develop consistent curriculum strategy at both degree and module level.

SETTING THE STAGE

As the use of technology escalates in society, this has subsequently led to an enormous expansion of student numbers in the field of computing. Such advances in technology have also served to heighten expectations of all students, regardless of discipline, to use ICT to support their learning activities. Thus, the requirement for having both the technology itself available as well as providing the opportunity to develop requisite IT skills has grown exponentially.

In the face of increasing competition, computing departments within UK universities have sought to increase the "value added" component that they perceive will enhance the attractiveness of their provision to potential applicants. As such, some have sought, and subsequently gained, accreditation by the British Computer Society for their programmes of study. A requirement of such accreditation is that programmes of study in computing include consideration of the ethical issues related to ICT. This is evidenced in a recent survey conducted amongst 14 UK universities who had Computing Science and Information Systems departments. "Nine of the fourteen universities said that their CE teaching was compulsory, six of them mentioned the BCS course accreditation as the reason for the compulsion" (Turner & Roberts, 2001).

The inclusion of CE, as with other topics, requires consideration of a number of issues in terms of how this is implemented, what teaching strategies are to be adopted as well as determining the target audience. Not surprisingly, Turner et al. (2001 ) discovered "there was little commonality in organization policy for the provision of CE programmes, with few respondents indicating a departmental or university policy. Most reported that CE programmes depended on initiatives by individual lecturers." Turner et al. (2001) found that, "there was a wide range in the approach to the teaching of CE from specialised subjects to apart of the computing subject or merely the discussion of professional issues in other than specialised subjects, while some departments offered only one or more sessions on what was termed the `Professional Development of Computer/IT/IS professionals. "'

Thus, although not addressed in this paper, it can also be seen that there are further issues related to the fact that, "the ongoing debates regarding the pedagogy and place of ethics in the computing curriculum relate chiefly to the moral education of the computer professional, and ignore the general computer user"( Turner et al., 2001).

However, regardless ofhow any particular provision is structured within the curriculum the delivery strategies are impacted by a variety of influences upon both the curriculum and the approaches to learning and teaching in general. These span the two extremes between the objective, deterministic models of learning that have largely underpinned the more didactic practice of teaching and learning (Skinner, 1954; Bernstein, 1977), to the more liberal, divergent, philosophies that have latterly had an influence (Illich, 1974; Vygotsky, 1978). There are further influences from development of the actual technologies as well as from such things as improving retention, widening participation and globalization.

As a consequence of such influences, most HE institutions have begun to adopt student-centred curricula that take account of the more cognitive aspects of learning. As noted by Vosniadou (1994, p.13), "recent approaches to learning emphasize the active, constructive nature of the knowledge acquisition process wherein the learner is not a passive recipient of information but an active and constructive interpreter of meanings." As such, the emergent use ofthe Internet and multimedia technology is increasingly being recognized as a way of encouraging participation.

CASE DESCRIPTION

Within the Faculty of Computing Sciences and Engineering, the decision was taken some four years ago to develop a multi-campus, specialist CE module that was to be offered as an option to final year undergraduate students. The module grew out of one person's developing area of interest in professional issues in computing as well as an impending reaccreditation by the BCS.

At the time of development, it was appropriate to make the module optional and this has continued to be the case while it has been offered on each of three university campuses (two located within the UK and one in another European country).

Ethical concepts and consideration of ICT as a discipline provide a necessary philosophical foundation for this module, and it draws heavily upon the research activity mainly centred within the UK. As such, students consider in detail how the development of ICT systems necessarily encompass an ethical dimension and consider their own values in relation to this as potential computer professionals.

Tutors located on each of the three campuses deliver the module during the same time period, and students are expected to achieve identical learning outcomes. Such learning outcomes are subsequently assessed through coursework and examination weighted at 30/ 70% respectively (see Appendix B).

In order to achieve the prescribed learning outcomes, as well as trying to meet issues related to distributed delivery, a great deal of consideration had to be given as to how the quality and equitability of provision could be supported and evaluated across geographically dispersed campuses. Initially, therefore, learning and teaching strategies underwent perhaps more scrutiny and consideration because of the differing contexts that would inevitably impact delivery.

A further issue lay in the sensitivity of the actual subject area itself for computer science students. For example, such students were still largely encouraged to adopt a scientific, "objectivist" approach to problem solving in developing software solutions to what are deemed to be definable business problems. Therefore, some staff and students largely perceived CE and similar philosophical or abstract subjects to be of rather less value than the more technical, more obviously career-related subjects.

Nevertheless, it was felt to be extremely important to develop the module, to "sell" it to the students and to get them to experience "first hand" some of the issues in using ICT. This was primarily because these students were to become the computer professionals of the future who would inevitably hold tremendous responsibility in this role. As such, it was perceived they needed to be aware of the social and ethical implications oftheir activities and then be willing to set standards that lead to safe and useful systems development and application.

Initial consideration was, therefore, given to identifying the prime learning outcomes and then to determine the most appropriate teaching strategies to be adopted for achieving these. Such an approach stemmed from prevailing standard practice for module development but was also underpinned by a shared belief that the social construction of knowledge was appropriate for learning. (Two members of the team are approaching education from an Information Systems (IS) perspective and one of these specialised in the Philosophy of Education as part of their studies for their first degree.)

Learning Outcomes

In determining the learning outcomes, it seemed reasonable to contend that one of the primary objectives would concern measurable development ofa student's ability with regard to moral judgement related to the application and development of ICT.

Kohlberg's (1969, 1972) research has, in fact, suggested there are a number of stages of moral development and that the highest stage of this (Level III, Stage 6) requires formulating abstract ethical principles and then upholding them to avoid self-condemnation. Furthermore, that movement from one stage to the next involves students undertaking an internal cognitive reorganization rather than simple acquisition of the moral concepts prevalent in their culture (Kohlberg, 1972).

Thus, heightening students' awareness of other cultures' morals and beliefs as well as considering appropriate use/abuse and limitations of the technology is highly relevant to the teaching of CE.

Additionally, at final year undergraduate level, it is also expected that students should not only take more responsibility for their own learning but also that they should clearly demonstrate reflection upon their collective and individual activity.

Thus, the primary learning outcomes were to promote deep learning that would lead to development of moral judgement related to the appropriate application and development of ICT.

Learning and Teaching Strategies

With regard to the teaching strategies that could be employed to achieve the learning outcomes, it was recognized that these were potentially quite diverse even though they might necessarily be constrained by expectations of the various stakeholders such as the institution, the students, society, funding councils and government agencies. Thus, the primary aim was to determine which strategies would be the most appropriate to meet stakeholders' needs.

Research of the literature at the time the module was first being developed indicated that the few tutors currently teaching in the area tended to use both traditional knowledge dissemination approaches (typified by large group lectures) and small-group seminar sessions (primarily used to discuss prepared scenarios relating to issues such as privacy, autonomy, freedom of speech and codes of conduct).

While delivering lectures is a fairly traditional, objectivist and often maligned, approach it is still widely adopted in HE organisations. Interestingly, Campo, Barroso and Weckert (2001) recently discovered that the lecture situation was not, in fact, as unpopular with the students as many might assume. Indeed, they propose "the ideal `Informatics Deontology' course would be based mainly on role playing, accompanying the explanations mostly with lectures by outside professionals and by academics from other departments." They also reveal that one of the "highest scoring techniques was role playing, through which `students learn to collaborate with others to achieve wise solutions to difficult problems (Loui, 1999)" (Campo et al., 2001). Fleischman (2001) seems also to have successfully adopted the use of role-playing coupled with assignment writing to facilitate student engagement with a CE module. However, of further interest is the fact that Campo et al. (2001) felt that one of the lower scoring methods-small group discussions-should be one of the techniques to be excluded.

Other research has, however, suggested that "dialogue is an important aspect of a rich learning experience," particularly in complex, discursive domains (Ohlsson, 1996; Voss, 1996; Laurillard, 1993) and that "learning can occur not only through participation in dialogue but also through observing others participating in it" (Stenning, McKendree, Lee & Cox, 1999; Gokhale, 1995).

In a related idea called the "reflective model" of education (Lipman, 1991), the conclusion is drawn that "the community of inquiry, especially when it employs dialogue, is the social context most reliable for the generation of higher-order thinking" (McKendree, Stenning, Mayes, Lee & Cox, 1997; Lim, Ward, & Benbasat, 1997). Thus as Leidner and Jarvenpaa (1993) note "Smith (1989) suggests that when students are actively engaged in a discussion, there is a greater likelihood of creative and critical, as opposed to factual, thinking." Davies (2001) further notes, "deep learning" "is based on active involvement of the student in the learning material. Analysis and construction ofthe relationship ofconcepts leads to understanding." This is as opposed to the "surface" approach to learning that is typified by routine memorization and, hence, lack of reflection.

Discussion, whether entered into or simply observed, was therefore perceived to be very relevant to the teaching of CE in that the primary learning outcome was for students to engage in "deep" learning in order to develop a higher stage of moral development. Fleischman (2001) also lends further support to the adoption of this type of approach when he notes, there is a "need to engage the imaginative and empathetic powers of participating students in thinking about situations in which ethical conflicts may arise."

It is recognized, however, that there are a number of issues surrounding this as Lee, Dineen and McKendree (1998) note-while "dialogue is an essential component of learning, particularly in complex, discursive domains" that "with increasing class sizes and the move towards more and more computer-based courses, this component is ever-decreasing and in danger of disappearing completely." Leidner et al. (1993) report, in fact, that research on within class activity at the college level discovered that only 17% involved higher-order discussion.

Module Delivery and Development

Thus, having considered the relevant research literature, the desired learning outcomes and the various strategies for achieving these the framework for delivery was originally structured around the use of both the lecture and small group discussion sessions. The lectures mainly focused upon giving students a basic understanding of the main teleological (utilitarian) and deontological (duty/rights based) ethical theories as well as an appreciation of normative principles defined as being "non-maleficence" (above all do no harm), "autonomy" (respecting the individual as an end in themselves) and "informed consent" (agree knowing the facts).

The aim of underpinning the module with appropriate philosophical theory was to provide students with an objective and prescribed framework within which they could conduct their analysis in order to achieve a morally justified conclusion. The particular strategy recommended to students was taken from the mandatory text for the module, written by Richard Spinello (1995).

At this early stage, the technologies used to support delivery of the module were in terms of using Powerpoint lecture slides and email plus development of a Web site to give an outline ofthe module complete with links to a variety of relevant resources. Students were also directed to undertake extensive additional reading of relevant books and journal/ conference papers.

Small group discussions were initially undertaken solely in face-to-face (f2f) seminar sessions that were, of course, potentially subject to a variety of constraints. For example, many educationalists realize that active involvement cannot necessarily be guaranteed in general f2f seminars for, as Fleischman (2001) points out, "in classroom discussion, it is not routinely possible to depend on a lively diversity of viewpoints when engaging a particular text, case study or issue."

In addition, it is also fairly widely accepted that there are a variety of factors that impact upon how individuals within groups interact. For example, group size, context of the situation, knowledge of the subject area, learning style, confidence, motivation and the like are just a few of the multitudinous variables that may affect group dynamics and subsequent interaction.

Therefore, as the module developed, it was perceived that further judicial deployment of technology may help to overcome both these and some of the other issues that were being identified. These other issues primarily related to developing students' confidence in discussing ethical issues openly (i.e., widening participation) as well as ensuring equality of provision on each of the three campuses. For example, use of the technology might, it was felt, encourage those students who would not normally participate in flf discussion to either contribute or, at least, undertake more reflection upon the activity.

It was also noted that f2f discussions would necessarily be impacted by the prevailing local culture therefore simple campus-based contact did not seem fully appropriate for meeting the learning outcomes of the module in that students could not then become aware of differing viewpoints from a variety of cultures.

Thus, it was perceived that the potential existed for using technology to impact learning outcomes and "push back the threshold imposed by the constraints" of f2f discussion. "This being achieved by opening up new media for discourse that are not subject to the same delivery bottlenecks as traditional methods (OECD, 1996)" (Lee et al., 1998).

Thus, a proposal was made to investigate technologies that might facilitate both discussion and role-playing within a virtual but monitored environment across all of the campuses.

Investigation into the Use of Technology

As noted by Leidner et al. (1995), technologies can serve to fulfil one of four purposes aligned to different models of learning. They note, for example, that technologies that serve "the automation function are closely aligned with objectivist theory, in which case the instructor remains the center of attention and in control of the learning process." Such use was, of course, being exemplified through the use of the Powerpoint lecture slides. Leidner et al. (1995) further suggest that technologies may also be used to "informate up." This they define as using technology to "assist the instructor as the nucleus of class activity" as well as "to improve the information an instructor receives concerning student comprehension of material."

However, the use of technology most appropriate for the aims and objectives of teaching CE seemed to lie in what Leidner et al. (1995) describe as using technologies to "informate down" or to "transform." Such use places much of the control of the content and pace of learning in the hands of students. Thus, as they note, "the purpose of instruction then moves away from knowledge dissemination towards knowledge creation."

Leidner et al. (1995) then determine that the technologies that support the "informate down" approach include such things as the creation of learning networks, use of simulations/ virtual reality and synchronous conferencing. However, in a geographically dispersed but campus-based environment, it seemed most appropriate to use the technology to "transform" the organization and thereby shift the locus of control away from the tutor. As Leidner et al. (1995) suggest, "in the context of education, the vision to transform would involve using IT (1) to redraw the physical boundaries of the classroom, (2) to enable more teamwork, (3) to allow learning to be a continuous time-independent process, and (4) to enable multi-level, multi-speed knowledge creation." They further note that "the notion of virtual learning spaces begins to operationalize these assumptions" and that "virtual learning spaces are those that link geographically dispersed students with no time constraints."

Thus, using technology to provide a virtual learning space not only seemed to fit the preferred socio/cultural, co-operative models of learning but also seemed appropriate to achieving the desired learning outcomes. Leidner et al. (1995) then determine that "the simplest virtual learning spaces are founded on electronic mail and electronic bulletin boards."

Upon investigation, however, much of the literature regarding use of electronic bulletin boards/asynchronous computer-mediated conferencing has largely been related to its use with adult, part-time, distance learning students and the emphasis on the tutor within this context has very much been to become a competent e-moderator. A typical example recommending this sort of approach can be seen in the work of Salmon (2000).

It was felt that such an approach, once again, simply reflected models of learning illustrated by the cognitive apprenticeship model, or Laurillard's (1993) proposed conversational framework. Within each ofthese models or frameworks, it can be perceived that much of the dialogue (or conversation) is expected to take place between the tutor and the student. For example, socialization then "occurs as a result of interaction with a `reference group' consisting of peers, teachers and clients, which sets and enforces standards and forms a yardstick against which the novice may evaluate their own performance (Pavalko, 1971, p.89)" (Davies, 2001).

In that sense, it seemed, therefore, simply to perpetuate the role model of the "expert" or "teacher" within the learning situation and did not, as a likely consequence, support greater student responsibility. One of the problems is, as Jacques notes, that "the teacher who is an incurable helper, in satisfying one ofhis or her basic needs, may fail to develop the student's capacity for self-growth into greater autonomy and responsibility" (Jacques, 1995, p. 17). Thus it was perceived that this did not really represent either the "ethos" of the module nor did it promote what was felt to be the much more appropriate collaborative, learning community approach similar to that proposed by Illich (1974) and Vygotsky etal. (1978), which would necessarily signal a different paradigm for learning.

Such paradigms propose that students should interact with each other, should socially construct their own meaning and thus take responsibility for this within their own community of learning. In this sense, the concern was that students should be empowered to take responsibility for and reflect upon their own collaborative learning within a wider context i.e., across different locations and cultures. This, therefore, seemed to accord with what might be deemed to be an ethical approach to the learning context as particular regard was being taken to respecting the rights and autonomy of each and every student.

It was, therefore, to promote what Campo et al. (2001) more recently propose as the "active apprenticeship" model that the Virtual Learning Environment (VLE) was subsequently piloted in September 1999 on one campus only. Within this model, it was envisaged that students would be cast in the role of self-regulating "pioneers" in what was to be, for them, a new environment-similar to that fictionally described in the novel "Lord ofthe Flies" (Golding, 1975) or as depicted by Deborah Johnson's (1994) "newly discovered island."

Implementing the Technology

Issues to be addressed in setting up the system included: determining which VLE technology might be appropriate; developing staff skills to enable them to access; "populate" and structure the environment; deciding upon the resources to be provided as well as in determining how to integrate and manage the discussion forum in support of actual module delivery. As the intention was to introduce the technology using an ethically aware approach, there were a number ofother issues that necessarily had to be considered. For example, issues of privacy and access primarily stemmed from the fact that students were expected to use the system. Furthermore, their contribution to the discussion area could not be anonymous and all of their activity would be automatically tracked by the system.

Further issues of a more technical nature stemmed from the choice of the actual technology to be used. At this stage, it was felt that detailed evaluation of the technology was not a prime issue but rather as Alavi and Leidner (2001) note, "It is the mutual influence of technology features, instructional strategy, and psychological process that impacts learning outcomes in a given context" that is of prime importance. Therefore, as various comparative evaluations had commented favourably upon the use of WebCT as a VLE (ULT Canada, 1999; McKenna & Bull, 1999; Wisdom Tools, 1997) plus the fact that this was the particular software that was readily available upon each of the three campuses this was the technology adopted to supplement the normal f2f contact sessions. Resources provided for within the WebCT environment initially took the form of providing links to relevant journal papers, provision of a course outline that identified both learning outcomes as well as an indication of the content of each lecture and tutorial session, reading lists, links to video resources and lecture notes together with the discussion forum itself. Students were then registered onto the system and were variously encouraged by tutors within the f2f sessions to use the WebCT resources as they felt appropriate.

Postings to the conference by students were, however, to be on a purely voluntary basis as the belief was that making this a requirement would necessarily change the environment and impose a variety of undesirable constraints. Similarly, it was decided that contributions would not be assessed because this would, again, impact usage. Thus, the intention was to provide a forum, as Alavi et al. (2001) note, "for learners to generate responses, thus, directly engaging and facilitating the psychological processes required for learning in this context." However, in order to provide some positive encouragement, tutors initially posted scenarios into the system to "pump prime" discussions. One of the original intentions in doing this was to replace some ofthe f2ftutorials. However, this did not prove to be very popular among the students. Therefore, all scheduled f2f lectures and seminars were undertaken. Notably, the specified Spinello scenario discussions were then continued within the virtual environment in addition to other diverse issues being raised. These included scenarios relating to such things as Intellectual Property Rights, Hacking/Cracking, Worms/Viruses, Surveillance, Privacy, Cookies, Abuses of the Web (cyberstalking, flaming, and the like) plus other social and cultural impacts of ICT. During the delivery period of the module, all accesses to the WebCT environment were tracked and the following results were gained for the discussion forum:

19 male students and 4 female students contributed towards the discussion in total. On analysis of the patterns of contribution, these were found, perhaps not surprisingly, to produce "star" networks wherein the focus revolved around the tutor's original contribution.

Before starting the next session, in February 2000, it had been decided that a different strategy needed to be adopted in order to prompt usage of the conferencing system and to attempt to integrate use of the system into the teaching of the module. Thus, an introductory exercise was proposed by way of an initial posting by the tutors into the discussion area. This exercise required that the students devise a Code of Conduct for implementation within the conferencing environment. Despite several iterations of this exercise, no finalised Code of Conduct has yet been produced. Further tutor postings were deliberately restricted but usage by the students during this delivery period was extensive as illustrated in the following table:

As the tutors refrained from posting into the discussion area during this period different patterns of networking were evident. Some students inevitably were notable in starting threads of discussion but generally these did not lead to the "star" network seen when the tutors posted ideas. However, a further pattern emerged that seemed to suggest that while initial use of the conference was relatively focussed and relevant that mid-term there was a degeneration into general inappropriate use including "flaming." At this stage, some students became anxious and reported this to tutors who took action in the f2f sessions to address the problem. Following such action, the discussion then became much more relevant and focussed with students clearly developing their analytical skills and moral judgement evidenced through more appropriate and reflective contribution.

In 2001, in an attempt to further link or embed use of the conferencing context within the f2f activity, students were encouraged to perceive the virtual environment of the conference as a microcosm of the Internet itself. For example, students were encouraged to draw certain parallels between the two contexts in that the conferencing environment (as with the Internet) was virtual, everyone had access to it and everyone had the freedom to express their own views. This also gave ample opportunity for tutors to relate ethical issues discussed in the f2f sessions to activities/discussions that were undertaken within the virtual environment. In order to facilitate a common approach among all of the tutors, a "briefing" sheet was developed and distributed. This also recommended that tutors simply monitor the conference activity and completely refrain from posting messages into it.

Contribution to the discussion during this period was predominantly undertaken by two male students on one of the campuses (63 postings by one student and 62 by one other). Only two female students from any of the campuses made any contribution and there were no contributions made by any non-UK based students. The pattern of contribution was again quite different to those noted in the previous experiments but discussions were relevant and continued to indicate improved analysis and reflection on the part of students.

Conclusion

Upon completion of each module delivery period, students have been required to complete an evaluation of the use of the conferencing system in support of their learning. In general, students have consistently commented very favourably on the inclusion of the computer conferencing resource. Primary among their comments was the fact that they felt that one of the major benefits for them had been the fact that they could access the discussion at times and places to suit themselves. Another positive outcome was that the students appreciated the fact that they could have time to reflect upon both their own ideas as well as views of their peers in developing their personal moral stance.

As the development of the teaching of CE is subject to ongoing research, students were also required to complete profiles that indicated their individual learning styles, group behaviour as well as moral judgement. Such profiles have then been used to try to identify some of the variables that might impact on approaches to and interactions with the computer conferencing context. Staff feedback has also been sought and generally this has proved positive towards the use of technology to support delivery of the module. The remaining issue is still, however, to determine the most effective way of engaging students with the module and how best to integrate use of the technology into appropriate techniques to facilitate this. As Leidner et al. (1993) note "the success of computers in education depends on how well they are integrated with the instructional objectives."

Whether or not the use of asynchronous conferencing has helped students to develop their moral judgement in a way that would not have been possible using only the traditional f2f approaches does, however, remain difficult to determine without reference to a control group. However, evidence from the discussions and feedback from each cohort demonstrates that students appreciate the opportunity for engaging with the module outside of normal time/contact constraints. That through discussion and reflection and actual use of the technology that their understanding improves and that they benefit through exchange of ideas with students outside of their own local culture and environment. This latter was evidenced by the improving quality of discussion undertaken in both the virtual and f2f context.

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

With the impending delivery of the CE module to another university in Asia together with possible future provision in the Far East, there are many challenges that face the organization both as a whole, as well as for specific module delivery itself in terms of successfully exploiting the technology. Thus, as Alavi et al. (2001) propose, there needs to be research into how various technology mediated learning (TML) environments "affect student psychological learning processes and outcomes."

Such research seems vital in light of the increasing perception that use of ICT may provide the key to widening participation as well as to enhancing progression and retention while, at the same time not losing sight ofwhat educationalists can provide in the f2fcontext. For example, the use oftechnology for providing flexible, "just in time," life-long learning is perceived to be of primary importance to survival within an increasingly competitive and global HE sector which sees students with a variety of learning styles taking a more strategic approach to their education having to juggle personal and academic priorities in order to fulfil their financial demands. Quite how this can be done to best effect at both the programme and organisational level is still a major challenge for most HE institutions within the UK. As Alavi et al. (2001 ) note, "recent attempts at studying TML in IS research tend to adopt an overly simplistic view of this phenomenon" which primarily "tries to establish a direct cause-effect relationship between technology (stimulus) and learning outcome (response), while ignoring the larger context within which learning occurs." This Alavi et al. (2001 ) feel "represents a static view and perhaps an outdated stimulus-response perspective on learning research." Such an approach might well be seen to underpin the development of "intelligent" tutoring systems which are intended to replace the "traditional" human teacher rather than in developing open learning environments wherein the student may take control and determine his or her own learning pathways and goals.

Many academics are, therefore, concerned to determine how to facilitate learning by using the technology in ways that are ethically sound as well as employing techniques that do not simply try to replicate what is probably better achieved in f2f situations. In other words, the concern that is particularly relevant for the teaching of the campus-based student is, it would seem, to determine how the technology may be exploited to offer different approaches to learning that are not feasible in non-virtual environments and how to integrate this with the f2f contact sessions with a tutor or "expert." As Alavi et al. (2001) note "TML should not merely attempt to replicate conventional learning but try to enhance and improve it. An important research question is, therefore: `How does technology enhance learning?.'

Thus, as further noted by Wintlev-Jensen (2000), "being swept forward by the constant waves of technological innovation is simply not a satisfactory solution to the fundamental problems facing educators and teachers today. It is necessary to stand back and re-examine the relevance of current mainstream activities in the light of new thinking. On the one hand, there is growing concern amongst pedagogists regarding the widening gap between educational theories and existing learning environments, the development ofwhich is driven mainly by technological advances rather than educational objectives. On the other hand, there are some technological developments which have the possibility of radically shifting the established paradigms of learning."

A major challenge for the HE sector as a whole would, therefore, be to acknowledge that as computers become more ubiquitous that there is an urgent need to ensure that ethical issues related to the malleability and societal impact oftechnology is more overtly addressed across all subject areas and disciplines. In so doing, a shared, ethically and pedagogically aware approach to the appropriate integration and exploitation of the technology might then be more universally adopted. It may then be possible to facilitate a technological shift and thereby challenge some of the established and proposed paradigms of learning.

References

REFERENCES

References

Alavi, M. & Leidner, D. (2001). Research commentary: Technology-mediated learning, a call for greater depth and breadth of Research. Information Systems Research, 12(1), 1 - 10.

References

Bernstein, B. (1977) Class, codes and control. Towards a Theory ofEducational Transmissions. 3. London: Routledge and Kegan Paul.

Campo, J., Barroso, P., & Weckert, J. (2001). Teaching computer ethics: A comparative study. In T. W. Bynum, H. Krwczyk, S. Rogerson, S. Szejko, & B. Wiszniewski (Eds.), Proceedings ETHICOMP 2001, Gdansk, Poland, pp. 215-222.

Davies, J. (2001). An historical review of the teaching of appropriate norms of behaviour to novices by professional groups, with emphasis on the teaching of computer ethics, and some observations for the future. In T. W. Bynum, H. Krwczyk, S. Rogerson, S. Szejko, & B. Wiszniewski (Eds.), ProceedingsETHICOMP2001, Gdansk, Poland, pp. 196-204.

References

Fleischman, W.M. (2001). The role of imagination in a course on ethical issues in computer science. In T. W. Bynum, H. Krwczyk, S. Rogerson, S. Szejko, & B. Wiszniewski (Eds.), Proceedings ETHICOMP 2001, Gdansk, Poland, pp. 171-183.

Gokhale, A. A. (1995). Collaborative Learning Enhances Critical Thinking. www: http// scholar. lib.vt.edu/ejournals/JTE/jte-v7n I/gokhale.jte-v7n .html referenced to Journal of Technology Education, 7(1).

Golding, W. (1975). Lord of the Flies. Faber Paperbacks.

Illich, 1. (1974). Deschooling Society. London: Calder and Boyars Ltd. Jacques, D. (1995). Learning in Groups. (21 ed.), Kogan Page. Johnson, D.G. (1994). Computer Ethics. (2nd ed.), Prentice-Hall Inc.

Kohlberg, L. (1969). Stage and sequence: The cognitive-developmental approach to socialization. In D. Grosling (Ed.), Handbook of Socialization Theory and Research, Chicago: Rand McNally.

References

Kohlberg, L. (1972). A cognitive-developmental approach to moral education. The Humanist, 4.

Koschmann, T. (1999). Towards a dialogic theory of learning: Bakhtin's contribution to understanding learning in setting of collaboration. In C. Hoadley & J. Roschelle (Eds.), Proceedings of the Computer Support for Collaborative Learning (CSCL) 1999 Conference, Dec 12-15, Stanford University, Palo Alto, CA, Mahwah, NJ: Lawrence Erlbaum Associates. http://kn.cilt.org/csc I 99/A3 8/A3 8.htm accessed 05/03/01.

Laurillard, D. (1993). Rethinking University Teaching-A Framework for the Effective Use of Educational Technology, London: Routledge.

Lee, J., Dineen, F., & McKendree, J. (1998). Supporting student discussions: It isn'tjust talk. Education and Information Technologies, 3, 217-229.

References

Leidner, D. & Jarvenpaa, S. (1993). The information age confronts education: Case studies on electronic classrooms. Information Systems Research, 4(1), 24-54.

Leidner, D. & Jarvenpaa, S. (1995). The use of information technology to enhance management school education: A theoretical view. AfIS Quarterly, 19(3), September, pp. 265291.

Lim, K., Ward, L., & Benbasat, I. (1997). An empirical study of computer system learning: comparison of co-discovery and self-discovery methods. Information Systems Research, 8(3), 254-272.

Lipman, M. (1991). Thinking in Education. Cambridge, UK: Cambridge University Press. McKendree, J., Stenning, K., Mayes, T., Lee, J., & Cox, R. (1997). Why observing a dialogue may benefit learning: The vicarious learner. In Proceedings of PEG '97, Sozopol, Bulgaria.

References

McKenna, C. & Bull, J. (1999). Testing Times, l(1), published by CAA Centre. Available at http://caacentre.ac.uk.

OECD Proceedings (1996). Adult Learning in a New Technological Era, OECD: Centre for Educational Research and Innovation, Paris.

Ohlsson, S. (1995). Learning to do and learning to understand: A lesson and a challenge for cognitive modelling. In P. Reimann & H. Spada (Eds.), Learning in Humans and Machines: Towards an Interdisciplinary Learning Science, Oxford:: Elsevier Science.

Salmon, G. (2000). E-moderating. Kogan Page Ltd.

Skinner, B.F. (1954). The Science of Learning and theArt of Teaching. Harvard Educational Review.

References

Spinello, R.A. (1995). Ethical Aspects OfInformation Technology. Prentice-Hall. Stenning, K., McKendree, J., Lee, J., & Cox, R. (1999). Vicarious learning from educational

dialogue. In C. Hoadley & J. Roschelle (Eds.), Proceedings of the Computer Support for Collaborative Learning (CSCL) 1999 Conference, Dec 12-15, Standford University, Palo Altom California, Mahwah, NJ: Lawrence Erlbaum Associates. http:// kn.cilt.org/csc 199/A43/A43.htm accessed 12/12/2001.

Turner, E. & Roberts, P. (2001). Teaching ethics to IT students in higher education: Provision, perspective and practice. In T. W. Bynum, H. Krwczyk, S. Rogerson, S. Szejko, & B. Wiszniewski (Eds.), Proceedings ETHICOMP 2001, Poland, 223-231.

ULT Canada. (1999). Why use WebCTwhen there are other good products available? http:/ /multimedia.marshall.edu/cit/webct/compare/whyusewebct.htmlaccessed 02/12/99.

References

Vosniadou, S. (1994). From cognitive theory to educational technology. In S. Vosniadou, E. De Corte, & H. Mandl (Eds.), Technology-BasedLearningEnvironments, NATO ASI Series, Berlin-Heidelberg: Springer-Verlag.

Voss, J. F. (1990). Reasoning by argumentation. In H. Mandl, E. De Corte, N. Bennett, & H.F. Friedrich (Eds.), Learning and instruction: European research in an international context, 2.1, Oxford: Pergamon Press.

Vygotsky, L. (1978). Mind in Society: The Development ofHigher Psychological Processes. Cambridge: Harvard University Press.

Wintlev-Jensen, P. (2000). Issues for Further Discussion, Workshop on Future European RTD Agenda for Advanced Learning Environments, Luxembourg.

Wisdom Tools: Centre for Excellence in Education and Indiana University. (1997). Comparison of Online CourseDelivery Software Products. http://multimedia.marshall.edu/cit/ webct/compare/benchmarktest.html, accessed 02/12/99.

AuthorAffiliation

Pat Jefferies

De Montfort University, UK

AuthorAffiliation

Simon Rogerson

De Montfort University, UK

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Pat Jefferies is a principal lecturer and teacher Fellow within the Faculty of Computing Sciences and Engineering, De Montfort University, England. Administratively, her role is as director of Undergraduate Studies but for the past four years she has, as part of her teaching, been involved in the development of the Computing & Ethics module for delivery to final year undergraduates. The formal undergraduate and post-graduate qualifications that she has gained are in the field of Education (specializing in Philosophy of Education) and Computing. Jefferies is currently studying for a PhD in technology-- mediated interaction and its impact on higher education. She has been successful in publishing several international conference and journal papers based on this research work.

AuthorAffiliation

Simon Rogerson is director of the Centre for Computing and Social Responsibility and professor in Computer Ethics at De Montfort University, England. Following a successful industrial career where he held managerial posts in the computer field, he now combines research, lecturing and consultancy in the management, organizational and ethical aspects of information and communication technologies. He has published more than 200 papers and books including Ethical Aspects of Information Technology: Issues for Senior Executives, Strategic Management Support Systems and Global Information Ethics. He was the winner of the 1999 IFIP Namur Award for outstanding contribution to the creation of awareness of the social implications of information technology.

Subject: Studies; Asynchronous transfer mode; Video teleconferencing; Technological change; Teaching

Classification: 9130: Experimental/theoretical; 5250: Telecommunications systems & Internet communications; 8306: Schools and educational services

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 370-386

Number of pages: 17

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198659664

Document URL: http://search.proquest.com/docview/198659664?accountid=38610

Copyright: Copyright Idea Group Inc. 2003

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 90 of 100

Computer service support at Glenview Hospital

Author: Garcia-Murillo, Martha; Maxwell, Paula; Boyce, Simon; Raymond St Denis; et al

ProQuest document link

Abstract:

This case focuses on the challenges of managing a help desk that supports computer users using the call distributing system and the knowledge base, a Web-based technology. The choice of technologies affected the service provided by the help desk staff. This case describes the benefits and drawbacks of both approaches and examines the challenges faced by management in its attempts to standardize call documentation and knowledge-base entries. [PUBLICATION ABSTRACT]

Full text:

Headnote

Computer Service Support at Glenview Hospital1

Headnote

EXECUTIVE SUMMARY

Headnote

This case focuses on the challenges of managing a help desk that supports computer users. There are two main technologies that the Information Center (IC) uses to provide this service: the call distributing system and the knowledge base, which is also available on the Web. The choice of technologies affected the service provided by the help desk staff. Specifically, the call distributing system was unable to provide enough information regarding the number of calls answered, dropped, and allocated among the different staff members. The hospital knowledge base, on the other hand, is created based on people's documentation of the problem and selection of keywords, which has led to inconsistencies in the data entry. One of the management challenges for the Information Center is to foster self-help and minimize the number of requests to the IC staff. This case presents the difficulties and some of the initiatives that the IC has considered to solve these problems.

BACKGROUND

Glenview Hospital is a non-profit organization located on the east coast of the United States. The hospital was founded in 1872 as a private organization offering general medical services to the surrounding community. Over the years, the hospital has incorporated numerous services and staff. The total number of employees at the hospital is 13,873. Table 1 shows a break down of the different types of employees. The hospital also supports 1,452 medical students. The total number of people that need computer support is approximately 8,200, which is almost 60% of the employees.

The hospital encompasses 62 different units that span from general medicine to more specialized medical units such as Thoracic Oncology and Neurosurgery. Table 2 lists ofsome of the services provided by the hospital.

While many of the services are provided at the hospital, there are also some services that are supported in different locations. An example is the new hospital building that was opened two years ago to accommodate the Neurosurgery and Gamma Knife Center, Regional Oncology Center and general medicine services. This extension to the hospital was necessary because the old facility was not able to accommodate the amount of staff and equipment necessary for the growing needs and services of the hospital. The hospital also has another facility in a community nearby which offers similar services to those provided in its main location. There are also satellite offices for some specialized services. The Oncology Center, for example, has two other offices in communities nearby. Aside from the medical services provided to the community, the hospital also has research centers in the field of Heart, Lung and Blood diseases, Allergy and Infectious Disease, Cancer, and Immunization. Associated with the Hospital is the Glenview Medical University, which supports four programs: (1) Medicine, (2) Graduate studies, (3) Health professions, and (4) Nursing.

There are many functions at the hospital that rely heavily on information technology. Patient care, for example, requires specialized software to handle appointments and insurance claims information. Although many requests come from patients requiring visits to doctors, there are also requests by doctors that want to schedule specialized tests and procedures on their patients. Scheduling then is done using scheduling software. The laboratories are another example of the crucial role of computers at the hospital. Databases at the laboratory for example manage information regarding patients, tests ordered, and the results ofthe tests. Other services that have benefited from information technology are Admissions/Discharge/ Transfer (ADT), Anesthesia Information Management, Budgeting, Clinical Information Systems (CIS), Computerized Patient Records (CPR), Dictation/Transcription/Voice Recognition, Dietary/Food Service, Immunization Tracking, Pharmacy/Drug Management and Electronic Data Interchange (EDI)/Electronic Billing. Similarly, the university attached to the hospital supports three computer clusters each of which have 30 computers including PC, Macintosh, and Solaris machines.

The Information Center

Computer Support Services (CSS) at the hospital were first established in the 1960s. At that time, the main role of this department was to support the hospital mainframe computers. The few applications that were run on these systems were built within the hospital research community to conduct sophisticated statistical analysis of medical data. With the advent of personal computing, the hospital began introducing computers to support its numerous research activities and patient services. The first computer applications that were introduced at the hospital were administrative, related specifically to scheduling and claims administration as well as payroll. These two were perceived as crucial to the operations of the hospital because they had an impact on their revenue and staff remuneration. As the hospital grew, new applications were introduced leading to the growth ofthe CSS. Today, CSS is composed of six units as presented in Figure 1.

Each of the Computing and Support Services Unit works independently and can make decisions regarding the purchase of equipment and software that would suit their needs. Of those seven units, Dan Horton heads the Client Services Unit, which in turn manages the Information Center, which provides technical support to the hospital.

When the Information Center was first established in the late 1980s, it was a small unit that consisted of only two individuals. The Information Center currently has seven full-time and 20 part-time employees. With the exception of Seth Abern, who has a computer engineering background, all of the other full-time employees do not have a formal education in information systems and have received all of their experience on the job at the hospital and other companies. Part-time employees are all students who attend the university nearby. Most of the students that work, providing computer support at the hospital, have taken classes in information systems, but their experience is limited to their course work and some training at the Information Center.

When the Information Center was first implemented, it provided technical support for the entire hospital. This was not a difficult task since there were only a few computers and, as a result, there were not many requests. With the boom in information technology in the hospital in the last 15 years, the Information Center was no longer able to keep up with requests. At that point, Robert Foels, the director of the hospital-wide Computing Support Services, decided to decentralize help desk support to the different medical units. This was also necessary because many of the more specialized units also required equipment tailored to their function. Not every medical unit was given a technical support employee. Only those units with heavy technology demands that were also more specialized received a full-time staff member. Smaller units were still supported by the Information Center. The focus of the IC was therefore to handle more general requests and, occasionally, to support units whose own technical staff was not able to provide a solution.

The IC now supports Windows 95,98, and NT operating systems as well as Solaris, Unix and, more recently, some Linux machines. They also provide support for general applications such as the Microsoft Office suite as well as more specialized systems such as Novel GroupWise, supporting accounting, electronic mail, calendar, and scheduling applications for the whole hospital. The center supports both PC and Macintosh systems.

One of the problems that the Information Center faced for many years was giving support to many different applications. This happened because some of the hospital units once decided to implement software that would help them manage their patients and operations. Many of the people who wanted applications made decisions without consulting the IC staff. This led to a wide variety of programs, ofwhich many performed similar functions. While the medical units made their own purchasing decisions, they nonetheless requested support from the IC when their systems were not working properly.

In an effort to control the number of applications supported, the Client Services director in consultation with all the other units that comprise the Hospital's Computing Support Services decided to implement an enterprise-wide system for their more basic applications, specifically those supporting payroll, staff scheduling, procurement, and budget. They also wanted to standardize their e-mail applications, calendar, and meeting room scheduling. Because the transition towards the standardized system happened only a year before, there were still many people using the old applications. Another factor that has led the Computing Support Services Department as well as Glenview Hospital administrators to consolidate their systems is the Health Insurance Portability and Accountability Act (HIPAA), which had as its goal to "provide better agreement on health data vocabularies, ensuring the privacy of health information, and addressing other issues surrounding the electronic transmission of healthcare data" (Rishel & Frey, 2001).

The budget for the Information Center is determined by Foels, whose own budget is in turn decided by hospital administrators. Budget is one of the problems that the Hospital Computing Support Services has always battled with. Although information technology has an impact on many of the hospital's functions, it is considered an expense that does not directly impact patient care. Hospitals are heavily regulated and have to keep close control of their expenses because government units or health insurance organizations determine many of their rates. This has led to the implementation of systems that were not necessarily the best or most appropriate for the hospital but instead the least expensive. The 2001 budget for the entire Computing Support Services was $94,000, which was to be allocated to pay for computer equipment and software. This generally led to a budget of only 15,000 for client services.

The decision making process at the Information Center is based on team discussions. They hold weekly meetings where they discuss new ideas, poor processes, and consensus rules. There have nonetheless been situations where upper management in the Computing Support Services pushes a decision, and then it is just handed down and not really discussed for its merits. The Client Services Unit as well as most of the Computing Support Services department is composed of employees that have worked for the hospital for a long time. The culture is very traditional. People continue doing the same things because that is how they have always been done. Change is feared by most, as the culture is made up of staff with seniority and not a lot of "fresh" ideas.

The primary responsibility of employees at the IC is to provide solutions to incoming requests and problems. Each employee also has a specialty area with co-workers crosstrained as backups. Other responsibilities include training of staff when new systems are implemented. Dan Horton is the head of this department and looks for improvements to facilitate the work of his staff and provide better support to the users at the hospital.

SETTING THE STAGE

When the Information Center was first established, it did not keep any records of the problems and solutions given to common computer related problems. As Horton states, "the Information Center relied on the broad knowledge of our employees to solve our clients computer's needs." The problem with this approach was that on many occasions people who were inexperienced with any given problem would then have to spend many hours working on something that another employee had already resolved for another user. Given such inefficiencies, the then director decided to begin documenting the problems and solutions to the problems. When the idea was implemented, one ofthe employees was dedicated to write manuals which were then given to all employees providing computer support. Although this provided some relief in the amount of work that was necessary to solve a problem, it still was time consuming to find the answer in a manual that was becoming increasingly lengthy.

IC employees created several versions of homemade databases until 1995, when it decided to implement a DOS-based help desk software package named CallOnUs. The vendor updated the system in 1997, but, after that, it ceased providing support. When the decision was made, CallOnUs was not one of the leading software applications to support help desk services. The price for top competitors ranged between $20,000 and $34,000 while CallOnUs was purchase by IC for $5,400.

CallOnUs has two interconnected purposes. It is used as a call tracking system to record and prioritize a customer's e-mail, phone, or walk-in requests. Employees log the requests as incidents in the system and assign them to a queue for troubleshooting. The system tracked the history of the incident from origin to completion. The CallOnUs system also functions as a knowledge base and contains more than five thousand documents. These documents include procedures, policies, and information used by the IC staff. They use this information when interacting with customers, training new staff, and supporting the staff of the smaller medical units when troubleshooting incidents.

Universal Call Distributing

In the early days of the Computer Clients Services Unit, a few employees provided technical support as part of their obligations. There was no dedicated call center to support users. Instead, the user called the CSS employee. This did not pose a problem at first, but, as the number of users grew, employee personal telephone lines were completely overtaken by hospital employees requesting help. At the request of the employees that were taking those phone calls, the then director of the Client Services Unit decided to purchase software to handle technical support. Since the Unit had not budgeted for such a purchase that year, the criterion for selection was, once again, price. Unfortunately, the technology at the time of installation was already outdated. While more sophisticated systems were becoming available, the IC was unaware of the developing technologies that could better support the center's future growth, primarily because they did not do much research into the product selection. The phone system that supports the help desk routes customer phone calls through the IC. Given its primitive features, the phone system has no way of tracking calls and producing reports to analyze production. As Horton stated, "metrics are implemented to understand how we are doing and find ways to do better." Without a way of producing call statistics, the IC is merely reacting to the loudest complaints instead of proactively analyzing deficiencies and determining solutions.

Information Center Web Site

In 2000, the Information Center implemented a Web site to support users. At this time, it was clear that the evolving hospital intranet could also accommodate technical-support material. Because the IC did not have a person with Web technologies expertise, it hired an outside independent consultant to develop the page. The IC Web site includes a search engine for the CallOnUs knowledge base. There are also various links to information that can solve customer questions. The function of the site is to provide efficient self-help for the hospital user community. Hospital users can reach the CallOnUs knowledge base from the Glenview Hospital home page. From the home page, users first click on Staff Support, then on Information Center, then on Support Services, and finally on the "search for a solution" link that uses the CallOnUs knowledge base. The Information Center's Web site has 40 links presented in two panels on its main page. One panel is organized alphabetically while the other is organized by main topics. The link to reach the CallOnUs database is in the alphabetized panel. When users reach the knowledge base, they have several search options. One method is to use the general search engine that accepts multiple word entries. The user can search by keyword or by symptom. If the user cannot find the solution, the other option is to send an e-mail to the IC, for which the address is at the bottom of the knowledge base page.

CASE DESCRIPTION

Most of the problems associated with the use of the CallOnUs knowledge base are related to poor data administration. As stated by McNurling and Sprage (2002), challenges of managing information resources derive from problems associated with ambiguity of language and undefined structure. They find that in the world of data administration, there are several tasks: (1) clean up of data definitions; (2) control of shared data; (3) management of data distribution; and (4) maintenance of data quality (p. 214).

Data Definition

Data definition refers to the consistency of definitions used in the logging or input of data. Any IC staffmember with access to CallOnUs can create a knowledge document, which requires the entry of between two and eight keywords. IC staff and end users use these keywords to search the system when trying to resolve problems. Each staff member has the freedom to use any words he thinks are best for the document. For example, to describe a common problem with an operating system, the terms Windows95, Win95, Windows 95, Win95 or Windows-95 are used. Because ofthe multiple terms that can define a problem, numerous incident solutions can result from using the full search query and the user has to read all of them to find his or her particular answer.

At the Web site, users experience similar problems. When using the search engine, they can create a query by subject or problem symptom. However, this too takes several tries because employees creating knowledge documents use many different keywords to describe the same problem. As a result, users do not retrieve all of the information available in the knowledge base applicable to their problems and the information retrieved is often not helpful. This creates a situation where a user prefers to call the IC for help rather than solving the problem alone.

Control of Shared Data

The CallOnUs knowledge base is used and maintained by all employees in the Information Center. When an employee is trying to answer a user's question, he will spend a few minutes locating the documents that will help to solve the problem. Because of the lack of standardized data definitions, there are occasions when he will not be able to find the exact solutions. If he cannot find an answer in the knowledge base, two things can happen. One is to ask other employees who are also providing help desk support. This is common because many employees are frustrated with the knowledge base and rely on each other's knowledge. If none of them knows the answer, then the employee will inform the user that he will try to find a solution and will call her later. When no solution is found, the employee then proceeds to create a document outlining the problem and solution that he was able to recommend.

Management of Data Distribution

As a result of the hospital having technical support staff in other units aside from the IC, there has not yet been a consolidation of documents. Each unit maintains its own knowledge base system. One of the problems associated with this set up is that there have been many occasions when one of the units was not able to find a solution to a problem for which the IC had already found an answer. This means that whenever an independent unit faced a problem that it could not resolve, an employee would call the IC for help.

Maintenance of Data Quality

As stated by Fisher and Kingma, "Data quality is one of the critical problems facing organizations today" (2001, p. 101). It has been estimated that error rates in industry are as high as 75% (Redman, 1998). According to the Data Warehousing Institute poor customer data quality costs U.S. companies $611 billion a year (2002). The metrics often associated with data quality are: accuracy, timeliness, consistency, completeness, relevancy, and fitness for use. Table 4 provides a description for each of these variables

Because each employee is able to document the solution to the problems that he faces when supporting users, there have been multiple documents answering the same question. The simple addition of documents that solve problems that have already been logged contributes to the problem of retrieving these documents in subsequent periods. Differing levels of expertise have further led to the creation of documents that provide inefficient or inadequate solutions to a problem. When an employee proceeds to provide support, he may be making things worse in the long term by giving solutions that could have negative effects on the overall performance of the system. This in turn leads to other problems.

Help Desk Support Flow

Employees at the IC log all incoming phone calls, e-mails, or walk-in visits into the CallOnUs system as incidents. When a user makes a request, the employee searches the knowledge base several times with a variety of keywords in an attempt to resolve the customer's request. If the incident is resolved, the employee documents the solution in the knowledge base. If the incident is not resolved, the employee forwards it to the appropriate queue for higher-level support. The request sits in the queue for up to three days until an employee attempts to solve the problem, or until the customer contacts the center again inquiring on the status of the problem. The time lag occurs because no one at the center is responsible for responding to questions left unanswered by other employees. It is only due to the unrecognized efforts of some employees that these requests are eventually resolved. If the customer contacts the center again, one of two things will occur. First, the employee will look for the incident report or start the resolution process with the customer again. This process includes searching the knowledge base again. Alternatively, the employee can forward the incident to the next level of support in another queue if he cannot resolve the incident. If the incident is resolved, the employee documents the solution. Alternatively, due to a lack of communication, the incident may be logged a second time and then two different employees may try to solve the problem, thus wasting staff time. The process repeats itself each time the customer calls back. The tension between the customer and the employee can escalate with each callback. Figure 2 shows the steps in the resolution process.

Support Over the Phone

If the user cannot find an answer on the Web site, they can call, e-mail, or walk to the Information Center. Unanswered calls and busy signals have created customer frustration, but the staff is unaware of reasons why calls are missed when staff is available. Neuma Adams, the head nurse in the radiology department, recently sent Horton a written complaint detailing the days and times her department placed support calls. She followed up with a phone call that stated: "When are you going to do something about this? We are all too busy to deal with these kinds of tech problems. We need your department to get things done to help us." Horton was unable to provide anything to her other than an apology.

Often, the employees are on the phone for extended periods with customers trying to solve customer callbacks on previously logged problems. Because of these long calls over unsolved incidents, no one is available to answer incoming calls regarding new incidents. Frustrated clients hang up and send inflammatory e-mails to Horton. He is not sure how often this happens because the phone system does not log hang-ups or missed calls. He does not know when the peak call periods occur or who is making the most support calls because the phone system provides no metrics. Employees are increasingly becoming frustrated and accusing each other of not "pulling their own weight" with regard to solving incidents when they are first logged into the system. Two of his most experienced front line employees left, and their replacements also left two weeks later.

CHALLENGES FACING THE ORGANIZATION

In order to increase the efficiency and reduce the workload of his employees, Horton instituted a tiered model consisting of four levels. The original tiered support level does not start from a planned strategy. Instead, it comes about as a result of the specialization that some of the employees were achieving in the handling of calls. Eventually, Horton decided to give these employees particular responsibilities. It originally had only two levels: desktop support and network engineering. Over time, the model evolved to include the four levels that are now in place. The biggest challenge this created for him and his staff was increasing the number of incident resolutions at Level 0 in order to reduce the workload of employees at Levels 1, 2, and 3. Horton feels that he does not have accurate numbers for percentages by tier. He needs to know this breakdown in order to justify improvements in certain areas. Figure 3 shows the tiers.

Level 0

Level 0 helps users solve problems themselves via the Internet, intranet, or printed material. There are printed User Guides that answer some basic computer set-up questions and the search engine on the internal site that queries the help desk knowledge base. Ideally, Horton stated that he "would like to get 15% [of support directed] to level zero." This would reduce the number of incidents requiring staff time.

Unfortunately for the Information Center, most hospital employees are not particularly knowledgeable about computers and will rarely take the initiative to learn by themselves. This is further exacerbated by the perception of many that computers are not their responsibility but rather the care of their patients. They, therefore, delegate all types of computer problems to the technical support of their medical unit or to the staff at the Information Center.

Level 1

Level 1 is the Information Center staff, and is the point of first contact by customers whether they come to the help desk personally, use e-mail, or phone. Among the tiers, Level 1 employees have the closest relationship with users because they are the point of initial contact. The Level I staff must also communicate thoroughly with customers to understand their needs and solve the problems quickly and efficiently to provide good customer service. Horton believes that "Level 1 should be able to resolve 55% of the incidents." If Level 1 staff cannot resolve the issue, they assign the incident to the next level.

Level 2

Another department handles Level 2 incidents. Level 2 employees focus on technical knowledge. They have to spend more time on each incident than Level I and have more onsite advanced customer support responsibility. Level 2 employees resolve a variety of incidents including hardware, software, and network problems. Ideally, Horton would like Level 2 to handle 27% of the incidents. All too often, Level 2 employees refer incidents they cannot resolve to Level 3.

Level 3

This is the Networking Support level. Employees in this tier are internal experts with a strategic planning focus. They have limited user contact, and mainly deal with network and server related issues. Horton wants Level 3 to handle 3% of incidents, "or even less." John, a new employee at Level 3, received a Level 0 User Guide during his orientation. Although he has worked for the hospital in other capacities for several years, he stated, "I have never seen one of these," even though the guides had been distributed to all new staff in the last two years, and are available at the Information Center. Upon receiving the User Guide, John was able to quickly solve an incident that the Level 1 and 2 employees had been working on for two days.

Table 5 presents the targeted and actual percentages associated with each of the levels.

Current and Future Projects

In an effort to reduce turnover and increase productivity, the Information Center intends to institute four projects:

(1) an updated phone system with extensive reporting capabilities,

(2) an innovative call tracking/knowledge management help desk package,

(3) an enterprise web based e-mail system, and

(4) an enterprise account management system.

The standardization of e-mail and accounting should reduce the number of requests.

The Phone System

The problems with the universal call distributing system are causing the Information Center to look at two alternatives for upgrading this equipment: (1) a new automatic call distribution system (ACD) and (2) an Internet Protocol (IP) telephony system. Both phone systems have enhanced features that track and route calls, but they also generate reports and allow greater communication between the call tracking software and the Internet. The ACD system is ideal for organizations with exceptionally high call volumes, and works by queuing incoming calls and routing them to technicians when they become available. The IP based system has the greatest degree of functionality because it incorporates both voice mail and e-mail with auto attendant, virtual extension, automatic call distribution, and single key voice mail response capabilities. Price is the most important factor considered in the choice of phone systems. While the IP system is more expensive than the ACD, it has many more functions associated with the computer telephony integration. At this point, no decision has been made.

Updated Knowledge Base

The existing help desk package, CallOnUs, installed in 1995 and upgraded in 1997, met with initial resistance among users until a management directive required all help desk technicians to use CallOnUs. While the CallOnUs system proved satisfactory in its early stage, as the number of knowledge documents increased and the service spectrum of the IC increased, the effectiveness of CallOnUs decreased. There are three main problems with the system: knowledge documents have no set search terminology or standards; it has an ineffective search engine; and it cannot cross connect to the IC Web page to allow easy access by Internet users. Another problem faced by the IC is that the vendor, after a series of mergers and acquisitions, ceased development of the product and announced that it would no longer support it at the end of 1997. Therefore, in 1999, the Information Center began to search for a new product to replace CallOnUs. Initial research indicates that the upfront licensing and installation for new systems from other vendors is likely to cost $250,000.

The increasing number of customers with varying technological needs has forced Horton to make radical changes in both the technology and structure of the Glenview Hospital Information Center. The hospital, the users, and the patients all depend on the ability of the IC to effectively deal with technology problems that arise ina timely manner. There is a delicate balance between organizational and system change. Managers must consider stakeholder acceptance in these decisions.

Horton has realized that to better serve his customers and decrease the pressure on his staff two things need to be changed. First, certain departmental procedures must be changed or augmented so that either users can solve their own problems or appropriate levels handle the calls. Second, technological improvements need to be made at the IC that will result in better customer service. Horton also needs adequate information to allow him to understand where the problems are within his own organization.

While there has not been a lot or research done with respect to the selection of the new system, it is clear that there are now more sophisticated tools to handle customer requests. One approach, for example, is the assignment problem. This is now being updated to Fault Systems, which provide a more optimal assignment of technicians to service faults (Lazarov & Shoval, 2002).

The IC is therefore coming to a point where major decisions need to be considered. Horton is running the risk of losing more staff, and the hospital is being negatively affected by systems that are not supported appropriately. The future of the Information Center and users at Glenview Hospital will thus be determined by decisions taken at this time.

Footnote

ENDNOTE

Footnote

1 The name of the organization, the industry, and the people involved have all been changed to preserve confidentiality and privacy.

References

FURTHER READING

References

HISTBA. (2002). Health Information and Technology Benchmarking Association. Retrieved May 27,2002, from the World Wide Web: www.histba.com.

Marcella, R. & Middleton, I. (1996). The role of the help desk in strategic management information systems. OCLC Systems and Services, 12(4), 4.

Rishel, W. & Frey, N. (2001). Integration Architectures for HIPAA Compliance: From `Getting It Done' to `Doing It Right.' Gartner.

References

Skip the help desk. (1997, March 17). Information week, 73. Stinton, I. (1996). Helping the Help Desk. Work Study, 45(1).

Yoon, V. Y., Aiken, P., & Guimaraes, T. (2000). Managing Organizational Data Resources: Quality Dimensions. Information Resources Management Journal, 13(3), 9.

References

REFERENCES

References

Data Quality and the Bottom Line: Achieving Business Success through a Commitment to High Quality Data. (2002). Seattle, WA: Data Warehousing Institute. Retrieved

References

November 7, 2002 from WWW: www.dw-institute.com/research/ display.asp?id6064#RS.

References

Kingma, C. F. (2001). Criticality of data quality as exemplified in two disasters. Information andManagement, 39, 109-116.

Redman, T. C. (1998). The impact of poor quality on the typical enterprise. Communications of the ACM, 41(2),79-82.

Rishel, W. & Frey, N. (2001). Integration Architectures for HIPPA Compliance: From `Getting It Done' to Doing It Right' (Strategic Analysis Report): Gartner.

Shoval, A. L. (2002). A rule-based system for automatic assignment of technicians to service faults. Decision Support Systems, 32: 343-360.

Sprague, B. M. (2002). Information Systems Management in Practice (5th ed.). Upper Saddle River, NJ: Prentice Hall.

AuthorAffiliation

Martha Garcia-Murillo

Syracuse University, USA

AuthorAffiliation

Paula Maxwell

Syracuse University, USA

AuthorAffiliation

Simon Boyce

Syracuse University, USA

AuthorAffiliation

Raymond St. Denis

Syracuse University, USA

AuthorAffiliation

Shwethan Shetty

Syracuse University, USA

AuthorAffiliation

Joan Shroyer-Keno

Syracuse University, USA

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Martha Garcia-Murillo has a PhD in Political Economy and Public Policy from the University of Southern California, where she was a research associate at the Center for Telecommunications Management. She is currently an assistant professor at Syracuse University's School of Information Studies, USA. She has also worked at the International Telecommunications Union in Geneva, Switzerland.

AuthorAffiliation

Paula Maxwell is pursing an MS in Information Management at Syracuse University, USA, and is also a technical analyst at the university's Computing and Media Services department.

Simon Boyce is currently pursuing a joint Juris Doctor and AIS in Information Management degree at Syracuse University, USA. He has an MA degree in PoliticalScience from Ohio University.

AuthorAffiliation

Raymond St Denis has an MS in Information Management from Syracuse University, USA. He is a member of the US Army Reserve.

Shwethan Shetty has an MBA in Marketing from the University of Pune in India. He is currently pursuing an MS in Information Management from Syracuse University.

Joan Shroyer-Keno is a database administrator for a computerized maintenance and logistics management project for surveillance systems equipment. She is pursuing an MS in Information Management at Syracuse University, USA.

Subject: Studies; Customer services; Technical support; Call centers; Quality of service

Classification: 9130: Experimental/theoretical; 2400: Public relations; 5320: Quality control

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 387-400

Number of pages: 14

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198654256

Document URL: http://search.proquest.com/docview/198654256?accountid=38610

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 91 of 100

Rx for integration: Lessons learned in health care EAI

Author: Nemati, Hamid; Stewart, Scott; Sherrill-Huffman, Faye

ProQuest document link

Abstract:

This case provides an overview of Enterprise Application Integration. Then, an examination of the technical and organizational challenges faced by a major medical center in North Carolina attempting to integrate its enterprise applications is presented, and how the project team responded to those challenges is discussed. An appendix featuring a complete list of products covered in this case, as well as a brief glossary of healthcare IT terms, follows the case. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

Managed care, Medicare reform and skyrocketing costs have forced health care providers to take a closer look IT and how it can help in providing a competitive advantage. Prior to the 1990s, most computer systems designed for health care were mission-specific. By the early to mid 1990s, many hospitals had begun to search the market for tools to integrate their aging transactional systems, since an integrated environment could provide more business-oriented functions such as decision support. However, for many medical centers achieving a seamless integration proved to be a daunting task.

Enterprise Application Integration (EAI) was a response to decades of organizations creating distributed stand-alone applications resulting in an overabundance of platforms and development approaches. Enterprise Application Integration (EAI) techniques provided the interface layer to allow the systems to act as one "seamless" whole. This case provides an overview of EAI and examines the technical and organizational challenges faced by a major medical center in North Carolina attempting to integrate its enterprise applications and discusses how the project team responded to those challenges. An appendix featuring a complete list of products covered in this case, as well as a brief glossary of healthcare IT terms, follows the case.

BACKGROUND

Rowan Regional Medical Center (RRMC) (www.rowan.org) was founded in 1936 as Rowan Memorial Hospital (RMH), an independent, not-for-profit medial center located in Salisbury, North Carolina. From its beginnings as an 80-bed facility, RRMC has grown to its present status as a regional acute care center and Level III trauma center serving a four-county area of central North Carolina, currently licensed for 308 beds.

Rowan County, the center of RRMC's service area, is one of the most populated counties in North Carolina and, in terms of industry, hosts the headquarters of a number of manufacturing and retail companies. RRMC is the fifth largest employer in Rowan. As the population of Rowan County has grown significantly since 1936 (at a rate of 17.8% between 1900 and 2000), RRMC has grown, as well, in terms of services provided and capacity. In 1996, the Board of Directors for Rowan Health Services, the parent company of RHS, elected to change the name of the facility to Rowan Regional Medical Center to reflect the hospital's status as a regional healthcare provider.

Being a privately held organization, precise financial statistics are not publicly available. Nevertheless, RRMC's operating margin (revenues vs. expenditures) of2.7% for FY 2001 are a matter of public record (DeLoache, 2000). This figure is consistent with other hospitals based on 1999 figures provided by the Medicare Payment Advisory Commission. RRMC has consistently sought methods to reduce healthcare costs for its patients and the organization. For several years during the 1990s, RRMC offered some of the lowest room charge rates of any similar facility in the region (Smith, 1997).

Rowan Regional Medical Center is part of Rowan Health Services, an umbrella enterprise which is comprised of four organizations: Rowan Medical Facilities, a for-profit arm which provides in-home medical equipment and services; Rowan Medical Alliance, a forprofit organization comprised of physicians and health-care plans; Rowan Medical Practices, a for-profit division made up of physician's practices owned by RHS; and the Rowan Regional Medical Center Foundation, a not-for-profit group charged with fund raising programs which benefit the medical center.

Beginning with the installation of a computerized patient accounting system in 1970, RRMC was an early adopter of IT solutions to bring efficiencies to functions that, directly and indirectly, affected patient care. However, this legacy installation in some ways hampered adoption of more standards-based systems that premiered during the 1990s.

SETTING THE STAGE

Healthcare Information Systems (HIS)

As an industry, healthcare has been behind most other business sectors in adopting Information Technology as a competitive tool. Generally speaking, until the advent of managed care in the late 1980s, the need to distinguish one provider from another was not necessary. Typically, each city or county had a "general hospital" that provided services for the local population. Very rarely did these local providers seek to gain market share from their competition in surrounding communities. Partly as a result of this non-competitive environment, as well as, prevailing economic trends, increases in health care costs began outpacing inflation rates. Employers, who foot the bill for the majority of health care costs through insurance premiums, began to take notice. Pressure on insurance carriers to keep premiums low gave rise to Health Maintenance Organizations (HMOs), which ostensibly focused on illness prevention or "wellness."

HMOs promised lower costs by negotiating fixed reimbursement rates with health care providers. In other words, unlike in the "fee for service" days under standard insurance plans, hospitals could no longer charge a patient covered by an HMO more for a procedure than was negotiated through the HMO contract.

Compounding the cost squeeze for providers was the aging "Baby Boomer" population, which was beginning to turn to Medicare in ever-increasing numbers. As with HMOs, Medicare dictates a fixed rate of reimbursement based on the procedure and the geographic region in which the provider is located.

These factors, in turn, forced providers to find new ways to generate revenue. Taking their cue from the business world, hospitals and other providers began actively seeking new "customers" for their services. Uncommon before, many medical centers engaged in advertising campaigns. Facilities began expanding high-demand services such as heart care and occupational therapy. Providers also turned to IT to provide an intelligence edge on their competition.

Prior to the 1990s, most computer systems designed for health care were mission-- specific. There were systems to manage laboratory testing, patient billing systems and admissions tracking systems, but few, if any, companies were developing systems that could encompass the full spectrum of activities conducted in the average medical center. For a time, some larger teaching hospitals developed their own Health Information Systems (HIS), which could act as an integrated environment to support a multitude of service areas. Gradually, vendors took notice and, by the mid-1990s, several long-time players in the healthcare systems market had developed (or bought their way into) first generation HIS.

A properly deployed HIS offers several potential benefits to a provider, depending on the applications bundled into it. Centralized registration, which enables a patient to register once, then proceed to any service area such as laboratory or radiology without the need for a second or third registration is one example. Greater convenience for the patient can translate to a greater likelihood that the patient will choose the facility in the future. HIS may provide access to patient information to physicians from remote locations, thereby forming the basis for a Community Healthcare Information Network (CHIN). This benefits the medical center, as well, since physicians who have access to such tools are more likely to admit their patients into facilities that have them.

HIS platforms may also provide more business-oriented functions such as decision support. For example, a medical center may want to model managed care contracts to see which contracts optimize revenue for the institution. Armed with this information, the provider will be in a better position to negotiate when the contract is due for renewal. Other Business Information (BI) tools contained in some HIS environments provide the ability to analyze patient demographics and enable their users to target services more effectively.

Despite the fact that HIS platforms provide many critical functions "under one roof," most of the current implementations were actually created by pulling together various point solutions and adding an interface layer to allow the systems to act as one "seamless" whole. The degree to seamlessness varies greatly and only in the past few years have developers begun to turn out products that have a truly integrated look and feel. Enterprise Application Integration (EAI) techniques provide this interface layer that is crucial to the modem HIS. To understand HIS, it is essential that we gain an understanding of the fundamentals of this burgeoning integration technology.

An EAI Primer

Enterprise Application Integration (EAI) can be considered the response to years of isolated systems development. In many organizations, applications have been created and/ or implemented in a vacuum, with little or no consideration of other currently deployed or planned applications.

EAI is not a single technique, but rather, a plethora of alternatives to tie isolated systems; also known as "stovepipe" applications, together. When choosing an EAI approach, one must consider not only the target applications themselves, but also the hardware platforms and operating systems that host these applications. These alternatives fall into three broad categories that will be summarized in the following sections.

The most obvious "point of entry" through which to extract data is usually an interface written directly into the target application. The use of such interfaces, also known as Applications Programming Interfaces (APIs), constitutes Application-level EAI (Linthicum, 1999). This approach assumes that the developers have taken future integration needs into account and have provided suitable linkages for external systems. In some cases, these APIs may be developed after the primary application development is complete, but this usually results in limitations in interface functionality.

When dealing with legacy mainframe systems, there may be no APIs provided with the original product. These interfaces can be written into the application after the fact, but this assumes that sufficient metadata exists to make such changes feasible. Additionally, one must consider the costs associated with program modifications, both in terms of dollars and potential downtime. If these changes are deemed too disruptive, the EAI project team might consider the database accessed by the application to be the next best choice as a source for integrateable data. This integration technique is known as Data-level EAI.

While data-level EAI might seem like a panacea for organizations that have built stovepipe applications atop industry standards DBMSs, this EAI method usually requires that some of the processing logic of the target applications be recreated in order to provide data that is calculated, but not stored. Again, the metadata issue looms. It is possible that documentation is not available which details this processing, rendering the data-level approach ineffective in providing all critical data. If neither of the two aforementioned techniques can provide the data required, then the third and perhaps the most limited form of EAI, User Interface-level EAI, should be considered.

User-level EAI accesses data, as its name implies, from the point at which the user interacts with the system. This might be a Graphical User Interface (GUI) as found in most current PC applications or a text-based screen as is common with mainframe and midrange systems. The interface is established by capturing data displayed on the screen with an intermediary program andpassing it to the target external application. The primary limitation to this approach is that only information presented to a screen or printer is available for use.

Despite the fact that interfaces are a major component of an EAI strategy, it must be remembered that the terms "interfaced applications" and "integrated applications" are not synonymous. A truly integrated system will not only provide for data transfers between component systems, but will also provide a common look and feel to the user. In this manner, the user of a composite system will feel that he is working with a single application. This is the ultimate goal of EAI efforts, but one that is none too frequently achieved and may not be required.

Now that we have gained a basic understanding of EAI and related implementation approaches, we will now see how these techniques were brought to bear during the complete overhaul of the clinical information systems environment at RRMC.

CASE DESCRIPTION

A Mainframe Legacy

In 1970, a team of developers was contracted to develop a mainframe-based patient accounting system to manage admissions and billing functions at RRMC. Over the next 25 years, this system would serve as the backbone of RRMC Healthcare Information System (HIS) architecture. Hardware was upgraded, then replaced, as performance needs or application requirements dictated.

In the early 1990s, serial terminals were retired in favor of PCs equipped with terminal emulation software. Code was modified to keep pace with the ever-changing mass of insurance, Medicare and state Medicaid regulations. New point solutions for departments such as laboratory and radiology spawned small departmental LANs. Some of the applications running on these isolated LANs were interfaced to the mainframe. These interfaces were custom-written and typically transferred only Admissions, Discharge and Transfer (ADT) data.

ADTs are the most basic level of data relayed by an HIS interface. When a patient is admitted to the hospital, an Admission transaction is generated. Depending on the interfaces available, these transactions will be passed to other systems, such as a laboratory management system, to eliminate the need for reentry of patient demographic information. If a patient is later transferred to a different room or unit, a Transfer record will be created and passed to all downstream applications. Similarly, when a patient is released from the hospital, a Discharge record will be processed to close out the patient's visit, also known as an encounter. Since medical history data is vital to proper patient care, the patient's record is usually never removed from the system. Additional encounter records will be linked to the patient record and some financial transactions may be purged, but the core demographic record remains. These retention requirements provide additional difficulties when replacing a legacy patient management system, as will be seen later.

It must be noted that ADTs alone, do not constitute all of the interfaces required to meet the needs of a modern HIS environment. Interfaces for patient orders, test results and billing information also play a part. These interfaces were lacking in the original system; thus, much manual effort was still required. In many cases, the lack of patient order interfaces caused the medical center to lose potential revenue, due to charges lost due to manual processing. Figure I details, albeit in a greatly simplified fashion, the primary data flows utilized in the RRMC 's new healthcare information system.

By 1995, the core patient accounting application remained largely intact. While other, less automated, medical centers were beginning to take advantage of the more standardsbased systems being offered by HIS vendors, RRMC was becoming increasingly aware of the constraints imposed by its highly customized environment. The medical center administration team realized that the mainframe's days were numbered and formed a search committee to recommend a course of action.

Building the Team

Comprised of departmental managers and supervisory level staff from critical clinical areas such as nursing, laboratory and radiology, as well as ancillary services such as business office, medical records and purchasing, the search committee began evaluating the HIS landscape in early 1995. The CFO of the medical center served as champion for the project and the leader for the search committee. While some members of the hospital staff and management had grown quite comfortable with the existing system and questioned the need for change, no one openly opposed the project. Having dealt with the legacy of customized applications, the decision was made that the new system would be implemented with a "nocustom" directive. Therefore, the chosen application would need to support the majority of the RRMC's requirements without specially tailored code.

Since RRMC had not undertaken such a massive revamping of its operating environment in many years, a consulting firm with experience in HIS acquisitions was brought in to "fill in the gaps" for the team. One of the first things noted was that most, if not all, of the available solutions required a more experienced IT support staff than was currently available in the medical center's Data Management department.

During this time, the Data Management (DM) department was actually an adjunct of the Business Office and reported to manager of that department. Most ofthe staff within DM was familiar with basic system operations, reporting and data-entry tasks. More complex issues with the mainframe were handled by the vendor. While the supervisor of the department performed basic PC support tasks, the majority ofthe microcomputer hardware and software issues were handled by the medical center's biomedical engineering service. It was clear that no members of the existing staff possessed the breadth of IT experience to oversee such a project. While the search committee proceeded with the onslaught of vendor presentations, site visits and marketing literature, the CFO shifted her focus to finding an experienced manager for the Data Management department.

After a three-month search, a suitable candidate for the DM manager's position was found. Soon after his arrival in July of 1995, he began working closely with the search committee and the consulting group to select a vendor from the remaining candidates. The prospective list had been whittled down from nine to three. Two heavyweights in the HIS industry were part of this list as was the original vendor of the mainframe solution, now offering a client-server platform. Early on in the process, the group had decided against a "best of breed" approach in favor of a single vendor solution. The driving force for this approach was the perception that a single vendor solution would be more integrated, therefore easier to use and support. Many vendors were dropped from initial consideration since they only provided solutions for particular clinical areas.

Further, more detailed, site visits were conducted during the final quarter of 1995. These visits focused on customers of the three vendor finalists. By December of that year, the medical center made their choice and initiated contractual negotiations with healthcare systems vendor McKesson/HBOC that lasted two and a half months. In February 1996, the contract was signed. The project was underway.

Integration Commences

Over the next several months, new staff members including a technical project lead, a decision support specialist and a network supervisor were added to the DM department. Existing staff members continued to support the production environment, while learning skills required for supporting the new environment. Some staff members in DM and other departments found themselves away for weeks at a time attending training sessions at locations across the country. In some cases, project timelines were compromised because critical personnel were off-site at these sessions. Figure 2 details the key IT personnel involved in the implementation effort.

Many tasks had to be completed before the first server to house the new applications could be brought on-site. One such project was the construction of a new data center to house the collection of Unix, Novell and NT servers that would make up the new system. The existing mainframe computer room was environmentally inadequate to meet these needs. Plans were made to convert several existing DM offices into a new computer room. Work on this phase of the project required four months to complete. Some small delays were introduced when it was discovered that the floor could not support the weight of the new systems. Additional supports had to be installed before the new data center could be utilized.

A new network infrastructure was also required to support the new environment. RRMC's existing LAN was a collection of cable of varying capacities and installation quality, placed by a number of vendors and in-house personnel. A network services vendor was brought in to assess the current cabling plant and develop a new infrastructure plan. This portion of the project ultimately required 15 months to complete and expanded the network from 90 nodes to over 700. Priority for new cabling installations was given to the new data center, DM offices and members of the Systems Implementation Team (SIT).

The SIT was an outgrowth of the systems selection committee, charged with the build and testing phases ofthe project. The manager ofDM asked each area affected by the project to select one or more persons (depending on the size of the department) to act as the "power users" for that area. It was determined that this group would not be comprised of management staff, since managers would be unable to focus all of their time to one project. By August of 1996, the systems and applications were available for the SIT to begin the build process. The project plan called for a one year build and test phase. The system, actually a collection of applications and hardware, was scheduled to enter production in October 1997.

While chosen vendor's history prior to the early 1990s was mainframe-centric, they had purchased several distributed-system development firms during a burst of acquisitions in the mid 1990s. It was this "growth by acquisition" approach that caused many of the challenges for RRMC in terms of integration. At the time that RRMC purchased an "integrated solution," the vendor was still trying to finalize their own integration strategy.

At the core of this strategy was Health Level 7 (HL7), which is a vendor-independent protocol for passing data from one HIS application to another. HL7 is to healthcare applications what ANS1X.12 is to Electronic Data Interchange (EDI). It is an attempt to create a "Lingua Franca" for healthcare-specific data.

During the selection process,HL7compliance was a requirement of RRMCs RFP. Companies acquired by the vendor were at different stages of implementing HL7. Some applications, such as the laboratory management system, supported HU v2.3, while the clinical documentation and patient accounting systems supported v2.2. Additionally, some of these products changed HL7 versions as a result of upgrades applied during the testing phase of the project.

As has been noted previously, historical patient records must be maintained for long periods of time in the interest of quality patient care. Thus, some conversion of data from the mainframe system to the new client-server platform was inevitable. Since the legacy patient accounting system did not contain much historical clinical data, it was decided that only a patient's demographic and insurance information would be converted. It was this dependence on legacy data and the complexities of conversion that forced RRMC to take an allor-nothing approach to installation of the new system. Rather than bringing the systems online in phases, the six core systems were slated to enter production status at one time. As a result, all interfaces between the systems had to be functional by October 1997.

McKesson/HBOC had chosen the DataGate interface engine by Software Technologies Corporation (now SeeBeyond Technologies) as their primary method of tying their disparate systems together into an integrated solution. STC was not acquired by the vendor, but rather worked as a business partner. STC was selected due to their early focus on the healthcare market (Schulte & Altman, 2000). The DataGate application was rebranded as Interface Manager by the McKesson/HBOC, but aside from the inclusion of the HBOC-- specific interface libraries, the product was identical to the STC release.

HIS Integration

DataGate (recently rebranded as eGate) is a very powerful application that allows a trained user or programmer to move data from one application to another through a variety of protocols and data formatting standards. At the time ofRRMC's installation, the DataGate server was supported by Unix variants only, although client machines could run any OS.

Within DataGate, data flows (messages) are processed in a FIFO sequence (unless reprioritized within the DataGate application) against authentication rules (message identifications and/or message translations). Figure 3 illustrates generically how DataGate processes these flows:

While DataGate greatly simplified the management and administration of HIS interfaces, it did not, by itself, provide all the tools necessary for their construction. Metadata, in the form of documentation which described the various inbound/outbound sockets built into the core applications, was required from the vendor in order to build the appropriate communications to and translations within DataGate. Difficulties in obtaining accurate metadata, provided the seeds for delays which crept into the HIS implementation timeline.

Project Delays

In the first few months of the build/test process, the DataGate engine was used very little. Before any meaningful testing could occur, numerous tables such as: department master, unit master, physician's master and item master had to be populated. Without these tables in place, no test admissions or orders could take place. This was not to say that EAI problems were non-existent during this phase. The applications that comprised the new system were, in most cases, originally developed with text-based interfaces. The vendor was in the process of building Graphical User Interfaces (GUIs) for these applications and RRMC found themselves an unwitting beta-test site. While this required extra effort on the part of the implementation team, it resulted in minimal impact to the project timeline.

As the build process neared completion, data conversion and interface tasks began to take more of the spotlight. The conversion process began in the fall of 1996, but problems caused the process to extend to September 1997, the month immediately preceding the planned transition to production status. Most of the problems resulted from data integrity issues with the source files. Literally, millions of records had to be processed and then reprocessed in cases where the conversion routines aborted due to data inconsistencies. A single conversion run might take days, depending on the file in question. Many days were spent tracking down the source of conversion terminations and re-running the processes. These conversion issues did not directly impact the testing of the new system, but did add impetus to delay the launch from October 1997 to December 1997. What did impact the latter stages ofthe test phase were difficulties encountered with the implementation ofthe interface engine.

As noted earlier, there was a lack of reliable metadata from which to construct the validations and translations that would be used by the DataGate engine. Since the HIS vendor was working internally on its own integration efforts, it was frequently difficult to get support from them for RRMC issues. By August of 1997, it was clear that too many interface issues and related testing remained to make an October launch feasible. Faced with PR issues due to a delayed implementation of their product suite, the HIS vendor redoubled their efforts to insure the success of interface efforts. Final testing was completed in mid-November.

Moving to Production

The completion of testing by no means meant that project team members could relax. There was still planning to be done for December 1, the date on which RRMC would see if the efforts of the past two years had paid off. The Administrative Team of the medical center was charged with acting as "goodwill ambassadors" during the migration to production and canvassed the medical center with light snacks for staff members.

To insure accessibility, cellular telephones were issued to all key project members for the duration of the launch. Additionally, a classroom used for system training was converted to a "war room" and staffed with those most familiar with the applications and product representatives from the HIS vendor. These personnel would act as a first level help desk.

Patients and visitors to the medical center were kept informed of the changes and potential impact of the conversion by way of posters and placards placed in key areas such as admitting. Admissions clerks reviewed their screens and instructions for a final time, as did the nursing staff. By the weekend of November 29, all was ready.

The process of moving to production on the new system turned out to be a busy time for the project team, though no major problems were noted. A few interface issues arose, but these were quickly resolved by the combined RRMC and vendor staffs. Problems that were not immediately resolved were placed on an issues list. Over the days and weeks to follow, this list was reviewed by the project team, which, after the transition to production status, was renamed the Systems Integration Team. The project manager provided by the vendor was kept apprised of the status of items on the list and any new issues that arose. Items that remained on the list for more than a couple of weeks or were of an especially critical nature were escalated by the DM manager to the vendor's upper management.

Post Production

By January 1998, the institution had settled into a regular maintenance mode with the new HIS, but a new round of EAI changes was just around the corner. The initial interface configuration which had served for initial production was showing its inflexibility at meeting new system and workflow demands. Converting these interfaces into a format that allowed for more flexible processing was hindered by the lack of personnel. As the technical project lead had moved to the manager's chair during the course of the implementation, a new team member who could be dedicated to the critical task of interface management was needed. The unique set of talents required made the newly created position of Interface Analyst especially difficult to fill. Several months passed before a suitable candidate could be found.

With the new analyst on board, work began on the interface conversion process. RRMC's decision to rebuild its HIS interfaces was driven by several factors. Many new systems, such as mammography tracking and fetal monitoring, that interfaced to the HIS were planned. Regulatory changes also dictated the changes. For example, vendor delays in meeting guidelines for outpatient billing were scheduled forced RRMC to develop their own solution using the DataGate engine.

The largest challenge to date at RRMC with respect to interfaces was the installation of an emergency department (ED) tracking and nurse charting system. The package was designed to fully track a patient's visit through the emergency department from the second they present at the door to the minute they are transferred or discharged. The process to retrieve the data required by the ED tracking system was handled through the Data Gate interface engine. Once again, EAI techniques freed the institution from having to resort to custom programming.

Lessons Learned from HIS Implementation

It would be easy to categorize an HIS implementation as a purely technical challenge, given the IT expertise required to make such an effort feasible. While having the necessary knowledge in-house is certainly critical, IT personnel must not discount the "people factor." RRMC realized early in the project that gaining buy-in from senior management, clinicians, ancillary staff and possibly most critical, physicians, was concomitant with the project's success or failure.

This "buy-in" is not merely an acceptance of the inevitability of the project, but also a feeling of ownership and participation in the final product. Implementation teams and target users alike must understand the goals of the organization in committing resources for an HIS implementation. In a business sector where budgets are extremely tight, end users and indeed, members of management in some cases may not see the "big picture." The IT department may be viewed as an ivory tower at best and a money pit at worst. The business case for an HIS revamping must be made clear to all.

Before undertaking a task that can easily overcome an institution's financial and personnel resources, it is vital to understand the following points:

1. Know the difference between an interfaced system and an integrated system.

Vendors often use the term "integrated," when in fact their application is actually a collection of smaller point solutions that are tied together via point-to-point interfaces. A truly integrated system may be comprised of several smaller applications tied together via an interface engine such as DataGate, but these applications are presented to the user in such as way as to appear seamless. A common look and feel is apparent throughout the environment.

On the other hand, an interfaced, but little-integrated HIS application will appear fragmented to the user. Training staff to use such as system will be more difficult since they may have to learn several different user interfaces to switch between components effectively. An interface engine may provide the back end data sharing, but the users, in effect, must provide the front-end integration.

2. Have "champions" for the project at all levels of the organization.

Even in small health care centers, the task of moving to a new HIS environment is staggering. In any organization, the longer a project takes to complete, the more likely it is to suffer from the perception that it is a never-ending process. Enthusiasm wanes for the original goals. Personnel changes, inevitable in any dynamic institution, further hinder the efforts to "keep the fire" under project members and the organization as a whole. For these reasons it is essential that the project team includes key staff members from senior and middle management, as well as influential clinical staff members to act as PR "agents" and further the cause

3. Insure that the proper skill sets are available before the project begins.

In many instances, organizations proceed too far down a project plan before realizing that sufficient expertise does not exist to complete the task. Usually this is the result of poor communication between the project steering committee and front-line personnel. Too often, management feels that once the project is complete, the need for specialized knowledge is reduced. As a result, they may turn to short-term expertise as might be found through consulting firms, only to find out that once the consultants leave, so does the knowledge.

4. Negotiate vendor contracts carefully.

Caveat emptor. While the process of contract negotiations may seem like so much administrative busywork as compared to other, more concrete project tasks, possibly no single item has more impact on long term success. Make sure that project deliverables are clearly specified along with a specifically stated timeline. This greatly reduces the chance that the institution will be bitten by the "vaporware" bug. The vendor will be contractually obligated to provide what they promise or face various legal remedies. It is also very important to include on-going support and maintenance into the agreement.

Software vendors normally increase maintenance fees for their applications between 6% and 8% per year. Lesser (or at least fixed) increases can be negotiated upfront to ease the budget planning process in future years. Frequently, new major releases of and application are not included as part of the maintenance and licensing fees. These, too, may be negotiable, depending on how eager the vendor is to complete the deal. RRMC spent three months in intense negotiations with the vendor to lay the contractual foundation of the project. Over the course of the next four years, the contract documents were referenced to iron out misunderstandings between the vendor and the institution.

5. Develop stringent system monitoring procedures.

One of the greatest post production challenges was insuring that all critical systems and applications were properly monitored. In the original mainframe environment, system monitoring was greatly simplified since the applications resided on one central system. In the era of distributed systems, however, it is very difficult to impossible to provide the monitoring necessary without exceeding staffing constraints. Monitoring toolsets and clearly written policies are vital.

RRMC used a variety of means to keep track of system performance. Most important was the interface status monitor provided with the DataGate product. The monitor was a prominent feature of the operations team office and was consistently checked for errors. Additionally, a number of scripts and procedures were written by the staff to provide additional alerts. A "red book" of critical systems procedures was kept constantly updated and available both on-line and in hard copy in the data center.

6. Understand the workflow impacts of new systems.

Some organizations may be tempted to consider new systems as a means of bringing efficiencies to existing processes. This shortsighted approach can lead to frustration after the system is placed into production, which can spell doom for the project and its backers.

Unless an application is custom written for an enterprise, some workflows and processes that have stood the test of time must be augmented or entirely scrapped. It is all too easy to fall into the trap of modifying the application, when it is the old way of doing things that should be revised. There are situations that may necessitate customizations, but each proposal must be reviewed carefully. Otherwise, the organization may find itself in a position of being unable to apply applications upgrades in a timely fashion due to the required retrofitting of customizations. This was the situation that RRMC found itself in with the original mainframe system. As a result of RRMC's decision to avoid "custom code," the institution has successfully applied two major system upgrades since 1997 with little difficulty.

CURRENT CHALLENGES / PROBLEMS FACING THE ORGANIZATION

The HCFA HIPAA regulation will significantly change most of the systems that RRMC utilizes. Passed by Congress in 1996, the act was designed to help protect the privacy of patients and their information while "administratively simplifying" healthcare transactions (www.oahhs.org). The transaction standards became effective in October of2000. Providers covered by the regulations have two years to comply. Standard claim formats, common code sets and unique health identifiers are part of the new regulations. The privacy portion of the act specifies how health providers handle patient information, both in transmission and accessibility. This rule went into effect in April of 2001 and carries a compliance deadline of April 14,2003. When the security regulation portion ofthe act has been finalized, it will detail procedures and safeguards that will have to be in place to ensure confidentiality and integrity of patient health information. A final set of rules is expected later in 2002. HIS applications in place at the time of HIPAA's ratification are subject to its guidelines. While RRMC is using some standard code sets and claim formats currently, more work is required to insure enterprise-wise compliance. RRMC will depend on the vendors ofthe systems in place, along with the HIPAA task force led by the Corporate Compliance officer of the facility to ensure timely compliance.

HIPAA privacy mandates will also affect the way users sign on to the RRMC network. A single sign-on application is being tested for implementation later in 2002. This application meets the security standard of HIPAA and saves users from having to memorize (or more likely, write down) numerous passwords.

Beyond achieving HIPAA compliance, eliminating paper and providing timely, accurate information to employees and physicians has been an ongoing effort. Most paper-based reports have been converted to electronic format accessible via a Web browser or the decision support application client. Clinical information, such as lab and red results, patient episodes, and pharmacy profiles are also available via the medical center's intranet. In the future, more information will be available on-line as RRMC looks to implement an electronic medical record (EMR).

These initiatives, along with new systems that are on the horizon, will keep RRMC at the top ofthe list of facilities that have computerized much oftheir processes and recordkeeping.

References

REFERENCES

References

DeLoache, F. (2000, April 4). Hiring freeze: Rowan Regional looks for ways to cut costs. Salisbury Post. Retrieved from http://www.salisburypost.com/2000april/040400h.htm.

Linthicum, D.S. (1999). Enterprise Application Integration. Boston: Addison-Wesley. North Carolina Hospital Association. (2001). NCHA Member Organizations. Retrieved December 5,2001 from http://www.ncha,org/public/membrs.html.

Rowan Regional Medical Center. Medical and dental staff at Rowan Regional. Retrieved from http://www.rowan.org/medstaff.htm.

Salisbury-Rowan EconomicDevelopment Commission. Largest employers Rowan County, North Carolina. Retrieved January 4, 2002 from http://www.rowanedc.com/Mfg-- Directory/Top-50-Employers.htm.

SeeBeyond Technologies. (2001). e *WaylntelligentDatabaseAdapters. Retrieved Decem

References

her 15, 2001 from http://www.seebeyond.com/products/pdfs/datasheets/ datasheets_ewayAdapters-for-Databases.pdf.

Smith, S. (1997, September 19). Presbyterian says Medicare supplement meets projections. The Business Journal. Retrieved from http://charlotte.bcentral.com/charlotte/stories/ 1997/09/22/newscolumn2.html.

U.S. Census Bureau. (2001). State and county quick facts: Rowan County, North Carolina. Retrieved January 7,2002 from http://quickfacts.census.gov/qfd/states/37/37159.html.

AuthorAffiliation

HamidNemati

AuthorAffiliation

University of North Carolina at Greensboro, USA

AuthorAffiliation

Scott Stewart

AuthorAffiliation

University of North Carolina at Greensboro, USA

AuthorAffiliation

Faye Sherrill-Huffman

AuthorAffiliation

Rowan Regional Medical Center, USA

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Hamid Nemati is an assistant professor of Information Systems at the Information Systems and Operations Management Department of The University of North Carolina at Greensboro, USA. He holds a doctorate from the University of Georgia and a Master of Business Administration from The University of Massachusetts. He has extensive professional experience as a developer and a programmer/analyst and has consulted with a number of major corporations. His research specialization is in the areas of Application Integration, Decision Support Systems, Data Warehousing, Data Mining and Knowledge Management. He has published widely and his research has been presented nationally and internationally.

AuthorAffiliation

Scott Stewart is a master Unix technical analyst for Sara Lee Corporation and is enrolled in the Information Systems/Operations Management graduate program at the University of North Carolina at Greensboro, USA. Previously, he served as manager/ technical project lead for the Information Systems department at Rowan Regional Medical Center during the HIS implementation.

AuthorAffiliation

Faye Sherrill-Huffman is employed with Rowan Regional Medical Center in Salisbury, North Carolina, USA, as an interface analyst. She has served in that position forfour years. Prior to her employment with Rowan, she was employed at Northeast Medical Center as the system manager for the Home Health department. She also holds a Bachelor's degree in Business Administration from Catawba College, Salisbury, North Carolina.

Appendix

APPENDIX A

Appendix

Applications Referenced In Case

Appendix

1. STAR: Clinicas

Appendix

Patient registration, patient order processing, pharmacy management, radiology management.

Where used: Business office, pharmacy, radiology, registration, nursing, patient information service

Appendix

2. STAR: Financials

Appendix

Patient billing, materials management, human resource management/payroll, G/L, AP, AR

Where used: Business office, accounting, human resources, materials management

Appendix

3. Care Manager

Appendix

Patient vital signs charting and documentation. Where used: nursing

Appendix

4. Advantage Laboratory

Appendix

Laboratory test processing and result management. Where used: laboratory

Appendix

5. Advantage Anatomic Pathology

Appendix

Pathology test processing and result management Where used: laboratory / pathology

Appendix

6. Trendstar

Appendix

Decision support and budgeting system Where used: all departments

Appendix

7. Clinical Browser

Appendix

Web-based patient information delivery system. Where used: physician's offices, patient units

Appendix

8. DataGate (a.ka. Interface Manager)

Appendix

Enterprise Application Integration (EAI) interface development and data transformation system.

Appendix

APPENDIX B

Appendix

Healthcare/IT Terms Used In Case

Appendix

ADT (Admission/Discharge/Transfer): The most basic type of data passed between healthcare applications. Contains information about patient admissions, discharges and transfers to other units/departments.

Community Healthcare Information Network (CHIN): A collection of computers, applications and communications facilities that enable healthcare providers to exchange information across a local to regional scope.

Electronic Medical Record: An electronic representation of current and historical patient clinical information. Data in an EMR is normally maintained for the lifespan of the patient and may contain textual data, as well as diagnostic images.

Generally Available (GA): Applications or hardware that have passed beta testing and have been deemed acceptable for release to the market.

Healthcare Financing Administration (HCFA) (now known as the Centers for Medicare and Medicaid Services): Federal agency responsible for administering Medicare, Medicaid and the Healthcare Insurance Portability and Accountability Act of 1996 (HIPAA).

Health Insurance Portability and Accountability Act of 1996 (HIPAA): Legislation established to protect insurance coverage for workers when they change or lose jobs. The second portion of the Act, known as Administrative Simplification, deals with mandating standards for electronic transmission and storage of healthcare specific information.

TCP/IP: Transmission Control Protocol/Internet Protocol. The primary communications protocol for the Internet. TCP/IP is quickly supplanting other protocols for use in local area networks (LANs).

Subject: Studies; Systems integration; Applications; Organizational change; Technological change

Classification: 9130: Experimental/theoretical; 5240: Software & systems; 2500: Organizational behavior

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 414-430

Number of pages: 17

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198722000

Document URL: http://search.proquest.com/docview/198722000?accountid=38610

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 92 of 100

Enterprise-wide strategic information systems planning for Shanghai Bell Corporation

Author: Long, Yuan; Nah, Fiona Fui-Hoon; Zhu, Zhanbei

ProQuest document link

Abstract:

This case examines Shanghai Bell Corporation Ltd, a leading telecommunications enterprise located in Shanghai, and China's initiative to develop its next generation Information Technology/Information Systems (IT/IS) strategic plan. This case describes the environmental and organizational context of the company and the problems and challenges it encountered in developing an enterprise-wide strategic IT/IS plan. The issues covered include alignment of IT strategy with evolving business needs, application of a methodology include alignment of IT strategy with evolving business needs, application of a methodology to develop the strategic IT/IS plan, and evaluation of strategic planning project success. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

In response to increasing competition and technological advancement, Shanghai Bell Co., Ltd., a leading telecommunications enterprise located in Shanghai, China, carried out a major initiative to develop its next generation Information Technology/Information Systems (IT/IS) strategic plan. The initiative was prompted by limitations of its current enterprise application systems where the systems were neither able to keep up with the evolving needs due to organizational change nor satisfy the increasing demands for information sharing and data analysis. This case describes the environmental and organizational context of Shanghai Bell Corporation, and the problems and challenges it encountered in developing an enterprise-wide strategic IT/IS plan. The issues covered include alignment of IT strategy with evolving business needs, application of a methodology to develop the strategic IT/IS plan, and evaluation of strategic planning project success.

BACKGROUND

Shanghai Bell Co., Ltd. (herein referred to as Sbell), is a joint venture between China, the Belgian Fund for Development, and Alcatel. Founded in 1984, Sbell has become one of the pillar enterprises in China's modern telecommunication and information industry. During the past few years, Shell was ranked among China's top ten foreign investment enterprises and China's top 100 enterprises in the electronics and information industry. In 2001, Shell employed more than 4,800 people with an average age of 29, among which 78 percent ofthem have university education, including 900 with postgraduate degrees. The main products of Shell include switching, transmission, terminal, mobile and Internet systems. Figure 1 shows the statistics on the market share of Shell in China in the Year 2000. In 2000, the sales revenue of Shanghai Bell reached 10.8 billion RMB (1.3 billion USD), which is an increase of 17 percent over the previous year. Figure 2 shows the increasing trend in after-tax sales revenue at the headquarters from 1995 to 2000. By the end of 2000, Shanghai Bell has total assets of 17 billion RMB (2 billion USD) and in May 2001 was recognized by Fortune as one of the best foreign investment enterprises in China.

Urged by intense competition and the fast-changing, dynamic environment, Sbell carried out a significant organizational innovation at the end of 2000. The company initiated a series of changes to reengineer its previous hierarchical and highly centralized management structure to a flatter and more flexible one. Four maj or measures were taken to establish a new matrix organizational structure, which includes six business divisions and three platforms within the overall company (see Figure 3).

First, Shell established six new independent business divisions- switching networks, mobile telecommunication networks, data communication networks, transmission networks, network applications, and multi-media terminals-to cover the key business core. Each division was given the authority to determine its own products and materials (within the broad company context) and has some degree of financial independence. The sovereignty and flexibility of these business divisions led to speedier response to the changing environment and a closer relationship with customers.

Second, a research and development (R & D) platform was set up to improve the capability for technological innovations. In order to manage the development of products efficiently, the R & D platform was organized as a three-layer structure. The first level is located at the top management level, titled as "Chief Engineering Office," which is responsible for corporate technical and product strategy, technological innovations, project management, technical/product standardization management, intelligence service, and corporate Intranet, etc. The second level is the corporate R & D department, which focuses on intermediate- to long-term R & D, and technologies that were shared among different business divisions. The third level is the Business Division (BD) R & D, which is located within each business division and is regarded as the front-line that interacts directly with customers on a regular basis. In order to enhance technological innovations, Shell planned to increase the number and proportion of employees in the R & D department (from 34 percent in 2001 to 40 percent in 2005) as well as its R&D investment (from 9 percent in 2001 to 15 percent in 2005). Sbell believes that enhancements of research capability using advanced Information Technology would greatly benefit its long-term development.

Third, Sbell set up eight marketing, sales and service regions in multiple distributed sites, including 32 branches in China and about 20 overseas offices, to establish a strong sales and service network across China and abroad. Instead of focusing only on sales revenue, the top managers of each region have to pay more attention to marketing and service. Both cooperation (gaining cross-regional customers and supporting nation-wide promotions) and competition (pressure to minimize cost and meet budget) co-existed among these regions.

Fourth, the previously isolated manufacturing sub-divisions (such as production, planning and procurement) were re-arranged to establish a flexible and unified manufacturing platform. Both the manufacturing platform and the business divisions have the authority to determine their providers or buyers based on their unit's cost and revenue (ROI). For instance, if the business divisions find that the manufacturing platform cannot satisfy their requirements (cost, time or technology), they can choose manufacturers from outside the company. The same is true for the manufacturing platform. When the price offered by the business divisions is too low or a technological requirement is too high, the manufacturing platform can receive orders from outside the company. Competition and cooperation greatly contributed to business performance. In this way, units that have an independent accounting privilege would strive to reduce cost and increase benefits in order to avoid elimination.

To summarize, a new matrix organizational structure (as shown in Figure 3) was established. The new organizational structure was supported by six business divisions (network applications, switching networks, mobile networks, etc.) and three platforms-(I) manufacturing, (2) research and development, (3) sales, marketing and service. The six business divisions share the resources provided by the three platforms. For example, a project team can recruit technicians from BD, technology instructors from R&D, and sellers from marketing on a temporary basis to deal with a specific case. In addition, functional departments, including human resource and finance, supported the daily operations of the company.

The integration and advancement of both research and development platform and the sales, marketing and service platform contributed to the evolving business strategy of Shell, which is a combination of"technical-oriented" and "market-oriented" strategy. A decentralized architecture enhanced sovereignty of units and increased flexibility. A flattened structure reduced management layers and resulted in quicker response to changing customer preferences and a shorter design-to-market cycle.

IT Structure

Shell implemented the SAP R/3 Enterprise Resource Planning (ERP) system in 1998 as its core transaction processing system. The ERP system comprises four modules-Materials Management (MM), Production Planning (PP), Financial Accounting (FI), and Sales and Distribution (SD). According to the ERP project leader, Mr. Yunjun Xiao, "The Fl module has worked well during the last few years. However, data-sharing problems existed between and within the MM and PP modules. Business processes for sales and marketing were only partially supported by the SD module." Hence, further integration of MM and PP modules as well as extensions of SD functionality were needed. Besides the ERP system, other applications were also developed, including the Human Resource (HR) system that was outsourced and a call center that was developed in-house.

Shell invested several million USD to develop its computer platform and network systems in 1996 and continued to extend and improve its networks and technical infrastructure. To provide a solid high-speed network, Digital Data Network was used to connect multiple sites within Shanghai, and ISDN, ISP and ADSL were installed to link sales distributions outside Shanghai with the headquarters. Despite using advanced equipment and technology, the current networks could not satisfy the increasing needs of the distributed and continually expanding environment. Moreover, distinct operating systems (Windows 95/98/2000, Unix, Windows NT) and databases (Oracle, Sybase) existed simultaneously in the company, which resulted in data isolation and inconsistency.

The company did not have an integrated IT/IS department that was responsible for developing IT strategy, managing IT projects, and supporting and maintaining the IT infrastructure. The current IT workforce within Sbell included (Figure 4): (1) an IT department (with ten people) that focused on providing technical support for the IT infrastructure (network, desktop, data center and maintenance) of the whole company; (2) 20 engineers in the switching business division that took charge of maintaining IBM mainframe; (3) technicians in each division who were responsible for installation and maintenance of local networks; and (4) teams established on an ad hoc basis for specific IT application projects such as the ERP implementation. There was no position similar to that of the CIO, and the existing IT department provided solely technology support rather than drove IT strategy by aligning it with business goals.

SETTING THE STAGE

Because radical organizational change took place over a short period of time, many problems, including organizational and behavioral issues as well as application systems and information technology issues, arose. The challenges discussed next led the top management to initiate a strategic IT/IS plan in order to support the organizational change and to improve the capability of current IT application systems.

First of all, the current IT applications did not provide sufficient support for the revised organizational structure. For example, the two core competencies identified-research & development, and sales, marketing & service-were not well supported by the existing application systems. Without the help of IT, the strategic advantage that can be gained from the new organizational structure was limited.

Second, the current IT/IS structure needed significant improvement. The existing information systems could not satisfy the increasing demands for information sharing and data analysis. For example, problems in integrating legacy systems and the ERP system, and in information sharing within the ERP system, still existed. Some departments felt that the current application systems could not satisfy their specific functional requirements of day-- to-day operations and decision-making, thus they began to build small-scale systems within their units without waiting for or obtaining approval from the top management. These isolated systems led to serious problems such as information conflicts and functional redundancy. Furthermore, the current information technical architecture could not support the decentralized structure of the extended organization. The current systems lacked the capability to manage, control and support multiple sites, and the ability to adapt to the changing environment. Moreover, without a centralized IT/IS department, the company felt an urgent need to build an effective and efficient IT organization to help the company develop its IT strategic plan, manage IT projects, and outline specific IT policies and rules.

Third, there was a high likelihood in the near future that Alcatel would acquire Shell by becoming a majority shareholder and develop Sbell as one of its major global information technology research centers. Although the contract was still under negotiation at the time of the case, future integration problems concerning management, organization and technology should be considered. IT should be designed to support the potential merger with Alcatel.

Facing the above problems, the top management decided to develop an enterprise-wide strategic information systems plan in early 2001 to achieve the following objectives:

Update Shanghai Bell's IT vision and strategy to align with its evolving business objectives;

Develop an appropriate application architecture that would meet its long-term growth objectives;

Develop an appropriate technical architecture that would ensure interoperability and integration between existing and emerging systems, and provide appropriate linkage to key business strategies; and

Assess and design an information services organizational structure to help meet its long-term objectives.

In the middle of February 2001, a kickoff meeting was held among the top management to initiate the Strategic Information Systems Planning (SISP) process. A project team was set up, and was directly led by a Vice President (VP) and two managers from the Information Center and the IT department of Shell. To facilitate the implementation of SISP, the company suspended all of its application systems projects under development, and declared not to approve any IS budget until the end of the SISP project.

In March 2001, two IT consulting companies were selected to assist in the SISP project. One of the consulting companies (company A) is a domestic company that has extensive knowledge of Chinese corporations and rich experience in developing strategic information systems plan in the telecommunication industry. The other (company B) is a well known American-based IT consulting company that has a good reputation, an extensive knowledge base, and a proven methodology for SISP. "We selected company A for its strong communication skills and rich experience in dealing with IT strategic issues in domestic industries," according to the Vice President, Mr. Zhiqun Xu. He continued, "As for company B, we chose it because of its strong IT background and specialization in IT strategic consulting. In addition, it is also viewed as being 'unbiased' in software and hardware selections and recommendations. Company B does not have its own proprietary application products, so it is more likely to recommend the most appropriate products rather than in line with its vested interest. We hope that the two consulting companies can work closely with our employees, to bring new concepts and ideas to the company and to educate our staff."

A Vice President, two middle managers, four consultants from consulting company A, five from consulting company B, two full-time Sbell employees and five other part-time personnel from key departments, made up the core SISP project team (as shown in Figure 5).

CASE DESCRIPTION

At the beginning of the project, the team members, particularly employees within Sbell, did not have a clear understanding of SISP, and had little knowledge of how SISP can benefit the company and how to develop a strategic plan. Hence, the consultants spent about a week to train the employees in SISP approach.

The project manager of consulting company B, indicated:

"A strategic information systems plan for Sbell, can be seen as a vision with directional statements, and comprises a set of both broad and detailed guidelines that provide a framework for strategic, tactical and operational decision-- making. An IS strategy should also clearly link the IS goals to the strategy of a business, and provide a detailed blueprint for the acquisition, development, deployment and retirement of IS/IT assets over a multi-year time horizon. "

A strategic IS plan, according to Sabherwal and Chan (2001), comprises three types of strategies: Information Systems (IS) strategy, Information Technology (IT) strategy, and Information Management (IM) strategy. IS strategy focuses on systems or business applications of IT, and is primarily concerned with aligning with business needs to derive strategic benefits. IT strategy is concerned mainly with technology policies, including architecture, technical standards, security levels, and risk attitudes. Finally, IM strategy is concerned with the roles and structures for the management of IS and IT, and is focused on issues such as the relationships between the specialists and users, management responsibilities, performance measurement processes, and management controls (Earl, 1989).

The two consulting companies jointly carried out a four-phase approach (as shown in Figure 6) to accomplish the SISP project's objectives:

Phase 1: Development of IT vision (2 weeks)

Phase 2: Understanding the current business (6 weeks)

Phase 3: Strategic Information Systems Planning (4 weeks)

Phase 4: Delivery of final report (2 weeks)

For simplicity, the SISP development process was depicted in Figure 6 as a linear flow of events. However, it would be more realistic to have a number of feedback loops included in the diagram. For example, while producing the IS plan in phase 3, the planners frequently returned to phase 2 to interview specific employees to obtain additional information.

The details of the four-phase approach will be discussed in the subsequent sections.

Phase 1: Development of IT Vision

The focus during the first two weeks of April 2001 was on understanding, identifying and documenting the IT vision. It was recognized that IT should support the basic goals of the firm, thus the first thing needed was to identify the business strategy. Several interviews were conducted at the top management level to understand strategic and organizational issues concerning short-term and long-term business goals, organizational reengineering, and IT evolution to support the necessary organizational change.

Mr. Xin Yuan, the associate chief executive manager summarized the weaknesses of Sbell as: weak in research and lack of innovative and cooperative culture within the company. "In order to survive in today's business environment and to become a global leading hightech company," he continued, "we urgently need to strengthen Research and Marketing, which would contribute significantly to our core business competencies. Therefore, we propose changing from our current spindle structure, which focuses on manufacturing, in the middle part of the spindle, to a dumbbell structure, which focuses on research and marketing at the two opposite ends of the dumbbell."

Based on an analysis ofthe information gathered from the interviews, the team delivered an IT vision report outlining the enterprise environment, business strategy, IT vision, and alignment between business strategy and IT vision.

Phase II: Understanding the Current Business

"One of the most important objectives ofPhase 2," emphasized by Mr. Ziqiang Pan, the project manager of consulting company A, "is to identify the critical business process of Shell." He continued to explain, "Core business processes are those activities flowing through the value chain of the company. They are stable and not easily affected by the external environment. Identification of core business process is the foundation for understanding the current business needs and the gaps between those needs and the functionality provided by existing IT applications. We can therefore determine the potential application opportunities and priority of application development portfolio."

Starting the middle of April, the project team was divided into five groups to conduct a six-week survey, which included a series of interviews and a semi-structured questionnaire. The objectives of this survey are two-fold: (1) to identify the current business process, and (2) to gain a better understanding of the organization, and its technical architecture and application systems. The five groups corresponded to the five business areas:

(1) manufacturing and procurement;

(2) research and development;

(3) sales, marketing and service;

(4) functional departments; and

(5) business divisions.

Each group, comprising one or two consultants working jointly with several Sbell employees, conducted interviews and administered questionnaires in the specific business area. These employees played an active role in bringing the consultants and Sbell employees together.

A series of interviews were conducted at the middle management level. Several meetings were held between the project team members, and the managers and representatives in the respective departments. The interviews provided the planners with an understanding of the core business process within each department, the functionality provided by existing application systems, and the future IT/IS needs of the departments. Communications between the planners and the employees also provided opportunities for employees to clarify the purpose of SISP and its approach.

The planners also administered a semi-structured questionnaire to representatives from each department. The questionnaire comprised four major parts:

(1) Business process-concerned with relationships between processes, average execution time of each process, number of participants involved in each process, available IT support, major activities, and input and output information of each activity.

(2) Organization and management-concerned with department objectives, organizational structure, human resources and IT resources, as well as the relationships and cooperation among units within and outside Shell.

(3) IT application-concerned with limitations of existing information systems, cost of each IT application, development methods (in-house or out-sourced), names and functions of each module, the scope and boundaries of business processes supported by each application, and interfaces among those applications.

(4) Technical architecture--concerned with current IT infrastructure, platform, database and network.

At this stage, the planners spent a lot of time on collecting documentations of business processes, seeking information on undocumented but critical activities, and then combining information produce an overall view of the enterprise. This work was labor intensive and time-- consuming. On one hand, the planners had to take much effort to check for accuracy of the core processes since inconsistencies might exist between the process presented in the "official" documents and those carried out in practice. On the other hand, the planners had to communicate frequently with on-site employees to seek information on undocumented but critical activities, and then produced a formal documentation (business process diagrams) based on the employees' description of their day-to-day operations.

Day-to-day operations in such a big company were so complex that the planners met many challenges. First, they found that the business processes were unstable with respect to ownership. Because of frequent organizational adjustment, work that was done by department A today might be carried out by department B tomorrow. Second, the more indepth the survey, the more they found unclear boundary and ambiguous relationships among some of the processes.

Facing these problems, the planners decided to take a break and to discuss these issues. First, was it necessary to depict ownership as part of the business process? Organizational structure (people) is easily affected by the external environment and internal innovations, while operations, especially the core business processes of the company, would remain stable no matter who does it. Therefore, analyzing activities by ownership is not worthwhile for obtaining a stable view of the enterprise. Second, how in-depth should the planners analyze these processes? At what level of detail was it sufficient for producing the strategic plan? Realizing that the objective of analyzing business process in this case was for IT/IS strategic planning, rather than to produce an implementation design, the planners felt it would sufficient to identify the core business process, capture the general activities for each process, and more important, realize activities not supported by IT applications. Third, how should planners deal with those problems, such as information conflict and process redundancy, found in the analysis procedure? Considering that this was an SISP project, not a BPR (business process reengineering) or BPI (business process improvement), the planners decided to document the problems and provide recommendations to the company for future improvement. In this way, the planners could save time and avoid being involved in political issues such as power struggle.

By the end of May 2001 (after six weeks of hard work), the planners presented an enterprise information resource diagram showing a snapshot of the existing information resource of the enterprise. Eight core business processes were identified, including manufacturing, procurement, research and development, marketing, service, sales, human resources and finance. Among them, manufacturing, procurement, finance and part of sales & marketing were supported by the ERP system; human resource was supported by an outsourced software; and research & development almost gained no support from application systems.

The enterprise information resource diagram is a two-tier model (shown in Figure 7).

The first layer of the enterprise information resource diagram depicts business processes that were identified through the survey. Application architecture, the second layer, describes the application systems that support specific business operations, Different colors were used to indicate different application systems that provided support for specific business processes. Therefore, from the two-layer diagram, it became fairly easy to identify the business processes that were covered by the application systems, and those that were important but only partially supported or not supported by any application.

Phase III: Strategic Information Systems Planning

At the beginning of June 2001, it was time for the planners to produce a strategic IT/ IS plan. The project team was divided into three groups to work on the following three areas: application architecture strategic planning, technical architecture strategic planning, and IT organization strategic planning. Much emphasis was placed on the application strategic plan; since it was considered the most critical area that needed a lot of work, nearly two-thirds of the team members participated in this group.

Application Architecture Strategic Planning

Application architecture comprises the set of IT applications (bought or built) that delivers the business process, and the technology (i.e., middleware) that integrates the various applications and links them with a coherent data model.

The enterprise information resource diagram was represented on "post-it" notes and stuck onto the walls ofa conference room for others to view, critique, and make suggestions for modifications. Several employee representatives were invited to comment on the correctness and accuracy of the diagram.

First, the planners tried to identify potential application opportunities from the enterprise diagram. They found that finance and human resources were well supported by the application systems. Although manufacturing and procurement were generally covered by the ERP system, information inconsistency existed, thus system optimization was needed. Sales, marketing and service were partially supported by the ERP system and some isolated small-scale systems; research and development obtained almost no support from the IT systems. It seemed Shell was in urgent need of the following: application for R & D (Collaboration Product Commerce or CPC), and application for sales and marketing (Customer Relationship Management or CRM), and optimization of the ERP system. Other application systems, such as e-procurement and knowledge management were also potential applications. CPC is a new type of software and services that uses Internet technologies to tie together product design, engineering, sourcing, sales, marketing, field service and customers into a global knowledge net (Aberdeen Group, 1999). CPC can facilitate management of product life cycle and cooperation with external partners. CRM is an integrated customeroriented system concerned with sales management, marketing information acquisition and service improvement. Since service and support would become the competitive edge of Shell, developing CRM would provide opportunities for Shell to establish a closer collaboration with partners, suppliers and customers. ERP optimization includes integrating current standalone systems, developing additional modules, improving user training, and strengthening ERP support team. These ways can greatly increase the efficiency of the SAP R/3 system.

Next, prioritization of projects was considered due to the limited resources. The key question is: Which project was the most urgent for Shell and should be implemented first, and which should be implemented next? The planners considered many factors in making a final recommendation, These factors included the business strategy, alignment with Alcatel (the potential merger), IT vision, budget, cost, time, technical complexity and technology trends.

Among the potential application systems, CPC was regarded as top priority for the following reasons:

(1) Lagging behind in advanced communication technology, Sbell faced the danger of decreased market share due to increased competition from both foreign companies and rapidly-growing local companies. Therefore, increasing the capability ofresearch and development became crucial for survival and future development of Sbell.

(2) There was a high likelihood that Alcatel would acquire Shell by becoming a majority shareholder and develop Sbell as one of its major global information technology research centers. Therefore, Sbell should build an advanced R & D platform to meet the anticipated challenge.

(3) Compared to marketing and sales, R & D was considered more urgent and crucial in its needs for IT support. Sbell has a well-organized sales force. Some operations in sales were supported by isolated or shadow systems. Although the functionalities provided by IT applications were inadequate, the system can handle basic operations. In comparison, R & D obtained little support from IT and was considered the weakest part of the company. Therefore, improvement of sales & marketing was necessary but not considered as urgent as improvement of R & D.

Other issues were also addressed in application architecture planning, such as application development alternatives (e.g., buy or build), application vendor selection, budget and implementation schedule.

Technical Architecture Structure Planning

The technical architecture is the foundation upon which the application architecture was built. The technical architecture should be further decomposed into "layers," such as application systems, database, IT service, network and platform.

Based on an in-depth survey of the current technical infrastructure conducted at the earlier phase, the planners collected detailed data and information in computing infrastructure, network infrastructure, and enterprise IT service.

A workshop was held with IT managers and users to develop a technology specification for Sbell's strategic architecture. The topics included: IT principles, platform/operating system(s), network infrastructure, middleware infrastructure, systems/network management, security infrastructure, and IT services.

After several discussions and changes, the group conducted a review session to finalize the written report detailing the IT mission, business drivers, IT principles, technology standards, and specific technology frameworks that would guide Sbell in the implementation and deployment of enterprise-wide technology and its next generation application systems.

Organizational Strategic Planning

The organizational architecture is the remaining component, which is important but often ignored in practice. The organizational architecture refers to the IT organizational structure, as well as the set of management processes or governance rules.

A series of interviews were conducted to understand the organizational and management processes in order to align the IT organization and management processes with the business strategy. The group first analyzed the current IT organization and compared it with other advanced IT organizations, and then presented a series of suggestions for IT organizational structure and project management. A workshop, which was primarily attended by management personnel, was held to present and discuss the results. The review was one day in duration and was held at Shanghai Bell's headquarters.

Phase IV Delivery of Final Report

Several review sessions were held among the consultants and the employees of Sbell to achieve consensus of the final report. A vote was taken by the top management during an application strategic planning workshop to determine the priority of potential IT applications.

The results of all phases were consolidated into a formal final report that documented the strategic and operational plans for IT development. The report addressed the following areas: business strategy and IT drivers, IT vision and mission, application architecture strategy, technical infrastructure strategy, and IT organization and management strategy. Application architecture strategy included a three-stage operational schedule for the implementation of information systems, including a potential list of applications, the priority ofthese applications, and recommendations on development alternatives (out-souring or inhouse), vendor selection and budget. Technical infrastructure strategy and IT organization strategy provided recommendations for technical framework and construction of IT organization in Shell.

In the middle of July 2001, after five-month of close cooperation, the project team presented a final report to Shanghai Bell's executive management at its headquarters. In summary, the suggestions included:

(1) ERP optimization, CPC, and CRM were absolutely necessary for Shell. Among them, ERP optimization and CPC were ofthe highest priority and needed immediate attention, while CRM was to be carried out next.

(2) Establishing an independent and centralized IT organization (shown in Figure 8) is essential. This organization should be directed by the CIO and should comprise both an IT department and an IS department.

(3) Building a distributed technical architecture that utilized advanced network technology.

CHALLENGES/PROBLEMS FACING THE ORGANIZATION

This case described the development of Strategic Information Systems Planning for Shanghai Bell Corporation, a high-tech company in China. Some of the key issues and challenges faced during the process are presented here for further discussion.

Issues and Challenges Faced in SISP

Issues related to evaluation. How should one evaluate a strategic IT planning project? What are the criteria for evaluating SISP success? These are hard problems with little consensus in the literature. From a practical perspective, the objective of SISP is to produce a workable schedule for approved application portfolio. Therefore, the close relationship between the strategic plan and the subsequent implementations can be considered as a key indicator of the contribution of a strategic plan. Success can be assessed by the degree to which implementations were carried out according to the strategic plan. Another indicator of success is the advancement of IT/IS positions in an organizational hierarchy. In this case, a CIO position was to be established and a centralized IT/IS department was being planned. Further, a significant increase in IT investment was planned. Could this SISP project be considered a success? What are the relevant factors to be taken into account in evaluating a strategic planning process?

Issues related to politics. The SISP project was supported and emphasized by Mr. Xi, the chairman and CEO of Sbell, and directed by one of the VPs, who was responsible for R & D. The planners received full support from the middle management within R & D, but less interest and cooperation from some departments, such as sales and finance. Insufficient communication with some of the middle management is one of the weaknesses ofthis project. Although this might seem to have a subtle impact on the strategic plan, it may have unexpected consequences on the implementation that follows (i.e., lack of support from middle management may jeopardize the implementation). Such problems are common for many projects. What are the steps could be taken to reduce the effect of politics and to increase participation?

Issues related to methodology. In this case, the strategic application architecture plan was based on the analysis of current business process. As we know, the business processes for a large company are very complex and it is almost impossible to capture these processes completely within a short time. At what level of analysis would it be considered sufficient? This seems to be a tricky issue to deal with. For example, ifthe business processes are captured at a high level of granularity, the planners might not be able to identify the key business processes, and the gaps between the business needs and the functionality provided by the existing application systems. On the other hand, if the analysis is too detailed, it would be extremely time-consuming, costly and unnecessary.

Support from top management. Support from top management is one of the critical success factors for any IT project, especially for a strategic IT/IS planning project, which primarily benefits the top management. The support from the CEO and VPs was very helpful to the planners in carrying out large-scale interviews and administering questionnaires within the company, Also, the commitment of top management is the decisive factor for subsequent implementation. Since obtaining commitment from the top management was not easy, the planners took the effort to seek opportunities to engage in regular communications with the top management. They also convinced the top management that the results have significant implications since they were developed based on a scientific methodology. What are some general recommendations and suggesting the seeking commitment from the top management? What could Sbell have done better?

Issues related to teamwork. A success factor in this case was attributed to the close cooperation among members in the project team. Three groups in the project-employees from Sbell, consultants from consulting company A, and consultants from company-- worked closely together during the entire SISP process. The team leaders (two IT managers from Sbell) and the full-time and part-time team members from Sbell played an active role in the development of SISP. They were highly regarded employees and professionals in the different departments, and they knew the business very well and had excellent communication skills. Without their help, it would be hard for the consultants to receive a fairly high level of participation in conducting interviews and questionnaires, and to obtain first hand materials in such a short period of time. The consultants in Company A possessed experience in developing IT projects in Chinese companies; they have skills to manage cultural and political issues; they also have no language difficulty in communicating with employees of Shell. The consultants in Company B have a strong IT consulting background and they have a sound methodology and a good reputation. The three groups have their unique characteristics, and a combination of these specific strengths contributed to the smooth development of the project.

The role of consulting companies. Companies might be reluctant to hire consultants because they are suspicious of what consulting companies can really do for them. In this case, the consulting companies played a key role in developing the strategic plan, in educating the internal employees, and in promoting the IT positions within the company. At the beginning, Shell had no idea how to develop a strategic IT/IS plan. The consulting companies brought the knowledge into Sbell, and educated the company on a scientific development methodology. The training greatly benefited employees, especially those in the project team, by providing them a good understanding of SISP. These employees became proficient in applying the SISP methodology at the end of the project and would definitely be taking an active role in future development of IT within Sbell. The communication between the consultants and the employees also led to increased recognition of the importance ofthe role of IT within the company. Furthermore, it prompted the top management, middle management and the staff to pay more attention to the role of IT in achieving business success. Several other lessons can be learned from this case. With rich experience and a strong knowledge base, consultants may be inclined to draw conclusions from their previous experience, which may not fit a specific company. In this case, due to the limitation of time and resource, Sbell spent little time on issues related to technical architecture, where the consultants made most ofthe recommendations. In the subsequent implementation (CPC and CRM), some problems emerged and the company felt the need to modify the technical architecture. Hence, Sbell learned that it should not completely rely on the consulting companies; modifications might be needed to better meet its needs before finalizing the plan.

References

REFERENCES

References

Aberdeen Group (1999, October 7). Market Viewpoint, 12(9). http://www.aberdeen.com/ ab_company/hottopics/pdf/10991290.pdf.

Earl, M. J. (1989). Management Strategies for Information Systems Planning. Englewood Cliffs, NJ: Prentice Hall.

Shanghai Bell Corporation website http://www.alcatel-sbell.com.cn.

Sabherwal, R. & Chan, Y. E. (2001, March). Alignment between business and IS strategies: a study of prospectors, analyzers, and defenders. Information systems research. 12(1): 11-33.

AuthorAffiliation

Yuan Long

University of Nebraska - Lincoln, USA

AuthorAffiliation

Fiona Fui-Hoon Nah

University of Nebraska - Lincoln, USA

AuthorAffiliation

Zhanbei Zhu

Shanghai Bell Co., Ltd., China

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Yuan Long is a PhD student at the University of Nebraska-Lincoln, USA, majoring in Management Information Systems. She received her master's degree in Computer Science from East-China Institute of Computer Technology. She has published articles in Computer Technology and Management Science (both in China). Her current research interests include strategic information systems planning and software engineering.

AuthorAffiliation

Fiona Fui-Hoon Nah is an assistant professor of Management Information Systems at the University of Nebraska-Lincoln, USA. She received her PhD in Management Information Systems from the University of British Columbia. She has published in Communications ofthe ACM, Journal of Computer Information Systems, Journal of Information Technology, Journal of Information Technology Cases and Applications, Journal of Electronic Commerce Research, Journal of Software Maintenance, Business Process Management Journal, and Simulation and Gaming. Her research interests include enterprise resource planning, human-computer interaction, individual and group decision-making, and theory building in information systems research.

AuthorAffiliation

Zhanbei Zhu is a manager of information center anda team leader of CPC project in Shanghai Bell. He received his PhD in Management Science from Being University, China. He has seven year of industrial experience in information service, knowledge management, and business intelligence research and practice.

Subject: Studies; Telecommunications industry; Information systems; Strategic planning; Enterprisewide computing; Technological planning

Location: China

Company: Shanghai Bell

Classification: 9130: Experimental/theoretical; 9179: Asia & the Pacific; 8330: Broadcasting & telecommunications industry; 2310: Planning; 5250: Telecommunications systems & Internet communications

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 431-446

Number of pages: 16

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198654461

Document URL: http://search.proquest.com/docview/198654461?accountid=38610

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 93 of 100

Systems development by virtual project teams: A comparative study of four cases

Author: Croasdell, David; Fox, Andrea; Sarker, Suprateek

ProQuest document link

Abstract:

This case study provides a comparative analysis of four cross-cultural virtual project teams as they analyzed design and develop information systems. It specifically examines the issues organizations face in trying to understand what factors are determinants of success with respect to virtual teams. Additionally, the case examines the factors that cause managers to reconsider traditional IS development practices. These factors include increasing network bandwidth, continuously improving communication technologies, shifting global economies, and changing social practices. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

Business organizations and global partners are increasing their utilization of virtual project teams to enhance competitive advantages in the global market. More than ever, organizations are using virtual teamwork to bridge time zones and geographic distances. The use of virtual work environments has spurred interest in understanding how team members interact and collaborate over the life of a project. Not surprisingly, organizations are trying to understand what factors are determinants of success with respect to virtual teams. Increasing network bandwidth, continuously improving communication technologies, shifting global economies, and changes in social practices have caused business managers to reconsider traditional practices. This paper provides a comparative case study of four cross-- cultural virtual project teams as they analyze, design, and develop information systems.

BACKGROUND

Teams are an integral part of organizational life (Gersick, 1988). Recent trends in globalization and advances in telecommunications technologies have enabled the use of distributed teams, especially those involved in Information Systems Development (ISD). These "virtual teams" consist of geographically dispersed team-members who interact using information and communication technologies (ICTs) such as email, groupware, video, and computer-based conferencing systems. Briggs, Nunamaker, and Sprague (1998) have ob-- served that while the demand for virtual teams grow, "little is known on how to actually conduct team telework" (p. 11). This case study provides some insights into virtual teamwork, specifically in the context of ISD.

Virtual Project Teams

Work teams described in this comparative case study were asked to identify the business problem associated with their project, develop a plan for addressing the problem using an information system to enable the solution, analyze design alternatives, define system requirements, and develop a working solution to address the business problem. Four project teams were observed as they worked to identify, initiate, plan, design, develop and implement information systems using formal system development methodologies. Project teams included some members that were co-located and some members that lived and worked halfway across the globe.

Teams coordinated their efforts in a virtual environment using WebCT(TM) a product designed to provide support for virtual collaborative computing environments by enabling synchronous and asynchronous communication between local and remote users. WebCT(TM) includes mechanisms for online discussion forums, synchronous chat, file transfer, and shared calendaring. The application was the primary tool used to support the communication, collaboration, and coordination among team members in each virtual team. Each team was given training to familiarize team members with tool specific functions. Project team members were experienced information technology users and proved quite proficient in their use of the tools. Individual team members posted discussion topics to a local team folder or to a global area accessible to the entire team. Discussion pages provided an environment for team members to read and reply to discussion topics asynchronously. Chat sessions provided synchronous communication in which multiple participants exchanged thoughts using typed dialog. Participants in chat sessions could view messages sent by other participants in "real-- time." With file sharing, team members posted project documents to a shared space. Documents placed in the common project directory were reviewed, updated, and re-posted as necessary. The calendar tool gave teams the ability to schedule events to a master team calendar for all members to see. Facilitators observed development efforts, provided guidance and arbitrated team conflicts. Table 1 shows the extent to which each team used the tools available in WebCT(TM) over the period of the projects. Team A held the most chat sessions (16), Team B scheduled far more events than other groups (26), Team C had a greater propensity for sharing files (68), and all of the groups contributed several discussion messages.

Project A

Aerial Painters Incorporated (API) is a private company located in the Pacific Northwest region of the United States. The company employs approximately 65 workers. API's business is painting medium to large-sized commercial airplanes. The primary contact for this project was Bruce Drago, API's business manager. Mr. Drago wanted to develop a Web presence incorporating the marketing goals of API. The plan for the project included developing a system that provided file-sharing capabilities, networked security cameras, an e-commerce Web site and a redesigned user interface. Bruce wanted the new system to integrate the companies existing marketing plan and an employee-tracking database. He requested changes that would convey corporate purpose, competitive position and industry presence. Bruce contacted Team A to discuss his project. The team was composed of five members from Norway and five from the U.S.

API has made a significant investment in building the image of the company. They wanted their Web presence to reflect an image ofhigh quality and high customer satisfaction. Mr. Drago wanted a Web site to offer information about API's mission, goals, and products and services. In addition, the site was to include a Web-enabled video clip providing an introduction to API's operations. Mr. Drago wanted employees to have access to updated information, company news and announcements real time. Potential employees could use the pages to investigate employment opportunities and apply for positions within the company. An e-commerce element would allow API to offer stenciling services to its customers.

Bruce wanted a portion of the Web site to be dedicated to an Intranet allowing API management access to networked cameras and private employee information. The ability to include networked cameras was an important design feature for API managers. Past accidents in API's hangers resulted in injuries to workers as well as damage to customer planes. Network cameras would allow managers to review accidents and stored video footage to help in accident analysis and implementation of new quality controls. The system would give managers the ability to monitor work areas from anywhere.

API's information systems have historically been paper-based. Physical artifacts created high overhead costs due to the expense of long distance phone services, faxed messages and Federal Express shipping charges. Work orders followed an interactive development process using surface based snail mail to pass designs and modifications between clients and the company. The new system was to provide a document transfer capability between engineers and clients. Online chat and discussion forums were to facilitate communication and shorten product design and development cycles.

Team A was asked to design and build a Web presence based on the guidelines formulated by Bruce Drago. Beyond creating functional pages, the team had to address issues of security and liability, increased communication with business partners, dynamic marketing initiatives and interfaces with the companies human resources department. An iterative development process was initiated between API and project team members. Throughout these early stages of the project, Team A successfully utilized communication tools to develop a strong social connection among team members. In part, this social connection helped the team deliver quality products to their client.

Project B

The sports and recreation division at State U. provides recreational activities in an organized and safe manner for a community of 21,000 people. Historically, the division used an informal, paper-based information system. Data collected from various typed and handwritten forms was used to track event information, employee data and work shift assignments. File cabinets were used to store information related to workers, activities and assigned tasks. For example, referees and umpires were regularly scheduled to officiate recreational sports activities. Using a paper system, division administrators sorted through hundreds of forms to determine the availability of officials and create weekly officiating schedules. The mechanism was complicated by the fact that multiple activities-requiring different officiating experience and background-occurred at multiple venues simulta-- neously. It was often necessary to modify schedules to reflect substitutions and rescheduling when officials were unable to attend an event.

A paper-based system limited the ability of administrative personnel to schedule officials in an efficient and effective manner. A centralized data store (file cabinet) did not allow multiple users to access the information concurrently. The time and effort required to maintain the systems was a source of frustration for division personnel. System administrators requested a new, automated information system to manage event scheduling. The purpose of the system was to coordinate sporting events, recreational activities and scheduling of required workers. Users requested the system be built using Microsoft Access as a backend database with a Web-style browser interface. The system was to be accessed anywhere an Internet connection and Web browser were available. Remote access would provide relevant information to individuals in the community looking up event information. Online access would allow officials to check schedules, update records and trade work shifts online. Finally, a Web-based system would allow administrators to query the database for relevant event and personnel information.

A project team comprised of five members each from the United States and Norway were asked to analyze the needs of the sports and recreation division. Their task was to design and implement an information system that would address the needs of the division. The team successfully completed the project and provided a working system to the sports and recreation division, but the team did not forge the social interactions necessary to bind members of the team. At the midway point of the project, a crisis in the relationship among the U. S. members and the Norwegian members was narrowly averted. The lack of social glue in the group nearly caused the project to breakdown. The team faced many challenges that were not directly related to project tasks. Lack of any real social interaction created several obstacles that the group had to overcome in addition to completing the technical requirements for the project.

Project C

Envision is a small innovation company in Norway. The company was established in February 2000. Sixteen employees develop products for use on the World Wide Web. Rolph Lyndgren is president and CEO of the company. Mr. Lyndgren requested an information system that would serve as a knowledge base in support of Envisions primary business function: the development of innovative products to enable e-business solutions. Employees ofthe company conduct market research via the Internet. Information from relevant Web sites is stored using tools and features found in most Web browser software (e.g., Favorites folders). Web browsers used by Envision employees provide the ability to bookmark URL addresses for later reference. However, bookmark information and Web page content was not available outside individual client computers unless users actively posted the URL's to a company server or e-mailed the information to interested co-workers. Mr. Lyndgren envisinned a "global bookmarks" folder that would serve as a knowledge base within the company. As employees identified relevant links on the Web, they could store the links in a centralized bookmarks file. Such a system would allow the company to stay abreast of coworkers efforts while also improving efficiency and reducing overlap. Ultimately, Mr. Lyndgren wanted centralized storage and access for all company documents.

Because Envision is an innovation company, they are quite concerned with security. Any centralized information system would require mechanisms for physical security as well as user login and authentication measures. In addition, files stored on centralized servers would require safeguards against outside intrusion. The system would also require a configuration management component that would notify employees of file updates and establish access privileges for company employees.

As with the other projects, Team C was comprised often team-members, five each from the United States and Norway. The team's objective was to develop a knowledge base to share URLs and track useful Web content. The team was successful in creating a functioning system that met the specifications of the client. Team members established strong social bonds throughout the project. In large part, this social cohesion was a driving factor behind the project. Team C consistently utilized all communication and collaboration tools made available. However, the most prevalent form of communication was virtual chats. Sessions were held at least once each week and very often two or three times a week. Almost every team member attended each chat session. Frequent communication created a strong social bond and allowed the team-members to grow quite close. As the project developed, the team relied heavily on the social relationship to overcome difficulties with system development.

Project D

Nembus is an independent Norwegian company established in 1933. The company has offices in Norway, the United Kingdom, Germany, Italy, the United States, Korea, China, and Taiwan. Offices worldwide employ more than 400 workers in 11 countries. Engineers comprise the majority of the workforce. Nembus's primary business function is to provide testing, inspection and certification services for electrical equipment, machinery and systems. Certification is necessary for electrical products to be released to the market. Manufactures would like certification to take place quickly and efficiently so that they can gain access to their markets as quickly as possible. Engineers utilize technologically advanced testing laboratories throughout the world to test electrical components and products. There are six testing laboratories in Europe, two in the United States and three in the Far East.

Nembus planned to replace its current information systems with Internet enabled applications to create broader access and synchronization for their employees across the globe. The information system in use required engineers to complete a variety of paper forms to report test results. Initially, corporate secretaries transcribed over 1,000 different forms and reports into digital format using Microsoft Word. Eventually, supervisors encouraged engineers to complete the certification forms themselves thereby circumventing the need for the army of corporate secretaries. However, the goal to reduce overhead and increase efficiency had some unintended consequences.

Test engineers at Nembus work autonomously in test labs around the world. As such, they are required to work with different criteria and generate different reports depending on local, cultural and political regulations. Inconsistencies in forms and reports occurred due to differences in language, terminology, and legal statutes in addition to individual differences in proficiency with the application software. Over time many of the documents were created and modified in an ad hoc fashion. The nature of the process produced an environment in which forms and reports were often incorrect, incomplete, and/or redundant. Engineers spent considerable time creating document templates in addition to filling them in. The net effect was a dramatic decrease in the efficiency of the testing labs (not to mention potentially perilous certifications). Managers at Nembus recognized they had a problem. They resolved to create a new information system that would reestablish a consistent look and feel to the certification documents and allow users to input, store, and search electronics testing forms and reports.

The new system was to be Internet-enabled and provide a repository of previously completed forms that could be retrieved and modified as appropriate for product certifications. Engineers would be afforded the ability to retrieve previously used reports and update only relevant information. The new system would increase consistency and efficiency across the organization by serving as a knowledge base to disseminate testing guidelines and results across the organizations where previously the information was held in the local testing facility. Test report forms (TRF) and a fourth generation relational database (SMOKK) were integrated to provide information about the products Nembus tested and the customers who used Nembus's services.

Team D was comprised of four members from the Unites States and five members from Norway. The team's objective was to develop a prototype for Nembus engineers. While team D completed the project and provided a system to the client, they also demonstrated many characteristics of an unsuccessful team. To call the completion of the project and delivery of the prototype a success was to stretch the truth. The final deliverable was mediocre at best. The system may not have been delivered at all ifnot for the major efforts ofa single U. S. team member. The team lacked a strong presence of both social communication and task-related communication.

SETTING THE STAGE

One useful way for evaluating virtual teams is to examine the quantity and frequency of communication among the members. Literature suggests that two dimensions in the communication are important: the social dimension and the task dimension. Social dimension is used to describe communication that focuses on building social relationship within the virtual team. Aspects of social dimension include shared understanding, mutual trust and social bonding among team members. Task dimension refers to communication that focuses on specific tasks that affect project completion. Aspects of task dimension include a common project goal, domain related knowledge and skills, task coordination, and modes of interactions within the team.

Lau et al. (2000) describe four archetypes of virtual teams based on the communication patterns and communication content. The level of social and task dimensions evident in the team's interactions describe each archetype (Figure 1). Common actions are defined for each archetype and can be used to determine which archetype a virtual team is placed in. All virtual team communications exhibit various levels of social communication and/or task communication.

Teams described in this manuscript can be evaluated using information about the various methods of communication presented in Figure 1. Common behaviors of virtual teams are presented in Table 2. The WebCT(TM) tools used to enable the virtual team environments were used to varying degrees by each of the project teams. The extent to which each team used the tools and the way in which team members utilized the tools seemed to trigger social or task orientations in the groups. The following sections illustrate team interactions and show how the teams went about their work along the orientations presented in Figure 1.

CASE DESCRIPTION

Phase 1: Initiation and Planning

Organizations identified for the virtual team projects had a defined set of requirements for the information systems they envisioned. The virtual work teams assigned to create the systems conducted thorough analysis before embarking on development. Each team wrote a narrative description of the project in order to clarify scope and direction. Teams also specified resource requirements and assessed the feasibility ofthe project. Finally, each team developed a baseline project plan to manage the progress of the work. The following passages provide information regarding team interactions throughout the initiation and planning stage of system development.

Team A-Aerial Painters, Inc.

Initial communication between team members occurred in the form of a discussion posting that provided names and contact information for the Norwegian team members. Along with contact information came a promise that members from Norway would "post some lines about [themselves] individually" and a request that "it would be nice if [U.S. members] could do the same." Eight out often of the team members quickly provided information about themselves ranging from topics of age, personal interests, favorite movies or music, and relevant skills and experience. A few members included links to personal Web sites or attached photos of themselves. Most of these initial postings concluded with the team members expressing their excitement about the project and enthusiasm about working with the various members (e.g., "I look forward to working with all ofyou. I feel confident that we can learn from each other!")

Less than 48 hours after the first discussion posting was made, the team began sharing information regarding the project. Members in the United States initially took the lead in this area, as they had direct access to client. All documentation received from the client was posted in shared file sections to inform all members of project communication. This practice proved especially valuable because team members who were unable to participate in some sessions still had access to project information.

Sessions followed a pattern of structured, task oriented, focused communication on detailed aspects ofthe project (e.g., "we should develop a front-end in Access that will allow the users to do simple things"). These sessions were used to assess tasks to be accomplished, coordinate project ideas, and establish responsibilities (e.g., "Sounds good in theory, let's explore the different possibilities locally in the group and get back to you on choice of language"). These conversations were also used to establish timelines for the completion of tasks (e.g., "I'll do both then, expect it around 24 hours.") Chat communications were sometimes used to express opinions on previous suggestions; (e.g., "someone mentioned writing up a contract [with the client] that goes into more detail. I think that would be a good idea.")

Team B-Sport and Recreation Division

Team B's objective was to develop a Web-based scheduling system for the sport and recreation division. Initial communication between the teams occurred via a discussion posting. This initial communique was strictly task-related and offered no introduction to the project or team. Subsequent introductory messages by the team members followed a similar pattern of focusing on details of the client or project. Personal information about team members was not offered or shared by the members.

Messages posted to the discussion section of the collaborative tool were very short and to the point during this phase of the project, often only consisting of a few words (e.g., "I have posted proposal and client information in the shared files section of WebCT(TM) Post any questions you may have"; "I don't see a file posted. Could you try again?"). Posts almost always focused on project related topics. Most posts didn't even include salutatory introductions.

Team B utilized the chat capabilities of the web collaboration tool and chatted at least once a week. During the first phase of the project, chat sessions were used to clarify project details and establish rules of communication. The members initially used sessions to assign and clarify team roles. Chat sessions usually began with greetings, but quickly transitioned to conversations regarding project topics. Generally one of the team members suggested, "We should probably talk about the project now." Or, "okay, we need to talk about the deliverable now." Such transitions effectively cut off all social interactions. Conversation rarely reverted to social communications of any kind other than to say, "Good bye, have a good rest of the day."

Nine days after the first communication posting, a Norwegian member of the team posted a message containing personal information: "A few facts about myself: I am a girl I do not think my name is used in USA, so this might be useful information. I am studying for a master's degree. I will hopefully finish my master thesis in December-almost one year from now. I am writing a paper on estimating work in software projects by using UML Use Cases." This message was followed by similar postings from two other members ofthe team. Of the ten-member team, only four members provided any substantial personal information to the team throughout the duration of the project.

After one month, a team member from the United States posted the following message: "I must unfortunately tell you all that I cannot continue with the virtual project. I have been assigned to other projects that require my full attention at this time. I hope that you understand. I wish you all the best of luck and success in the future." Only one member of the team bothered to respond to the post saying simply, "Good luck to you." Apart from this message and the personal information shared by a few members of Team B, all message posts focused on the project and contained no social communication.

As project deadlines approached the frequency of discussion postings increased. Messages focused on which members would complete which parts of the next project deliverable. Questions regarding clarification of client expectations or information to be included in the deliverable were often asked via discussion postings. These sorts of "informational" posts were usually answered promptly.

Team C-Envision, Inc.

Initial interaction within the team occurred via messages posted to the discussion forum. Messages originated from Norwegian members who provided brief introduction of themselves, limited personal information, and contact information. Members from the United States replied to the postings by providing similar information as well as expressing excitement for the project--"I just wanted to say we all look forward to working with you." Discussion postings continued over the following weeks. For the most part postings were short, establishing rules and norms for the project. Most of the communications were unidirectional whereby one side initiated the communication with the other watching, feeling uncomfortable to interact, or simply indicating their own presence on a particular communications channel (Lau et al., 2000).

After a few weeks, the team planned its first interactive chat session. The session focused on defining tasks necessary to successfully complete the project. Team members exchanged information regarding the project --"Well, we can create ASP web pages to access the information from a local database, or we could create a program that would allow them to enter info as well as extract it." These sessions represented the first real use of bi-directional communication between team members. In bi-directional communication, both local and remote members talk past each other in exchanging task or socially related information. Information is shared but responses are not meaningful and members' circumstances and priorities are not considered (Lau et al., 2000). In fact, members ostensibly engaged in chat where not devoting much attention to the chat-"Sorry, I got distracted-now I am back" "Sorry about that I am at work;" "ahh, I am at work too." Similarly, a few conversations occurred at the same time creating cross-talk and indicating a lack of attention/care to the ideas and questions being provided by different team-members.

Later conversations involved the sharing of personal information, humor and stories. The group discussed upcoming members' weddings, personal interests, even public transportation. Conversations such as these seemed to establish a social foundation and allow group member to move into a mutual communication pattern evident in the high degree of social cohesion in the group.

Team D-Nembus

Following introductions, the team worked to establish a convenient time to hold synchronous chat sessions. Unfortunately, the group was unable to determine a time when all members of the team were available to participate. In the end, a time was selected that excluded at least two members from the online discussions. Prior to the first chat session, a member of the Norwegian contingent posted a message to the discussion forum. The post provided an agenda for the chat session. One of the agenda items indicated members of the U.S. contingent were to design and build a prototype for the system. A deadline for completion of the task was also provided. Team members from the United States had no prior knowledge of this prototype. One U.S.-based member stated, "I felt as if the Norwegian members were delegating project tasks to us without seeking information or collaboration from the United States-based members. They were assigning us tasks to complete without seeking any knowledge of our capabilities and/or skills. It was frustrating to be told to complete certain tasks. Had they bothered to ask, they would have discovered we did not have the required skills or knowledge to complete the task as assigned."

This chat was task-oriented with little social communication. Early in the chat, Norwegian members took a strong leadership role dictating how United States members would be participating in the project. The following comment from a Norwegian member is representative of the entire dialogue: "One ofthe deliverables is a design document, how do you plan to develop this document?" "When making the design you will not specify a programming language." Frustration in the United States group developed because they felt as if they did not have a say in the project. According the U.S. contingent, `the Norwegians had defined the role ofU.S. members as laborers whose primary job was to focus on the grunt work of the project."

By the second chat, frustrations had swelled. This feeling was magnified when United States members asked a question regarding an upcoming project deliverable. Norwegian members responded by saying, "I thought that was our deliverable." This interaction provided the first indication that the two groups were destined to participate in the project as two separate teams working on one project. The attitude was prevalent for the remainder of the project and proved a serious obstacle in the team's ability to successfully attain project goals. For the remainder ofthe chat, the members of United States asked questions regarding the project and expressed confusion regarding the answers provided. One member from United States commented, `We expressed the desire to learn more about the client and the project and were told the Norwegian members would take care of that area. This was extremely frustrating because we felt we didn't have any say in the project and were just being delegated work."

Following this first chat, team members from the United States contacted project facilitators and expressed concerns that they were not being provided the opportunity to contribute to the overall project. They perceived that Norwegian members felt that United States members' skills were inadequate to contribute in any significant way. When facilitators communicated this concern to the Norwegian team members, they quickly responded via a discussion posting. One member of the Norwegian team stated, "I am really sorry if you got the impression yesterday that your skills are not adequate." A more in-depth explanation of the project followed but did not address issues of collaboration and teamwork. At best, the comments only added more details as to what Norwegian members expected of the United States members.

Phase II: Design and Development

The purpose of this phase in the development of the information systems projects was to analyze details of the current operations and outline problems, bottlenecks, opportunities and other issues present in the existing systems. Logical and physical design documents were created to layout system requirements and design specifications. Project teams develop strategies for acquiring or building the new systems described in Phase 1. Finally, project teams identified functional specifications such that programmers could develop the required systems. Project deliverables from this phase of the system development required significant investments in time and effort on the part of all team members.

Team A-Aerial Painters, Inc.

As the project moved into Phase II, discussion postings continued at a steady pace. Posts were used to convey new information about the project and chat transcripts. However, after about six weeks, the communication began to change significantly. The team began to test the social aspects of the group to help understand the personalities of virtual members. This shift from task communication to social communication was first evident during a chat with a conversation regarding "Americans and lawsuits." Both sides joked about the potential for the system's vulnerability to lawsuits and that it might be wise to hire Johnny Cochran to represent the group. This conversation was followed by emoticons to convey personal emotions (e.g., LOL, ;-), hehehe). After a short discussion the conversation was refocused and the group "got down to business."

Similar instances of group members using humor to help uncover the personalities of members followed in the chats to come. The group joked about the time of day the chats were taking place, Member A - I'd say owl for us :); Member B - owl? Member A - It is pitch dark here; Member B - Bat time for you = owl time for us. (No big deal LOL). By the middle of the second phase of the project these exchanges of jokes and humor had become a significant part of chat sessions. Most chat session began with a few extensive conversations of humor and joking around before any actual project topics were discussed. This pattern continued throughout the remainder of the project. As the team members began to understand each other's personalities the exchanges became more tailored to the various individuals. One member of the team commented that this

"Shift to a more social communication pattern created an environment for a more open form of communication. The environment was then one where members could be constructively critical of ideas and thoughts without the fear of stepping on the toes of group members. This new social attitude also allowed for an environment in which ideas flowed with more freedom. While this didn't add much efficiency to the chats, the content of the conversations was much richer. "

Team B-Sport and Recreation Division

By the second phase of the project, discussion postings had grown in length and detail. Messages were typically specific to the project, frequently including detailed questions for specific members of the team. Roles and task assignments were assigned and posted as deliverable deadlines approached. Members of the team completed assigned tasks individually and asked questions to group-members as necessary. Chat sessions continued to take place at least once each week. Unlike the chat sessions in Phase I, little or no small talk occurred. Conversations were strictly task-based.

Project progress and communication slowed down as United States members took time off for vacations. Upon their return, team momentum lagged. Frustration within the team grew becoming obvious when miscommunications regarding task assignments were uncovered:

"The screen designs was our task ... it is unnecessary that both local teams spent time doing this. At the chat meeting we said you could send or fax what you've made so that we could get some ideas. You were not supposed to complete this task-this was a task assigned to the Norwegian team. "

This message did not elicit a response from any member of the U. S.-based team. In fact, no action was taken to address the miscommunication and/or misunderstanding.

Team C-Envision, Inc.

As the project progressed through the first phase and into Phase II, Team C continued to utilize all of the collaboration tools available in WebCT(TM) Messages were frequently posted to the discussion forum. These messages usually consisted of short bits of information such as updates on deliverables status, system status or schedule of chat sessions. Substantial discussion rarely took place via the discussion forum.

Chat sessions remained the primary method of communication. However, after several weeks of working together, the chat sessions began to shift drastically from the task orientation present in Phase I to an orientation that included much more social communication. One session consisted entirely of conversations about the ages of team members, birthdays, the structure of higher education systems, recent and future travels, even wolves and cougars-"Cougars are dangerous, I think. Wolves are not, not to humans anyway." These dialogues played an important role in the group's ability to understand each other's norms, values and experiences as well as shift the group communication pattern from bidirectional to mutual communication in which group members were "talking to each other" in a substantive fashion. The shift in orientation illustrated team members respect for each other and demonstrated the ability ofeach team member to consider individual circumstances later in the project.

At one point, social conversations encompassed approximately 75% ofthe chat session conversations. At times, non-project-related discussions dominated the dialogues so much that project tasks were not being addressed. In one instance a group member wrote, "1 have to go in 15 minutes...could we go on?" After the request a few project points were discussed, but the conversation quickly reverted to more social topics. This pattern of putting social conversation first continued through phase two. Evidence of the lack of task focus began to frustrate some team members. In one session, members had to ask three times if they could begin discussing the project before the group began. "I think it is important that we decide it pretty quick as we don't have much time left," "ok... we should move on," "we need to move on..." Misunderstanding and confusion also surfaced as social conversation obscured project tasks - "sorry about the confusion, it made sense to us, but I guess we didn't think it through well enough."

Team D-Nembus

By the second phase of the project team, cohesion had declined and frustration was increasing among members of Team D. Due to scheduling difficulties, some members of the team had yet to attend a single chat session. Consequently, they were unknown to remote group members. Progress was slow due to the lack of communication between group members. Six weeks into the project, the team used a chat session to finally set standards for document control. Shortly after this session, the problems that had developed within the team were brought to the surface and discussed. During one ofthe chat sessions a Norwegian team member expressed, "[United States]: we are sorry for not including you more in the earlier deliverables, was that a problem for you?" A U. S.-based team member responded, "Well, we'd like to start working on the prototype now." It became evident that roles had not defined very well. Communication was lacking on both sides. Norwegian members felt they were communicating while United States members felt they were on hold, waiting to be told when to participate. In fact, team members from the United States weren't listed as team members on project deliverables, nor did they have assigned roles. Both sides of the group agreed to communicate more often and become more actively involved.

Late in the second phase of the project, it appeared the team had come together to work as one entity rather than two. The group had an extensive dialogue regarding the next deliverable and how the work was to be divided. Initially, Norwegian members suggested that United States unit do the majority of the work and they would help where needed, ("We have also been looking at the next deliverable. Hopefully, we can take some of the work off you. However, this is only if you want to. We are more than confident that you can manage!") A few discussion postings later this approach had changed and Norwegian members proposed to work on six aspects of the deliverable and suggested United States produce the remaining two. All members of the group agreed that the matter should be discussed further and scheduled a chat session during which all members would attend. Unfortunately, all nine members of the group failed to recognize that time changed due to daylight savings time. Groups arrived to chat at different times.

The miscommunication allowed each side of the group to chat among themselves as they waited for the remote members to arrive. During one ofthese conversations, a Norwegian member discussed the quality of output produced by their United States counterparts"what they have done is repetition of what we have done earlier." This comment led a few members of the group to becoming possessive. One Norwegian mentioned "our text" and asked, "why can't they just refer to our old deliverable?" At this point in the conversation, a team member pointed out, "We are suppose to work as one group, not two." It was clear to everyone that this principle was not being put into action by the team as a whole.

Phase III: Implementation and Close-down

The final phase of the project involved writing code according to specifications defined in Phase II and documenting the system for future users. Teams developed working systems with documented code, test procedures, test results and maintenance and users manuals. The virtual teams delivered final project deliverables via ISDN lines and Microsoft NetMeeting. Videoconferencing allowed all team members to participate in showcasing their work. Upon delivery ofthe final project documents, team members were asked to reflect on their experience working in a virtual cross-cultural environment.

The third phase required teams needed to be highly interactive in order to accomplish all required tasks in the short time frame available to complete the projects. The stress was clearly evident in some groups, less so in others.

Team A-Aerial Painters, Inc.

The project team worked diligently to complete the system for the client. By the end of April, the group had successfully created a system that met and exceeded user-defined needs. Over all, the group expressed excitement with the final results and that it was delivering a quality product. All members of the team participated in the final presentation. The videoconference was the first time group members interacted in a face-to-face environment. However, team members had interacted frequently throughout the project using discussion forums and interactive chat sessions. Team members were familiar with personalities, norms, and values. Consequently, the group was able to deliver a presentation as one group working toward the same goal. The final project presentation was entirely task oriented. The usual jokes and pats on the back were not evident to the audience. Nonetheless, following the final presentation and delivery of the system to the client, all members posted messages to the discussion forum echoing congratulations on a great project and gratitude for the hard work done by all members.

Team B-Sport and Recreation Department

As the project entered the third and final phase, Team B's communication remained largely task-oriented. Attempts at social interaction were made when Norwegian members of the team posted pictures of themselves working on the project. However, only one member of the U.S. contingent responded to the posting-seven days after they were initially posted! Chat session occurred more frequently in this phase of the project as the team prepared for system delivery. Frustrations that had not been previously addressed continued to escalate over time leading to a near breakdown. Frustrated with the lack of communication and involvement coming from U.S. members, Norwegian members wrote a note expressing their frustrations. When members in the United States read these comments, one member posted a personal apology. "I want to start of by apologizing for my lack of communication over the past few weeks." The team member went on by reassuring the group of her commitment to the project--"I am willing to put in as much time as needed to make this project successful so please let me know anything I can do and I will get it done." The post drew a response from one member of the team and participation increased after the exchanges.

Team B presented the final product using NetMeeting (application sharing) and ISDNbased videoconferencing. After the presentation, team members posted messages to the discussion forum expressing their thoughts about the final project and the over-all experience. "Nice to finally talk to you all `face-to-face .... .. "I have had a great time working on this project and getting to know everyone. I think we did an amazing job and pulled off some great work." Follow-up posts were scant and never drew responses from other team members.

Team C-Envision, Inc.

As the group moved into the final phase of the project, they found themselves in a rush to finish the system as they had spent little time focused on task details in the second phase of the project. Three months into the project, they were finally able to declare that they "have a good understanding of the project now," and "should be able to handle things from here." The late start on project work caused members to become frustrated and anxious-"we are experiencing some set backs here ... kind of frustrating for us." The massive social interactions from previous phases seemed to be pulling the team apart. Fortunately, they played an important role in keeping the team together. In a weekly chat session, team members discovered that the client organization had gone bankrupt. Group members expressed disbelief and surprise, but the social relationships served to bond team members. Despite the clients impending demise, Team C made a decision to continue the project and deliver a solution reasoning that their solution could be useful as part of a future system. The individuals facilitating the virtual team environment agreed to continue with their sponsorship as well. One team member expressed her hope that the team could "manage to keep the spirit and complete the system even with the bad news." Others replied that the team should be "motivated by the challenge of the system, not delivery of the final project." All members agreed that they would make the best of a worse case. Here, the social bonds established in earlier project phases worked to hold the team together even the midst ofa significant negative event.

Despite monumental eleventh-hour efforts to develop and code the applications, the team had produced a system that only partially met the specifications originally outlined by the client. Evidence of the social bond that had developed during early stages was evident in the final videoconference in which the both sides of the team interacted with comfort and ease. After the final delivery, members of the team posted closing remarks to the discussion forum expressing gratitude for the hard work and well wishes for the future.

Team D-Nembus

By the final phase of the project, the team had almost completely split into two separate teams. Distrust and dissatisfaction led the team to conclude their best alternative was to try and deliver a prototype of a working system to the client. It was evident a full-fledged working system simple wasn't in the cards. Ironically, Norwegian members had assigned the task of building a prototype to United States members early on in the project. In fact, one United States member dedicated substantial time and effort to developing the prototype using information from deliverables and information provided in chats and discussions. Unfortunately, scheduling conflicts and the lack of interaction in virtual space resulted in a prototype that was inconsistent with system requirements. After many long hours and significant struggle, the U.S. contingent was able to develop a prototype. Meanwhile, Norwegian members turned their attention to developing a final presentation for delivery of the project. The group divided the presentation - each side focusing on topics they were familiar with. Norwegian members discussed the analysis phase of the project. Members from the U.S. focused their presentation on the prototype. As a result of their efforts, U.S. team members were able to present a "successful prototype." However, when evaluated on communication and group cohesion evidence throughout the duration of the project, "success" appeared to be limited. In fact, the existence of any prototype at all was largely attributable to one or two individuals who took it upon themselves to develop a satisfactory product.

CHALLENGES OF VIRTUAL TEAMS IN SYSTEMS ANALYSIS AND DESIGN

Virtual teams are quickly becoming an integral part of the business world adding functionality to group work as well as increasing competitive advantage. This study of virtual teams and the communication within helps enhance our knowledge and understanding of virtual teams providing insight into a participants' views as well as providing information that would be useful in virtual team management. Information presented in the study can be used to help management build successful teams and can be used as a learning tool for future virtual teams aiding in their success. Determinants for success may lie in the shared frame of reference of the virtual teams, the ability and willingness to work through cultural differences, the capability to recognize differing skill and interests and the ability to incorporate technology to span time and space.

The cases presented in this comparative study demonstrate that successful utilization of communication tools helps develop strong social connections among team members. In part, these social connections allow team to deliver quality products to their clients. Frequent communication can create strong social bonds and allow team-members to grow together. For some virtual teams, the lack of social glue can create project breakdown. Teams that lack a strong presence of both social communication and task-related communication have more difficulty successfully completing projects. Lack of social interaction can create obstacles that are difficult to overcome in addition to creating difficulties in collaborating on the technical requirements for the project.

Questions still remain regarding the understanding of virtual teams. How do managers evaluate virtual teams? How do project leaders instill the factors of success in teams? What factors of virtual teams contribute to team productivity? As technology advances, how are virtual teams affected? Does "rich" communications actually lead to more productive cohesive teams? As virtual teams become increasingly important for businesses and are studied in greater detail, we will hopefully begin to gain some insights regarding some of the above issues. The review questions present additional areas for consideration and analysis.

References

REFERENCES

References

Briggs, R.O., Nunamaker, J.H., & Sprague, R.H. (1998). 1001 unanswered research questions in GSS. Journal ofManagement Information Systems, 14(3), 3-21.

Gersick, C.J.G. (1988). Time and transition in work teams: Toward a new model of group development. Academy of Management Journal, 31, 9-41.

Jablin, F. M. & Sias, P. M. (2000). Communication competence. In F. M. Jablin & L. L. Putnam (Eds.), The New Handbook of Organizational Communication: Advances in Theory, Research, and Methods, 47-77.

Lau, F., Sarker, S., & Sahay, S. (2000). On managing virtual teams. Healthcare Information Management & Communications, 14(2), 46-52.

Sahay, S. & Krishna, S. (2000). Understanding global software outsourcing arrangements: A dialectical perspective. Working Paper, Indian Institute ofManagement, Bangalore, India.

AuthorAffiliation

David Croasdell

Washington State University, USA

AuthorAffiliation

Andrea Fox

Washington State University, USA

AuthorAffiliation

Suprateek Sarker

Washington State University, USA

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

David Croasdell is an assistant professor of Management Information Systems in the School of Accounting, Information Systems and Business Law at Washington State University, Pullman, USA. His current research interests include Organizational Memory, Knowledge Management, and Inquiring Organizations. Dave teaches courses on Systems Analysis and Design, Data Communications and Networking, and Electronic Commerce.

AuthorAffiliation

Andrea Fox recently graduated from Washington State University, USA, with a degree Business Administration. Her major area of study was Management Information Systems. Andrea's honors curriculum involved intensive participation and study of crosscultural system development virtual teams. Andrea currently works in technology risk consulting with a global professional services firm.

AuthorAffiliation

Suprateek Sarker is an assistant professor ofManagement Information Systems in the School of Accounting, Information Systems and Business Law at Washington State University, Pullman, USA. His current research interests include virtual teamwork, ITenabled change, and on-line education.

Subject: Studies; Comparative analysis; Systems development; Virtual reality; Information systems

Classification: 9130: Experimental/theoretical; 5240: Software & systems

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 447-463

Number of pages: 17

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198659906

Document URL: http://search.proquest.com/docview/198659906?accountid=38610

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 94 of 100

Enabling B2B marketplaces: The case of GE global exchange services

Author: James, Paul; Schiro Withanachchi; Mockler, Robert J; Gartenfeld, Marc E; et al

ProQuest document link

Abstract:

This case provides an overview of the B2B segment of the e-business industry and explores how B2B e-commerce functions. Additionally, the case describes an in-depth example of how to analyze a specific industry and offers an example of how to identify keys of success for a company, GE Global Exchange Services. The case also describes how an organization can identify opportunities and threats in its industry and analyze competitive market situations. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

The objectives of the case are to provide an overview of the B2B segment of the e-business industry for students to understand the intricacies of how it functions, an in-depth example of how an industry can be analyzed, and an example of how to identify keys to success for a company, GE Global Exchange Services (GXS). Other subject matter objectives are to provide an example of how a company can identify opportunities and threats in its industry and how to analyze competitive market situations, develop alternative strategies, evaluate the consequences of decision models, and make winning corporate decisions.

BACKGROUND

Global eXchange Services combined innovative Internet commerce technologies with its quality control process. General Electric's division of GE Information Services (GELS), as shown in Figure 1.

For more than 30 years, GEIS had been pioneering advances in the information management industry. In the 21st Century, GE Global eXchange Services intended to maintain this leadership position as the most experienced and responsive provider of complete solutions for business electronic commerce. In its initial stages of formation in 2000, GXS began to service its own customers (i.e., its own set of buyer and seller trading partners involved with GE internally). In later stages, GXS began to serve as a dual-purpose private exchange where it sold its B2B e-commerce services to external buyers and sellers (i.e., linked more than a hundred separate markets) plus maintained its internal network operation. GXS planned to stay ahead of its competitors by applying Internet technologies, forming strategic alliances, and creating additional products and services to help GE customers streamline supply chain management. GXS mission was "To create intelligence throughout the business supply chains ofour customer around the globe combining Six Sigma process discipline with innovative electronic commerce technologies" (GE, 2001). The three basic services that GXS extended, Enterprise Resource Planning, Quality Control, and Consulting and Training, were incorporated into its products offered.

Technology

In a June 1999 interview with Business Week Online, GE Chairman and CEO, John Welch, stated, "Where does the Internet rank on my priority list? Its number one, two, three, and four. I don't think there's been anything as important or more wide spread in all my years at GE" (GE, 2001). As Welch noted, the technology was a major component ofbusiness, especially at GXS. The software involved e-commerce applications that performed as Web portals for e-commerce to be conducted. As shown in Figure 2, there were 3 portfolio applications through which GXS conducted its B2B commerce: GE Integration Solutions, GE Interchange Solutions, and GE Marketplace Solutions.

Customers

The customers in the B2B segment were broken down into two categories: buyer and supplier. Buyers were scattered over 1,200 e-marketplaces, but most concentrated at select sites that presented the best purchasing opportunities for their needs. For GXS, suppliers comprised of small businesses, corporations, and supply chain partners within a single company, a single industry, companies in an industry, or across industries.

Employees

Management

SETTING THE STAGE

The B2B segment was expected to explode in the future. According to the Gartner Group, by 2004, it was projected to reach 6.7 trillion with North America accounting for nearly 40%. This growth may be due to several reasons.

One reason was the rapid transformation ofbusiness processes from paper to electronic due to the benefits of B2B-reduced costs, faster time to market, greater customer loyalty and broader market reach (Cisco System, 2001). Goldman Sachs predicted that B2B transactions would account for nearly 11 percent of the total business economy by 2002. Also, during an economic slowdown, businesses would look to increase efficiency through shortened product development cycles, collaboration, and lowered product costs through better planning-this resulted in businesses shifting into the B2B segment. Finally, the shift toward Net Markets by many brick-and-mortar businesses brought light many significant back-end integration issues. This translated to huge revenue opportunities for companies engaged in B2B-something that was becoming more evident as those marketplaces reached the next level of maturity.

The B2B Industry had seen its share of growth prior to 2001. Many companies whether small or large wanted the ease of being able to buy and sell online. They counted on 13213 companies to develop and implement a B2B e-commerce marketplace where customers could easily buy goods and services. A major trend that was taking place within the 13213 industry was the ability for buyers and sellers to place orders with a multitude of suppliers by directly accessing their suppliers' electronic catalog. B2B e-commerce involved businesses selling products and services to each other over the Internet (About.com, 2001). With much business online, one ofthe main problems would be finding the best B2B Company with which to do business. A new breed of electronic "hubs" had emerged which could intelligently route business transactions over the web from one business to another (GE, 2001).

Conglomerates

Conglomerates were companies that engaged in diversified business operations such that no single operating segment, in a specific industry, generated a majority of revenue (Hoovers, 2001). Figure 3 shows that some of the main industries, in which these companies were involved.

The functions ofthese conglomerate companies, as shown in Figure 4, could be divided into two categories, industry-specific and cross-industry functions.

In consumer-to-consumer, consumers sold to other consumers (e.g., eBay). Through an intermediary, consumers were brought together to buy and sell. In consumer-to-business, consumers stated their price and firms either took it or left it (e.g., Priceline.com). Intermediaries played an important role in bringing the consumers and business together. Intermediary models were used in pricing the goods that were exchanged in transactions such as auction (e.g., TradeOut.com), reverse auction, fixed or menu pricing, bargaining, and barter (Afuah & Tucci, 2000). In business-to-consumer commerce, businesses sold to consumers (e.g., Dell online & Amazon.com) with or without an intermediary. Customers around the world could access 24-hours a day everyday, could receive goods instantaneously while e-- tailors had no limit to the number of goods displayed and had low cost standards. In businessto-business, businesses bought and sold goods and services to and from each other (e.g., GXS). Buyers could put requests for new bids for suppliers and sellers around the world had a chance to bid. The more buyers, the better offthe sellers were and vice versa (Afuah & Tucci, 2000).

The future of the conglomerates industry was expected to grow as new products were added and future competitors entered the market while, economically, personal disposable income increased. Since this industry was so vast and diversified, this study focused on one of the cross-industry functions, e-commerce or specifically, B2B.

The B2B Segment

B2B uses Web-based technologies to conduct business (buying, selling, or exchanging information) between two or more companies. As shown in Figure 5, the B2B segment involved B2B models, customer, services provided, industry functions, alliances, sales and promotion, technology, employees, industry standards, and competition (which included independent Internet and non-Internet companies).

B2B Models

The B2B segment experimented with various new business models as seen in Figure 6. A business model was the method of doing business by which a company can generate revenue-it specified where a company was positioned in the value chain (Rappa, 2000). The strategic profiles ofB2B models included BUY-side, SELL-side, eMarketplace or exchange, and Trading Partner Agreement model (IBM, 2001).

BUY-Side Model

The BUY-side model (1 buyer, many sellers) provided electronic purchasing services to the business customer with its suppliers, as shown in Figure 7.

SELL-Side Model

As shown in Figure 8, the SELL-side model (many buyers, 1 seller) provided electronic sales and distribution services for the supplier or seller through electronic business catalog, price lists, and order entry with high integration to the supplier back office systems (Yael, 2001).

EMarketplace or Exchange Model

The eMarketplace or exchange model (many buyers, many sellers), as shown in Figure 9, combined suppliers and business customers by providing full scale sales and procurement to both the supplier and the customer and by transferring business documents automatically (Yael,2001).

Trading Partner Agreement Model

The Trading Partner Agreement model (1 buyer, 1 seller) automated the process between companies for buying, selling, and enforcing contracts through collaboration platforms and applications such as Electronic Data Interchange (EDI), Value Added Networks (VAN), and eXtensive Markup Language (XML). This model was appropriate for contingents that were interested in focusing on specific functions such as collaborative design and engineering or in providing project support with a virtual team of consultants (Timmers, 1998).

Services Provided

Although the main services for most B2B companies were to provide buying and selling opportunities, there were many different services that these companies provided. However there were certain support services that companies provided to make its overall service more efficient. In order for companies in the B2B segment to stay competitive and add these support services, they had to create efficient supply chains. There were three basic services that many companies in the B2B segment offered: Enterprise Resource Planning, Quality Control, and Consulting and Training.

Industry Functions

There were two industry directions that B2B companies focused on: vertical and horizontal. Vertical industry functions were those functions that included all layers of production from manufacturing to consuming. An example of this would be ChemConnect, which was an online marketplace for buyers and sellers in the chemical industry. Horizontal industry functions were those functions that included a single layer of business incorporating different products and services in various sectors. For example, iMark.com acted as an intermediary between sellers and buyers of used capital equipment across different industries.

Alliances

Using collaborative capabilities or out-sourcing non-core functions to appropriate partners, partners could operate as a single business entity. With shared knowledge and joint decision-making, the added value, higher revenues, and reduced costs were all rewards. The main components of alliances within this industry segment comprised of technical partnerships, marketing partnerships, and product and service partnerships.

Sales and Promotion

B2B companies used a variety of sales and promotions techniques to ensure quality of service. There were three components that ensured the highest effectiveness: sales and marketing, support, and training.

Sales and Marketing. Activities in this category included both traditional marketing techniques and opportunities to participate in more unique forums. Some of the benefits of the GXS sales and marketing included: Website listing on www.gegxs.com, joint trade show participation, visibility/exposure to the GXS sales force, and participation at EC Forum, which was GXS's annual user group conference.

Support. To help its trading partners quickly build practices, GXS included a number of support methods in the program. Some of these include support during the installation and integration of the operational system, support to manage the overall process, and post-installation support.

Training. Training took multiple forms. Some partners required an in-depth technical knowledge of each GXS integration product. Other partners were content to understand how an integration solution benefits a company. Each partner was offered a level of training appropriate for its level of commitment to the program.

Technology

Technology was the main force behind the changes being experienced in the B2B area. The technologies behind this business were: a) the Internet - a mediating technology with many properties that had the potential to interconnect parties that were interdependent; b) software applications-including Electronic Data Interchange (EDI), Enterprise Application Integration (EAI), extensive Markup Language (XML), and Value Added Network (VAN); and c) knowledge management.

Industry Standards

The regulation that set the limits and standards of B2B commerce had not been firmly established. However in effort to define much-needed standards, several groups of experts had been organized: RosettaNet, CommerceNet, Open Buying on the Internet, The Organization for the Advancement of Structured Information Standards, and Microsoft's BizTalk (GE,2001).

Competition

The main competitors within the B2B segment included independent Internet and nonInternet companies.

Independent Internet companies. These companies were not brick-and-mortar companies but dot-com companies. Some of the top competitors in the BUY-side model included FreeMarkets.com, the SELL-side model included TradeZone and Ariba, and the eMarketplace model included VerticalNet and FastParts. Companies such as FreeMarkets.com were vertically integrated and allowed buyers to bargain about price and obtain competitive offers from a number of sellers. Companies such as TradeZone and Ariba allowed sellers to provide an e-catalog, cross-selling or up-selling capabilities with integration of back-end order processing. Companies such as VerticalNet and FastParts were mainly horizontally integrated and matched buyers with sellers in a virtual marketplace (also called an exchange) through auction or reverse auction. These independent Internet companies varied in size, products, and services while maintaining different customers.

The strengths of these firms were in their B2B models, customers, services provided, ability to function within an industry vertically and horizontally, technical partnerships, and sales/promotion. With software, these competitors allowed the transformation ofinformation easily and securely through organized procedures while buyers or sellers accessed supplier or customer information with superior service. These companies successfully transported secured data, operated high-performance networks, improved quality, reduced costs, and set global standards for manufacturers, distributors, and end-users. They were also strong in technical partnerships alliances. Through these partnerships, these companies successfully increased market share, reduced costs, obtained greater R&D capabilities, and offered better products/services while promoting and selling their applications.

Independent Internet companies were moderately competitive when it came to providing content for specific capabilities, overall creativity, minimization of organizations security, and ease of information exchanging through efficient applications. Independent Internet companies continued their moderately competitive status with joint decisions, selection of its partners, and initiating pilot programs. In order for Independent Internet companies to be considered strong against competition they had to gain a competitive edge in providing mutual benefits, create mutual trust in R&D, establish partner confidentiality, establish agreements on services offered, and have the ability to create complimentary products with certain partners.

The weakness of some of these competitors was in their industry standards involvement. They seemed less involved with organizations that promoted universal compliance. These companies' adherence to self-initiated rules and regulation, participation in forums, establishment of an in-house check system, and employee compliance were weak.

The main trend in the B2B area was a shift by many dot-com companies to create a brickand-mortar establishment as well.

Non-Internet companies. These companies were combined brick-and-mortar and dot-- com companies. Some of the top competitors in the Buy-Side model included Japan Airlines, the Sell-Side model included Cisco Systems, and the eMarketplace model included the General Motors-Ford-DaimlerChrysler alliance. Companies such as Japan Airlines were set up by one or more buyers with the aim of shifting power and value in the marketplace to the buyers' side. Companies such as Cisco Systems were set up by a single vendor seeking many buyers. Companies such as General Motors, Ford and DaimlerChrysler formed an alliance (Covisint) to develop their own procurement system to match many buyers to many sellers. GXS had a variation eMarketplace model where it functioned as a private exchange. These non-Internet companies varied in size, products, and services while maintaining different customers.

The main strengths of these firms were their liquidity and capital. Also, other strengths included their B2B business models, customers, services provided, ability to function vertically and horizontally within industries, Ztechnical partnerships, and sales and promotion. With software, the non-Internet companies allowed secure transformation of information using different features and ease. These companies successfully transported secured data, operated high-performance networks, improved quality, reduced costs, and set global standards for buyers and sellers alike. Furthermore, the non-Internet companies did not have the disadvantage of being a "no name," rather an established, secure, brick and mortar business.

Non-Internet companies were moderately competitive in providing content for specific capabilities, overall creativity, minimization of organizations security, and ease ofinformation exchanging through efficient applications. These non-Internet companies also continued their moderately competitive status with joint decisions, selection of its partners, and initiating pilot programs. For the non-Internet companies to be strong against competition they had to gain a competitive edge in providing mutual benefits, create mutual trust in R&D, establish partner confidentiality, establish agreements on services offered, and have the ability to create complimentary products with certain partners.

The weaknesses of these firms were alliances for partnerships. Through technical partnerships, these companies did not seem to successfully utilize the benefit of increased market share, reduced costs, greater R&D capabilities, and better products/services. The non-Internet companies were slow in careful partner selection, communication exploitation, and technology leveraging.

The major trend in the B2B area with these companies was creating an independent division or going private. The opportunities with these were the flexibility and greater market share obtained by being owner, operator, and manager of an independently run division.

General Competitive Environment. As the B2B segment was a highly competitive and rapidly changing market, it was sometimes hard to tell which company would succeed and which would fail. In Michael Porter's five-forces chain, an in-depth analysis was conducted for the B2B area as seen Figure 10.

ENTRY: The entry and exit barriers were low with many new entrants in the B2B area. This was due to the low cost standard of the Internet, flexibility, and minimum regulation. However, over time, market segments for B2B companies would mature and first comers would hold their position. This may lead to market capitalization and rigorous strategies of existing firms subsequently requiring significant up front investment for new competitors or narrow opportunities by offering specific products (Hopkins & Shoegren, 2000).

INTERNAL RIVALRY: With e-commerce, the internal rivalry was actually the survival of the fittest. The most successful B2B companies anticipated the need for change and acted in advance of the competition. The least successful B2Bcompanies adjusted too slowly or ignored the need for change altogether. Forward-looking B2B companies used e-commerce to enhance their agility and improve their competitive advantage (Cisco Systems, 2001).

BUYER AND SUPPLIER POWER: The bargaining power was low and was likely to increase due to the availability of more sellers and products and the availability of information and comparative analysis on the Web (E-commerce and Perfect Competition, 2000). Supplier power was the backbone of the technical architecture of and products offered by B2B companies (Hopkins & Shogren, 2000). So, supplier power was high. However, supplier power may decrease due to the increased number of suppliers and ease of quote requests.

SUBSTITUTES AND COMPLEMENTS: Although the B2B segment was a young market with new competitors emerging daily, competition was dependent on first mover advantage and strategic partnerships to gain access to customers (Hopkins & Shogren, 2000). However, the threat of substitutes was high with more Web-based substitute products/services being offered.

The future vision of B2B was integrating supply chains with integrated businesses and solutions. While B2B was approaching its third generation, it was no longer enough to simply automate the process. The future of B2B would change the way companies conducted business. The next phase would include auctioning and global trading portals (Hopkins & Shogren, 2000).

CASE DESCRIPTION

In early 2001, the ingenious 65-year-old CEO of $112 billion (revenues) General Electric (GE), John F. Welch, was studying the changing environment of the conglomerates industry as a whole and the business-to-business (B2B) segment in particular and noted that, "E-- business was made for GE, and the `E' in GE now has a whole new meaning" (GE, 2001). At the time, the industry was experiencing increased globalization of markets and advanced information technology. Specifically, GE management realized that, first, through internally derived productivity, 20% to 50% of selling, general, and administrative expenses could be saved. Second, delaying e-commerce could risk being cut out of the market by traditional and new companies alike (Rudnitsky, 2000). Third, business-to-business (B2B) e-commerce had grown from $43 billion in 1998 to $251 billion in 2000. According to another source, the Gartner Group, e-commerce was projected to reach $6.7 trillion by 2004 with North America accounting for nearly 40% ofthat. With these issues on hand, Welch devised a winning plan that directed 600 senior executives-in areas ranging from appliances and engines to power systems, plastics, and network programming at NBC-to develop an enterprise-wide strategy of ecommerce (Rudnitsky, 2000). This strategic corporate decision led to the formation of GE's own Web technology-enabled subdivision, Global eXchange Services (GXS) in 2000, with Harvey Seegers as CEO. GXS was an e-commerce service provider that focused on connecting trading partners electronically and enabling them to share information in order to make the supply chain more efficient.

The threats facing B2B companies were vast as well. One threat was that as e-- Marketplaces and online trade became an integral part of how industries operated, business on the Internet might experience a massive round of regulation. The success of e-marketplaces would spur strong oligopolies in many industries. The emergence of e-Marketplace oligopolies would lead to renewed debate about whether the government should intervene in the market or simply regulate it to make sure that monopolies were not abused (GE, 2001). Another threat was that as traditional rivalries died hard, some participants might still distrust their competitors and worry about revealing too much information in the exchange. Another threat was that many of the software programs used by exchange participants were not compatible. Also, international B2B marketplaces faced problems with conflicting currencies and language barriers. Another threat that may slow the development of B2B e-commerce was that even though the technology was available, corporate decision-makers might take longer than anticipated to embrace its benefits (Sood, 2001).

There were pros and cons that were associated with being a buyer in the exchange method. The pros for buyers were the following: one-stop shopping exchanges provided a single shopping center for all a company's supplies, eliminating the need to communicate with multiple suppliers. Comparison-shopping buyers used an exchange to find the lowest rates and best terms for products. Volume discount exchanges allowed small businesses to get better prices by pooling their buying power with that ofother small businesses. 24/7 ordering buyers ordered any time of the day with no wait for a customer service representative. Access to new suppliers exchanges offered a way for buyers to find items required for one-time use or to make up for a local shortage of critical supplies (known as "spot buying" or "spot sourcing"). The risk associated with buyers was that in replacing trusted vendors with unreliable new-sources buyers, the company tended to lose the relationship with a company's current suppliers (unless they joined the same exchange) and had to start all over again with new suppliers. There was a possibility the new suppliers would not live up to the company's expectations and needs. For mission-critical supplies or suppliers that were required on a tight deadline, a company had to think twice about using an exchange and instead stick with a proven supplier. Loss in customer service quality made it easy to compare prices, but not to compare intangibles or to negotiate contract deals. If quality service and contract deals were important to businesses, all exchanges were not the place for buyers to make deals. To try to address this need, some exchanges were adding features that allowed buyers and sellers to negotiate more complex terms than price and quantity. For example, FreeMarkets offered premium auctions for buyers and sellers of products that required value-added services, such as technical support (Afuah & Tucci, 2000).

The keys to success for buyers were the ability to control the marketplace by developing the marketplaces for oneself, to refine the specifications of the purchase with detailed information listed on line, to screen the potential supplier by setting up and conducting an on online bidding session, to buy more effectively by accepting bids that match the needs, and to reduce order processing time and costs through collective buying and consolidated purchases.

Supplier. A supplier or seller consisted of all business suppliers that offered a product/ service online. Sellers comprised of small businesses, corporations, and supply chain partners within a single company, a single industry, and companies in an industry, or across industries (e.g., IBM). E-sellers (as opposed to brick-and-mortar sellers) had an advantage with the ability to reach more customers, gather better information about them, target them more effectively, and serve them better. The corporate Web site set up by Cisco Systems was an example of how a seller controlled the marketplace by enabling buyers to configure their own routers, check lead times/prices/order shipping status, and confer with technical experts. This site generated $3 billion in sales a year (about 40% of Cisco's total) and saved $270 million annually (Berryman, Harrington, Layton-Rodin, & Rerolle, 2000). As the number of sellers was expected to increase in the future, the amount of complementary goods would increase and sellers would increasingly learn from each other (Afuah & Tucci, 2000).

There were also pros and cons to the supplier aspect of exchanges. One benefit to suppliers was that an exchange allowed suppliers to sell on the Internet without having to buy or build their own online store. Some advantages of selling online included reduced errors in orders (sellers avoided traditional phone calls or faxes, which required interpretation of speech or handwriting). An online channel also allowed suppliers to offer customers 24/7 ordering and easy access to product information. A way to reach new customers was another benefit to sellers since if an exchange had a large membership, suppliers were exposed to many potential customers. If you're a small manufacturer, an exchange was used as a way to sell directly to customers. If a company provided services, sellers used an exchange to expand clientele. As an outlet for surplus inventory exchanges, particularly those that offered auctions, exchanges benefited sellers as they offered a great source to find buyers for surplus inventory for which sellers may not have had a local buyer. The risk that suppliers faced included loss of direct customer relationships since suppliers ran the risk of having an exchange supplement the customer relationships. Some customers began to perceive the exchange as the supplier and the other sellers on the exchange as interchangeable commodities. Some suppliers also lost control over the customer experience, including how goods and services were presented for sale. Price wars occurred with small businesses since being grouped with a myriad ofother suppliers in a marketplace that only displayed vendor product offerings and prices sometimes spelled doom for them when competing on service or valueadded services. Competition for value-added services exchanges increased revenue by offering value-added services, such as providing insurance quotes, arranging logistics, or offering credit. Another disadvantage to sellers was the imposition of transaction fees that most exchanges charged the supplier, not the customer, to promote existing business through the exchange. Possible loss of customers was another disadvantage to sellers since some businesses that joined exchanges expected to reach new customers, also lost customers to other suppliers on the exchange. If competitors were listed on the same exchange a business is on, companies were competing for existing customers every time the customers used the exchange (Afuah & Tucci, 2000).

The Company--GXS

The biggest challenge to GXS was to decide how to differentiate itself from its competition while maintaining a strong hold of the market share. This decision would alter the services and products that GXS were to offer. Would it remain atop the B2B segment or would it expand its services to include business-to-consumer or application-to-business? Or would GXS choose a different B2B model? Also, would GXS further decentralize itself from the General Electric Company? GXS would implement a winning strategy based on understanding and analyzing the necessary changes.

B2B Models

GXS's B2B model was a private eMarketplace or exchange model.

Private EMarketplace or exchange model. This model combined suppliers and business customers by providing full scale sales and procurement to both the suppliers and customer by transferring business documents automatically (Yael, 2001). In its initial stages of formation in 2000, GXS serviced its own customers (i.e., its own set of buyers and sellers involved with GE). In later stages ofbusiness, GXS served as a dual-purpose exchange where it linked more than a 100 separate markets through its B2B e-commerce services. On one aspect, by operating as a private exchange, GXS was owned and maintained by GE for the purpose of trading with its own partners. This collaborative process of real-time supply/ demand chain management utilized Web-based technologies to squeeze inefficiencies out of processes across enterprises. GXS conducted business with partners using predetermined terms and contracts at privately negotiated price (Sood, 2001). On the other aspect ofbeing a network operator, GXS integrated several B2B exchanges such as Global Healthcare Exchange (that integrated hospitals, healthcare buying organizations, and healthcare product manufacturers), BevAccess.com (that focused on integrating the electronic business communications of bars, restaurants, distributors, and alcoholic beverage manufacturers), Exchange Link (that focused on providing billing information to competitive carriers in the telecommunications industry), and PubNet (that was a consortium of book distributors and college bookstores) (GE, 2001). By offering a hot of tools and services to enable e-commerce, GXS ran a global network of 100,000 trading partners with 1 billion transactions annually.

GXS's strength in this private exchange model included sizeable transaction volume through strong backing and financial stability of the GE company and a long roster of suppliers through incentives for sellers to join. Also, GXS was strong in providing services such as financing, settlement, and logistical support through efficient systems and providing cost-savings with enough suppliers to create liquid marketplaces. Other strengths of GXS included short cash-conversion cycles for buyers and sellers through sophisticated trading platforms and search engines, long survivability through high cash flow and strong backing, interoperability of various applications with supreme technical alliances, and security of information through Secure Sock Layer and passwords. A possible extension of this model was the lease model where GXS could allow small- and medium-sized companies to enter the B2B segment by charging fees as a means of revenue.

Customers

The customers in the B2B segment were broken down into two categories: buyer and supplier.

Buyer. Buyers were scattered over 1,200 e-marketplaces, but most concentrated at select sites that presented the best purchasing opportunities for their needs. GXS aggregated the leading eMarketplaces, comprising the majority of all online dynamic-pricing transactions. GXS gave access to consumer, business and industry-specific audiences, all actively seeking to purchase products. GXS strategically pursued network partners using selective criteria regarding registered users, product offering, and liquidity. Some benefits for GXS were that transaction costs were reduced by automating and streamlining the approval process and the paperwork associated with purchase orders and purchase contracts were reduced as GXS assisted buyers in reducing expenses associated with ordering and expanding vendor options.

For buyers, GXS was strong its ability to control the marketplace by developing the marketplace for itself, to refine the specification of the purchase with detailed information listed on-line, to screen the potential supplier by setting up and conducting an on-line bidding session, to buy more effectively by accepting bids that match the needs, and to reduce order processing time and costs through collective buying and consolidated purchases.

Supplier. For GXS, sellers comprised of small businesses, corporations, and supply chain partners within a single company, a single industry, companies in an industry, or across industries. GXS helped sellers/suppliers reduce transaction cost by eliminating manual processing of purchase orders. There were also more guaranteed, predictable sales through negotiated contracts with buyers. GXS continued to reduce expenses and increase accuracy in processing orders. Furthermore, with GXS backing there was great potential for reaching a larger customer base and broader geography for sellers. Although GXS's suppliers enjoyed many of the services that GXS provided there were some recent trends and weaknesses that suppliers were facing. For suppliers, the two biggest detractions for exchanges were transparency-the fact that every competitor could see what every other competitor was bidding-and lack of liquidity, which meant that there were not enough buyers to really generate much bidding. How GXS would position itself to adjust to these obstacles would determine whether or not they could remain a force in the B2B exchange segment.

For sellers, GXS was strong in its ability to minimize online procurement complexity by enabling buyers to configure their own routers, to handle high volume traffic through advanced technical applications, to advertise aggressively through mass media, to assure privacy protection through SSL and passwords, and to obtain purchase/sale behavior to improve system. In addition, GXS was able to retain strong relations with buyers/sellers by speeding up ordering or order status checking and providing on-line and telephone-based technical assistance.

Services Provided

The three basic services that GXS extended, Enterprise Resource Planning, Quality Control, and Consulting and Training, were incorporated into its products offered.

GXS had developed a collaborative planning solution which took advantage of Internet technologies to extend the virtual company to include suppliers, sub-contractors and customers in planning and design phases of product development. GXS's procurement offered the opportunity to shift staff focus on strategic functions with significant payback to the company and employee job satisfaction. By leveraging message broker technology, clients could accept and send data to and from these systems by virtually any means including web interface. Many companies turned to GXS to conduct the building integration and ongoing facilities management oftheir Extranets. GXS had the expertise and the services to allow companies to have the Extranet they want faster and at a less total lifecycle cost to that company. GXS could help companies use electronic commerce to leverage their current processes and make crucial information available to the right decision-makers when they needed it.

Some of the services GXS offered included Back-Office ServicesSM, Community Implementation ServicesSM, EC Service CenterSM, EDI*EXPRESSSM Service, Interchange ServicesSM, Systems Integration ServicesSM, Telephony Consulting Services, Tradanet(R) Service, VPN-Security ANX-TPSM Service, and VPN-SecuritySM Service.

With services provided, GXS was strong in providing software solutions as part of services to increase profitability, offering implementation, consulting, and training services, integrating services from other vendors, sharing services with trading partners, allowing the use of Internet (online) help by extending the virtual company, and streamlining.

Industry Functions

There were two industry directions that B2B companies focused on: vertical and horizontal.

Vertical. GXS supported industries from raw material-stage clients to consumer-- clients. By focusing on the entire industry, GXS provided content that was specific to the industry's value chain brought sellers, buyers, and complementors into one virtual area. Some key exchanges that GXS had been selected as the B2B integrator included: Global Healthcare Exchange (which integrated hospitals, healthcare buying organizations, and healthcare product manufacturers), BevAccess.com (which integrated bars, restaurants, distributors, and alcoholic manufacturers), Exchange Link (which provided billing information to Competitive Local-Exchange Carriers and Incumbent Local-Exchange Carriers in the telecommunications industry), and PubNet (which was a consortium of book distributors and college bookstores wishing to streamline shared commerce) (GE, 2001).

With vertical industry functions, GXS's strength lay in the secure transport of data through industry-wide systems integration, high-performance network for inter-enterprise data communication, improved quality through cycle times, lower costs, and global standards for manufacturers, distributors, and end-users. Also, GXS was strong in creating special technology to run independent company-run auctions or industry-auctions as well as providing content specific to an industry's value system of sellers, buyers, and those that accompanied them.

Horizontal. With horizontal industry functions, GXS incorporated different products and services across different industries into a single layer of business. By being flexible and with interoperability a non-issue, GXS was able to provide an abstraction between internal systems and the outside world. Furthermore, it simplified the process of data standards proliferating and reduced data communications.

With horizontal industry functions, GXS's strength lay in providing content to build function-specific capabilities for different industries, customized solutions through creativity, minimum compromise of organization's security and internal controls through advanced technology, and ease of information from outsider to company's internal system through advanced technology.

Alliances

With GXS, the only components of alliances comprised of technical partnerships.

Technical Partnerships. GXS entered into strategic alliances to create solutions based on the business strengths and experience of itself and its partners. Companies partnered in technology were companies that provided value-added technical components, such as system platforms, operating systems and Internet infrastructures, to the services and solutions provided to customers. A technology partnership with GXS promoted solutions within its customer base. Within the technical partnerships, GXS had two types:premier level technology and base level technology. Premier level technology partners were companies committing resources to an annual program of structured joint marketing activities. For instance IPS AG and GXS were premier level technology partners. GXS was working together to insure that users of GXS's Purchasing Expert(TM) software product could access IPS's content management and procurement services over the Internet. IPS was the largest European e-procurement service provider, and its catalog organized over three million products. The integration between GXS Purchasing Expert software and IPS's service would enable customers to use the GXS's procurement portal on the Internet to access IPS's catalog. Base level technology partners were companies interested in promoting the partnership by using the marketing tools available in the Global Alliance Program. For instance, GXS announced an agreement with Questio.com, a leading eMarketplace relationship management company. Under the terms of the multi-year agreement, GXS would market, sell, and provide integration services for the Question.com service as part of its strategy to build vertical exchanges and extranets that enabled business-to-business supply chain e-commerce. The Question.com service would help eMarketplaces attract and retain participants. The ability of GXS to maintain a strong influence and to create strong alliances in different industries would determine how it competes in the ever-changing climate of the 13213 area.

With the technical partnerships GXS was strong and careful in selection of partners by defining common goals, exploiting lines of communication through EDI, other systems of the Internet, and leveraging the right technology for additional support through greater R&D capabilities.

Sales and Promotion

GXS continued to take the highest effectiveness measures to ensure B2B e-commerce. Its methods included the following: sales & marketing, support, and training.

Sales and Marketing. As a partner, companies had the opportunity to gain exposure to GXS customers and prospects, as well as enter into joint sales and marketing campaigns with GXS. Activities in this category included both traditional marketing techniques and opportunities to participate in more unique forums. Some of the benefits of the GXS sales and marketing included: Website listing on www.gegxs.com,joint trade show participation, visibility/exposure to the GXS sales force, and participation at EC Forum, which was GXS's annual user group conference.

In the sales and promotion aspect ofthe B2B segment, GXS was strong with its exposure to other companies, participation in unique forums, and continued growth with traditional marketing techniques. However, GXS did not focus on global companies where a larger customer base could be formed and, subsequently, more revenue could be earned.

Support. GXS was committed to providing its partners with non-technical and technical assistance to promote and sell joint solutions into the marketplace. To help its trading partners quickly build practices, GXS included a number of support methods in the program. Some of these include support during the installation and integration of the operational system, support to manage the overall process, and post-installation support.

In the support area, GXS was strong with its ensured technical assistance to alliances and partnerships.

Training. GXS offered a variety of training options so alliance partners could learn about its integration solutions. Training took multiple forms. Some partners required an indepth technical knowledge of each GXS integration product. Other partners were content to understand how an integration solution benefits a company. Each partner was offered a level of training appropriate for its level of commitment to the program.

With training, GXS ensured in-depth knowledge of the integration products and indepth knowledge of integration solutions.

Technology

There were three portfolio applications through which GXS conducted its B2B commerce: GE Integration Solutions, GE Interchange Solutions, and GE Marketplace Solutions.

GE Integration Solutions. With this, GXS provided software that permitted any business application to send and receive business information to other business applications in a secure and reliable manner (GE, 2001). These solutions used Enterprise Application Integration (EAI) to homogenize the flow of data and information. Many EAI vendors came to GXS for data transformation capabilities that they, in turn, converted into their own products. GXS was the only EAI vendor with more than 500 installations of its integration brokers around the globe. EAI Journal, an industry trade publication, awarded GXS the prestigious silver medal for best e-business solution. This made GXS the only recipient of an award for assisting a dot-com e-tailor. These solutions were expected to increase in demand as more organizations wanted control of the supply chain.

GE Interchange Solutions. With this, GXS automated paper, fax, telephone, and e-mail transactions to improve quality and efficiency in a supply chain (GE, 2001). These solutions used Electronic Data Interchange (EDI) and extensive Markup Language (XML) as a combination. This was a tremendously popular technology (mainly with XML usage) that was expected to grow with the need for vendors increasing. With XML standardized, GXS believed that electronic commerce over the Internet was poised for unprecedented growth.

GE Marketplace Solutions. With this, GXS provided the business applications and technology infrastructure to enable the development, integration, and service of highvolume, one-to-many and many-to-many 13213 electronic marketplaces (GE, 2001). These solutions worked as an exchange that incorporated 13213 technology with a 13213 business model. The future here was also expected to grow as more buyers and sellers entered into e-commerce.

With all these above applications, GXS was strong in 10 different areas. They were security of information through SL and password, ease of placing orders through advanced technology, ease of returning products and refunds through an organized system, a well-- organized website using experienced designers, quality of information about purchase choices through advanced technology, variety of choices through creativity, easy payment procedure through advanced technology, quick delivery through efficient systems, availability of different features through creativity, and price competitiveness through volume and market share (Mockler, 2001).

Employees

GXS had over 1,500 employees world wide, and was headquartered in Maryland, USA. The global presence enjoyed by GE means that support could be extended to all customers. Further to this, multinationals companies could confidently deploy Integration Brokers across all locations, thus maintaining infrastructure consistency. With GXS's employees, GXS strength included hiring an adequate number of staff to handle the business and match the economies of scale and hiring employees experienced in technical requirements for research and development capabilities.

Industry Standards

GXS was monitoring and participating in a number of initiatives which included several groups of experts like Rosetta Net, Commerce Net, Open Buying on the Internet, The Organization for the Advancement of Structured Information Standards, and Microsoft's BizTalk(GE,2001).

RosettaNet. GXS was a member of the managing board of RosettaNet, a consortium of supply-chain trading partners. As a member, GXS's goal was to define and specify the schema necessary to accomplish collaborative activities such as new products introduction and catalog updates.

CommerceNet. As a participant in CommerceNet, the premier global consortium for companies building electronic commerce solutions on the Internet, GXS worked on several projects. One on-going project was the eCo Framework project that intended to develop a specification for content names and definitions in electronic-commerce documents and an interoperable transaction-framework specification.

Open Buying on the Internet (OBI). As a member of OBI, a consortium of companies dedicated to developing and deploying standards for B2B Internet based procurement, GXS helped in developing the OBI standard. This standard reduced the need for expensive, custom Internet-purchasing systems.

The Organization for the Advancement of Structured Information Standards (OASIS). As an active member of OASIS, a non-profit, international consortium that focused on the first adoption of product independent formats that used public standards for B2B services, GXS encouraged development ofa reference repository and technical framework that would enable consistent XML usage.

Microsoft's BizTalk. As a member of BizTalk, a private community facilitated by Microsoft, GXS reviewed proposed specifications and adopted the specifications in its products and solutions.

In the regards to industry standards, GXS's strength included adhering to rules and regulations of these initiatives and participating in educational and awareness seminars conducted by these initiatives. Also, GXS was able to establish an in-house unit to follow up on new regulations and ensure that employees were in compliance.

Management

The combined talent and unique leadership skills of Jack Welch (GE Chairman) and Harvey Seegers (GXS President and CEO) enabled GXS to become one of the world's largest provider of electronic commerce solutions. Jack Welch was widely viewed as one of the best corporate leaders in the U.S. who drove the General Electric Company with a mandate to make it #1 or #2 in every industry it operated. Harvey Seegers had a vision to have nearly every electronic dollar pass through his company's systems. Welch "got with the Net" in January 1999 and, true to character, went out all for it. By 2001, GE had written the book on B2B. In the most recent annual report, Welch announced to shareholders that e-business would "change the DNA of GE forever by energizing and revitalizing every comer of this company" (Rudnitsky, 2000).

Welch did not believe that e-commerce was something left for the "techies." Also, he did not want to permit web start-ups of brand new exchanges to get between him and his customers. As a result, GE developed its own Web-technology enabled division, General Electric Information Services (GEIS).

As President and CEO of GXS, Harvey Seegers focused on creating new business-to-- business Internet-based marketplaces. Seegers's intention to divide GE Information Services (GEIS) into the 2 different businesses was to extend the immense assets and expertise. Seegers felt that the company (GEIS) would be unable to stay competitive in B2B e-commerce unless the General Electric Company gave them substantial investment. When Harvey Seegers explained the description and market opportunities to Jack Welch, Welch (with the suggestion of his closest advisors) gave Seegers the green light within a few hours.

With the decision behind him, Harvey Seegers believed that GXS would have impact beyond transaction-based marketplaces as e-commerce spread into design, logistics, marketing, and production. Seegers believed that GXS was more than a mere e-procurement application (Kaneshige, 2001). Seegers' main focus would be how to distinguish GXS as more than an e-procurement, and more of a B2B powerhouse.

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

Given the trends of the B2B segment, GXS management was exploring strategic decisions, such as creating a variation in its B2B Internet-based marketplace model. The biggest challenge for GXS was to decide how to differentiate itself from its competition and so achieve a winning edge over competitors within intensely competitive, rapidly changing intermediate and long-term time frames based on its B2B model.

One manager proposed a first alternative that GXS center on growth in the intermediate future by focusing on its B2B model. In this alternative, GXS would continue to act as a 13213 e-commerce facilitator with its existing B2B model and the same type of exchange-a private eMarketplace model.

The benefits of this alternative included maintaining market share and awareness by attracting more large businesses with a well-known model, being able to create standard technology to run a high-performance network for different industries to different requirements, and being able to reduce costs for marketing, research and development through an existing model. A further benefit would be the ability to access growing markets worldwide (where an early base could be planted) with a well-know, strongly backed exchange. This benefit could enable GXS to establish a presence in Asia which had overtaken Europe as the No. 2 region for B2B transactions behind North America (eMarketer, 2001). Asia jumped from generating a mere $5 billion in B2B transactions in 1998 to more than $68 billion in 2000. The long-term mass adoption of this type of technology throughout Asia was tied to how quickly China and India (Asia's most populated countries) embraced new technologies. For example, China did not want to see India's fabric industry embrace B2B and use the technology to get cheaper raw materials and therefore hold the market.

Such an alternative was feasible since GXS would have the financial backing of GE to continue its long survivability. The idea of a private exchange model was possible through a system where buyers and sellers of GE could enjoy privileges to a ring of allied businesses. This ring would be formed with businesses that were attracted to GXS's strengths with its B2B model, customers, services provided, industry functions, sales and promotion, technology, employees, and industry standards. GXS would be able to win against competition due to the brand recognition of the General Electric name. Also, by using its strength in the proposed alliances, industry standards, horizontal industry functions, and employees, GXS would be better than its competitors, by offering an established, reputed streamline channel to businesses before its competitors did.

There were some drawbacks to this alternative. The drawback to this alternative was that GXS would continue to use its existing business model of a private exchange. The problem with this was that buyers and sellers may perceive GXS as having a comfortable status as an industry leader and competitors would copy and improve on the existing model-- thereby stealing potential GXS customers. Another drawback was the risk ofbeing a private B2B model. An example of this was Dell, who tried but failed at establishing an independent B2B model. From a global standpoint, the threat ofpolitical instability, corruption, economic uncertainty, and cultural barriers in developing countries (where growth opportunities were the strongest) were other issues associated with this alternative. A further concern that could impede profitability for GXS was the inadequacy of infrastructure in many of these countries to enable high tech business.

The ways around these drawbacks, however, could be overcome with the assistance of GE, the Corporation. With GE being the largest company in the world by market capitalization, GXS could use its large trading community and Research and Development capabilities to implement innovative models to keep ahead ofnew technology and customer needs. With the global aspect, GXS could encourage overseas governments to lower entry barriers for companies to establish the basic foundation to support such technologies and to get involved in worldwide standards discussions to investigate ways to make B2B systems usable for all industries.

Another manager proposed a second alternative that GXS create a variation to its 13213 model. With the business model, GXS would commence and focus on a lease model as a subset of its existing private eMarketplace or exchange model which was strong in transaction size, suppliers, services, security, and cost-savings. A lease model was explained as a form of allowing buyers and sellers to use B2B applications and services on a lease basis. This would allow other companies to use the applications that GXS would host for a monthly fee. It would also allow companies to trade with their suppliers.

One of the benefits of this alternative was that it would allow GXS to take advantage of gaining larger market share and awareness by attracting small- and medium-sized. Other benefits ofthe lease model included creating a first time service where companies would lease valuable applications without the risk, enabling small- and medium-sized businesses to compete in the B2B economy, and possible decisions by companies to bring the software inhouse at the end of rental contracts. Another benefit would be the ability for GXS to gain global access into other countries and increase the number of markets in which services would be provided by attracting businesses that wanted to "taste" B2B through a leasing system. For instance, eMarketer predicted that, as Western economies improved, Europe would regain its foothold in the technical gear (eMarketer, 20001).

This alternative was feasible since GXS would have the financial backing of GE to introduce a "new" concept of leasing. Its existing private exchange model would allow GXS to focus on establishing the lease model and implement fees for leasing and for use of partner or divisions' services. Also, this was possible due to GXS's strengths in its customers, services provided, industry functions, sales and promotion, technology, employees and industry standards. GXS would be better than its competitors with this alternative of a lease model since GXS would be able to build and maintain a larger customer knowledge management system which suppliers would choose over the competition. Also, with GXS initiating a lease model such as this, and by using its strength in alliances, industry standards, horizontal industry functions, and employees, GXS will win against competition.

The drawbacks to this alternative of a lease model focus included inability to predict the type of eMarketplaces or exchanges customers would lease, complications if customers wanted to lease the system for multiple purposes, inability to predict how end-users perceive value in a system (size of inventory, geographic location, personal sales calls or amount of buyers and sellers), and loss of customer-controlled data (Kelly, 2000). Another drawback included slow progress for companies to move their buying onto the Internet. A report from Jupiter Research indicated that many procurement managers saw so little advantage on moving online and found that their sellers were not selling online, that they intended to do less than 20% of their business buying online until 2003 at least. Also, it was difficult to measure the success of better established eMarketplaces since published revenues and third-party audits of earnings were difficult to obtain while the establishment of profitable B2B eMarketplaces was taking longer than forecast (Cyber Business Centre, 2001).

The ways around these drawbacks, for the lease model included determining the size of the system to affordably lease for differently sized customers, determining what information was required for various customers, creating a shell that all customers could use with slight variations, and customizing customer data (Kelly, 2000). Another way around the drawback of the lease model was creating a service that offered to house or manage hardware for Internet companies and technology-dependent firms to quicken e-commerce progress.

With the combined talent of the two CEOs, Jack Welch and Harvey Seegers needed to decide which strategic decision to implement. GXS had to modify its current strategy within the B2B segment for increased internal company growth and expected external trends. As an e-commerce service provider and network operator, GXS was focusing on strategic decisions, such as creating new B2B Internet-based marketplaces. But to be the "hub of hubs", GXS had to consider possible competitor moves and customer needs while the transformation of business processes from paper to electronic was rapidly occurring.

References

REFERENCES

References

About.com (2001). A beginner's guide to b2b electronic commerce. Retrieved February 5, 2001 from http://e-commerce.about.com/smallbusiness/e-commerce/library/weekly/ aa021600a.htm.

Afuah, A. & Tucci, C. L. (2000). Internet business models and strategies. New York: The McGraw-Hill Companies. In Strategic Marketing (pp. 141-211) New York: St. John's University.

Berryman, K., Harrington, L. F., Layton-Rodin, D., & Rerolle, V. (2000). Electronic commerce: Three emerging strategies. Retrieved March 1, 2001 from http:// www.mckinseyquarterly.com/article_page.asp?articlenum=919.

Cisco Systems (2001). A guide for growing businesses to the new business model. Retrieved February 2, 2001 from http://www.cisco.com/warp/public/cc/so/cuso/smso/ cm.ecom_pl.htm.

Cyber Business Centre (2001). Trend watch - business to business (b2b). Retrieved March 29,2001 from http://www.nottingham.ac.uk/cyber/tw-b2b.html.

E-commerce and Perfect Competition. (2000). Retrieved February 7, 2001 from http:// www.economics. nuigahway.ie/student/healycaroline/page04.html.

References

eMarketer. (2001). Retrieved February 7,2001 from http://www.emarketer.com. GE (2001). Retrieved February 7,2001 from http://www.gegxs.com.

Hoovers Online Network. (2001). Retrieved February 10,2001 from http://www.hoovers.com. Hopkins, A. & Shogren, L. (2000). CommerceOne case study. Retrieved February 7,2001 from www.techedcon. com/mason720/casestudies/CommerceOnes2000.htm.

IBM. (2001). Retrieved February 7,2001 from http://www 1.ibm.com/servers/eserver/iseries/ btob/b2b-definition.htm.

Kaneshige, T. (2001). Harvey Seegers' grand plan. Retrieved February 7,2001 from Wysiwyg:/ /29/http://line56. com/articles/default.asp?NewsID=2135.

Kelly, T. (2000). To lease or not to lease. Retrieved March 29, 2001 from http:// www.progressivedistributor.com/ progressive/archives/E-business/lease.htm. Mockler, R. (2001). Winning in Today's Rapidly Changing Markets. New York: Strategic Management Research Group.

Rappa, M. (2000). Managing the digital enterprise business models on the web. Retrieved February 20,2001 from http://e-commerce.ncsu.edu/topics/models/models.html. Rudnitsky, H. (2000). Changing the corporate DNA. Retrieved February 7,2001 from http:/

/www.forbes.com/global/2000/0724/0314099a.html.

Sood, R. (2001). The b2b exchange is dead, long live the exchange! Retrieved April 12,2001 from http://www. thestreet.com/comment/connectingdots/ l 267797.html.

Timmers, P. (1998). Business models for electronic markets. Retrieved February 20,2001 from http://www. electronicmarkets.org/netacademy/publications.nsf/all_pk/949.

Yael (2001). Retrieved February 20,2001 from http://www.yaelsoft.com/eng/tech/ecomm/ ecomm2.htm.

AuthorAffiliation

James Paul

St. John's University, USA

AuthorAffiliation

Schiro Withanachchi

St. John's University, USA

AuthorAffiliation

Robert J. Mockler

St. John's University, USA

AuthorAffiliation

Marc E. Gartenfeld

St. John's University, USA

AuthorAffiliation

William Bistline

St. John's University, USA

AuthorAffiliation

Dorothy G. Dologite

City University of New York, USA

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

James Paul is an MBA program research assistant for the Management Department of St. John's University's Tobin College of Business, USA.

AuthorAffiliation

Schiro Withanachchi is an MBA program research assistant for the Management Department of St. John's University's Tobin College of Business, USA.

AuthorAffiliation

Robert J. Mockler is the Joseph F. Adams professor of Management at St. John's University's Tobin College of Business, USA (BA/MBA, Harvard; PhD, Columbia). He is director of the Strategic Management Research Group and its Centers of Case Study Development and of Knowledge-Based Systems for Business. He has authored/co-authored more than 50 books/monographs, more than 200 case studies, and more than 250 articles, book chapters, and presentations. He has lectured, consulted, and taught MBA courses worldwide, received national awards for innovative teaching, and been a Fulbright Scholar.

AuthorAffiliation

Marc E. Gartenfeld is an adjunct professor in the Marketing Department ofSt. John's University's Tobin College of Business, USA (BS/MBA, St. John's University). He is associate director of The Strategic Management Research Group and the Center for Case Development and Use. He has co-authored more than 40 journal articles, conference presentations and table topic papers, textbook instructor's guides, and case studies in the areas of Multinational Strategic Management, Expert Knowledge-Based Systems, Entrepreneurship, and Application Service Providers. One of his co-authored papers won a Distinguished Paper award in 2002. He is also the recipient of the 2001 Teaching Excellence award and Professor ofthe Year award both from the Tobin College ofBusiness.

AuthorAffiliation

William Bistline is an associate professor of management at the Tobin College of Business, St. John's University, Staten Island, New York, USA (PhD, Drexel University). He is the director of the Entrepreneurial Institute at St. John's. After working in industry and starting three companies he entered academia. He is an active member of the NCRA, The SECRA, the DSI, and an officer in the NDSI. His research has appeared in prestigious journals. In addition to case writing activities and the Entrepreneurial Institute, his research interests include electronic commerce and developing Decision Support System models. His teaching interests include the development of effecting methods for using technology in the classroom, including distance learning and student based community service work.

AuthorAffiliation

Dorothy G. Dologite is a professor of Computer Information Systems at the Zicklin School of Business, Baruch College, City University ofNew York, USA. She has written 12 books and many articles related to computer information systems. Her 15 years of computer industry experience before becoming an educator includes positions with computer hardware and software firms. She lectured and conducted workshops on computers in China, Russia and many other countries. She was a Fulbright Scholar in Malaysia on a strategic information systems project. Her research interests include applying knowledge

AuthorAffiliation

based system technology to management decision-making, diffusing technology in small businesses and in developing countries, and exploring creativity in information system products, processes and people.

Subject: Studies; Business to business commerce; Globalization; Technological planning

Classification: 9130: Experimental/theoretical; 9180: International; 5250: Telecommunications systems & Internet communications

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 464-487

Number of pages: 24

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198672732

Document URL: http://search.proquest.com/docview/198672732?accountid=38610

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 95 of 100

How to successfully manage an IT department under turbulent conditions: A case study

Author: Leonard, A C

ProQuest document link

Abstract:

The case study describes the history of the IT department of a South African bank and how it started to introduce information technology to gain competitive advantage. The case study explains the problems and frustrations end-users and IT professionals experienced with regard to wrong decisions made by the management team. This case offers management models for problem management and project management that were used by the management team to organize and direct the actions of IT specialists. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

The case study describes the history of the IT department of a South African bank and how it started to introduce information technology to gain competitive advantage. Apart from explaining how the IT department made progress through the years, the case study explains the problems and frustrations end users and IT professionals experienced with regard to wrong decisions made by management.

Furthermore, the case study describes how a new management team was appointed to solve the serious situation in the IT department and as such in the bank as a whole. It also describes the strategies followed, and the policies and actions introduced to overcome the problems. Special management models for problem management and project management that were used by the management team to organize and direct the actions of IT specialists are introduced.

BACKGROUND

In the early' SOs when the Cooperation Bank (nom de plume) was established, all banking transactions were done by hand. The bank started with about 5,800 clients and in a short period of time grew to one of the major banks in South Africa today, having about 800,000 clients. Although the bank performed well without using any special information technology, its top management realized that in order to gain competitive advantage, they needed to look at the whole situation of applying information technology.

In the late '70s the top management decided to establish the bank's own IT department and appoint the necessary IT personnel to do the job. IT skills were very rare, and they decided to allow their current bank people to take part in a selection process in which employees could apply to follow a career in the IT department. If initially selected, an employee had to write an aptitude test and went through a thorough interview process. If an employee finally was selected, he/she went through the necessary training programs for the specific job. In this way the bank established an IT department with about 40 of its own bank employees and 20 employees from outside the banking environment. The number of employees later grew to 110. The most important IT functions that were established at that stage were those of development, facilities and training.

In the late '70s the IT department established a network division. Its manager reported directly to the facilities manager. At this stage more than 11 large transaction processing mainframe systems and 20 online systems were developed. A large network of terminals was available, allowing end users to have access to different data/applications from remote terminals. The above-mentioned systems were developed to support bank managers in their decision making, as well as for serving clients at bank branches. Some of the most important applications/systems in this regard are:

* General ledger

* Payroll system

* Budget

* Human resources management system

* Marketing system

* Branch systems for handling savings accounts and investments

In the late'80s the bank started to use microcomputers on a limited basis. Under the strict (almost autocratic) control of the bank's administrative manager, employees were allowed to buy microcomputers and certain software. This was the case for the head office of the bank, the 80 branches, as well as for the IT professionals.

No standards were available when buying microcomputer technologies, and everyone who was able to convince the administrative manager about his/her specific taste could buy what he/she wanted.

Also in the late '80s, the IT department grew to such proportions that the need for an end user computing division and a training division emerged. End users with the necessary skills and knowledge, and who had access to microcomputer technology, started to develop their own systems. Although this contributed to a decline in the backlog, there were neither standards nor proper control over these systems development activities of end users. The table in Appendix A displays the variety of systems end users developed.

It was the responsibility of the IT department to develop all the information systems for the bank. To fulfill this responsibility, the following divisions were established.

* Systems development and maintenance

* This division was responsible for the analysis, design and implementation of all information systems at the bank. Apart from systems development, this division was also responsible for the maintenance of all software products.

* Quality assurance

This division was responsible for quality assurance, and as such they had to evaluate all software products against a set of standards. They also had to make sure that the official systems development methodologies were used in the correct way. The writing and spreading of end user and systems documentation was also one of their major responsibili-- ties.

* Facilities-Also called the production division, they were responsible for running all systems that have been implemented. Their responsibilities included database administration, network management and the smooth operations of all systems

* Office automation-Initially this division started to introduce the microcomputer to the different divisions of the bank. It was basically responsible for giving users advice about hardware and software.

* Training-Although this department was responsible for the training of users on all systems, they made use of personnel from the other divisions to conduct most of the training. They also arranged and presented courses to personnel in soft skills.

The organizational chart of the IT department is shown in Appendix A.

SETTING THE STAGE

The IT department was run in a very autocratic way. It was relatively small and consisted of a CIO, three senior managers, a quality assurance manager and a training manager. In total the IT department consisted of 110 employees. Only the CIO and three senior managers made decisions and gave direction in terms of what projects should be initiated and what their priorities were. Knowledge about the most important mainframe and smaller office systems was very rare. Only a few systems analysts, who worked for the bank's IT department since its establishment, were in the privileged position to know the technical details about those systems and how to maintain them. In most cases no documentation existed for systems, and if documentation did exist, it was not reliable.

There was what could be called a large culture gap between the personnel of the IT department and its end users which was characterized by distrust, skepticism and cynicism. This culture gap had a very negative impact on the relationship between IT professionals and their end users and, as such, their ability to produce service and support of high quality.

The following information technology architecture was in place in the early '90s:

1. Roughly 11 main systems, including batch systems as well as real-time systems, were in use.

2. These systems consisted of packages as well as in-house developed systems for both mainframe and microcomputer systems. External contractors also developed some. The systems were developed and implemented on different software platforms.

3. About 75 branches situated throughout the country had local area networks at their disposal, though they were neither standardized with respect to the hardware nor with respect to the software.

4. All the LANs of the different branches were attached to the mainframe system.

5. Communication between the different systems was imperative, and for this purpose numerous interfaces between the relevant systems were constructed.

6. Some sections had their own microcomputer systems at their disposal and had no interfaces with the other systems. In most cases such interfaces were indeed required.

7. No structured techniques or standards were applied during systems development. In fact, no discipline with regard to the application of generally accepted systems development principles existed.

8. No quality control was applied in any phase of the systems development process. The typical problems experienced by IT professionals and end users were as follows:

1. A large number ( 11) skills eventually had to be available in order to be able to maintain all the different systems architectures.

2. The maintenance teams were relatively small (even as small as one person in some cases), resulting in personnel having to be on permanent stand-by.

3. The maintenance level on virtually all systems was exceptionally high.

4. Hardly any new development projects could be undertaken. Whenever a new project was undertaken, knowledge of a wide spectrum of systems was required in order to accomplish meaningful integration between the various systems.

5. This inevitably resulted in inferior software product output.

6. Top management believed that the unsatisfactory progress in the development of new products and the large backlog that existed could be attributed to the structural composition ofthe Department of Information Technology. Accordingly the structure of the whole department, or parts thereof, was altered as often as once every three months.

7. The structural changes gave rise to anxiety among development personnel, which had a negative influence on their morale. This inevitably led to deficient productivity in the Department of Information Technology.

8. User satisfaction was on a very low level as a result of most of the above-mentioned problems.

In due course the previously mentioned problems triggered a large amount of turbu-- fence among IT personnel of which the following were of the most important:

* A high turnover in IT personnel

* Complaints about unsatisfactory working hours

* Unhappy and unmotivated IT personnel

CASE DESCRIPTION

By the end of 1991, drastic organizational changes were introduced in the IT department to try and overcome the existing problems. The main focus of these drastic changes was on the systems development and maintenance division, which was on the front line of giving service and support to end users. Other smaller divisions in the IT department, like Quality Assurance, Facilities, Office Automation and Training, were affected to a lesser extent, because they were not identified as the real problem areas.

A whole new management team was appointed in the systems development and maintenance division. The action was prompted by the need to solve as many of the critical problems described in the previous section as possible. Top management believed that the only way to solve the existing problems, and to regain end user trust and satisfaction with the service and support of the IT department, would be to restructure the systems develop-- ment and maintenance division and to appoint new managers where necessary. All of the previously mentioned problems and frustrations could be summarized by the following three major concerns:

* Low-quality software products and services

* An unstable production systems environment

* An unusually high maintenance frequency

The management team was challenged with analyzing the given situation and putting forward the necessary short- and long-term strategies that would be required to maintain and promote the bank's competitive position in the market. All this had to be done in the shortest possible time span.

This case study is based on a true situation. Some strategies were applied very successfully by the management team, while others failed.

Background

The manager of the newly formed department believed in teamwork, and all projects/ problems were analyzed and tackled by means of team efforts. Communication within the department was sound and took place regularly on an informal as well as a formal basis.

All systems development within the bank was the responsibility of the information systems development department. On establishment of the department, the main assignment from top management was threefold, namely to:

1. Stabilize the existing systems as soon as possible in terms of maintenance problems

2. Dispose of the magnitude of outstanding ad hoc requests for general management information

3. Deal with all new needs from users for the adaptation of existing products and the development of totally new products

Needless to say, the previously mentioned assignments were all rated equally critical by top management.

Approach to the Problem

The systems environment had to be maintained and ad hoc requests for management information had to be possible and available to users on a daily basis. Furthermore, the backlog of new requests, with regard to systems amendments and new products that had to be developed, kept growing bigger and bigger.

The information technology management team was faced with the challenge to solve the given problems ofthe department as soon and as effectively as possible. They thoroughly released that a proper short-term and long-term strategy for dealing with the problem had to be formulated and "sold" to all personnel. Yes, they really had to deal with a change-- management situation.

In short, the strategies of the management team were the following:

1. The first immediate objective was to follow a so-called breakthrough strategy. As Bob Schaffer puts it: "A strategy which consists of locating and starting at once with the gains that can be achieved quickly and then using these first successes as stepping stones to increasingly ambitious gains... Schaffer urges managers to... focus on accomplishing a short-term result, a success" (Peters, 1989).

2. A second important component of the strategy was that everything that had to be done, had to be subjected to strict quality control. As Tom Peters (1989) appropriately remarked: "Give quality all your attention."

3. The third important leg of the strategy was to demonstrate to all personnel in the department that the management team really had faith in their capabilities, but that there also had to exist mutual trust between colleagues, in order to help create aprofessional occupational environment in which high-quality products can be generated. This fact is strongly emphasized in the article of Tom Peters (1989) where he says: "... ifyou don't believe in the_fulsome capabilities ofpeople on the front line to get the job done and take responsibility for getting the job done, then you will make a million boo-boos. "

4. It was decided to create an atmosphere of self-control, which would lead to selfdiscipline.

5. It was furthermore decided to create a work environment for each person in which be would be able, as a motivated person, to produce work of a high quality. This implied that each post within the information systems development department should have all the elements (dimensions) that would eventually ascertain that each member ofstaff:

* Is motivated

* Produces work of a high quality

* Gets job satisfaction

The previously mentioned is based on the model of Hackman and Oldham (1991, p. 118), where job characteristics stimulating work motivation are identified. The complete model is shown in Appendix B.

6. In order to be able to carry through the total strategy to its full consequences, it was decided to create three sections within the department, namely: systems development, project management and business consulting. Each of these departments had to formulate its own objectives and policy.

7. A participating management style was followed, inwhich all personnel were constantly invited to give input with regard to the character and scope of the problems they encountered. Furthermore, suggestions and ideas towards the solving of problems were constantly elicited.

Implementation of Strategic Plan

The first short-term objective of the management team was to determine exactly the nature of the current systems architecture. Several work sessions were held over a period of two months, in which all personnel had the opportunity to share their knowledge with regard to the existing systems architecture with the management team. It was decided initially to put up the whole architecture on a white board in a conference room, so that everybody could see it. It would afford anybody the opportunity immediately to point out any shortcomings he might incidentally notice.

After this process, the big challenge lay in determining how to go about simplifying the given architecture to such an extent that the variety of knowledge required for the mainte-- nance thereof could be scaled down as soon as possible.

Regardless of the consequent suggestions and debates over how the complicated systems environment could be phased out, one thing stood out clearly-there were no affordable instant solutions for the existing problems.

However, it was thoroughly realized that they would have to be able to show short-term results to top management. As Winston Churchill aptly put it, "It is no use saying `we are doing our best.' You have got to succeed in doing what is necessary."

Problem Management System

The second immediate objective ofthe management team was to evaluate and categorize all outstanding as well as new user requests.

Although a computerized problem management system (help desk system) had already been available, it had many shortcomings and was not used by everybody. Some requests were therefore computerized and some were only available in letter format, which impeded the administration to a large extent.

Quality control with regard to the handling of all user requests (problems) was of course imperative, in order to be able to render a professional service to users. At that stage the information technology department was very unpopular with users, due to the fact that there were requests that were outstanding for more than a year. It was of the utmost importance to develop an effective problem management system.

It was immediately made policy that all users had to register their requests by means of the help desk system, before the development department would give attention to them. Information sessions were presented to users to supply the necessary training. The shortcomings in the system were immediately attended to, to provide for the categorization of user requests, as well as the furnishing of the necessary management information. The project management department was responsible for managing the system.

It was decided initially to apply strict control from management level with regard to all requests that had to be handled within the department, until a mental attitude of "only the best is good enough for our clients" had been established. It boiled down to "do it right the first time" and "deliver quality on time."

The management team believed that the root of quality work lay within the people themselves. Any person who is proud ofand enjoying his job would deliver quality products. Practice proved this right.

The management team met every day (over a cup of coffee) to discuss and categorize the list of user requests immediately. It was the responsibility of the project management department for final quality evaluation.

The objectives of the evaluating and categorization process were the following:

* To determine which requests were ordinary ad hoc information requests that could promptly be handled by the information center (which formed part of the development section)

* To determine which requests had to be viewed as urgent maintenance and therefore had to be completed within 24 hours by the maintenance teams in the development section

* To determine which requests were relevant to the amendment of existing systems and should therefore be viewed as maintenance projects

* To determine which requests required further examination, because it is a new user need that could possibly lead to the development of a new bank system or subsystems.

In the latter two cases, the request was directly referred to the business consultation section for execution of the following basic functions, namely:

* a proper examination of the real problem

* a feasibility study

* an impact study with regard to the existing systems environment

A graphic representation of the whole process is shown in Appendix B.

Thereafter the recommendations regarding such requests were put before the prelimi-- nary project team, who decided if the project should proceed. Such a project was then called a maintenance project, or a development project.

Project Management Section

The project management section was put in control of the management function of all development projects. This section therefore had to manage the whole systems development lifecycle.

The responsibilities of this section can be summarized as follows:

* To act as a metrics team for the planning and monitoring of all projects.

* To put operation information as well as management information at the disposal of all levels within the organization. The approach was to keep everybody informed. It is aptly put by the manager of the Scandinavian Air Systems in the article of Tom Peters (1989): "An individual without information cannot take responsibility; an individual with information cannot help but take responsibility" (p. 9).

* To ensure that all phases within the systems development lifecycle satisfy the prescribed standards and quality requirements ofthe department. Nobody was allowed to proceed with the next phase in the lifecycle before he had complied with the prescribed quality requirements.

* To apply an after implementation audit to all software products, in order to determine whether the original objectives were reached and to take notice of (and to learn from) problem situations that were encountered during the development process.

* To apply quality evaluation to all completed requests that were not handled as projects. This was just an interim measure, since they believed that it was the responsibility of each individual to ensure that he did quality work. The nature of this evaluation was primarily to determine the level of user satisfaction.

Project Management Model

The project management model used was based upon the IEM method. An illustration of the model is shown in Appendix C.

For the purpose of this paper, only the components that supported the quality assurance process are discussed:

* Project management-From the diagram it is clear that the total project lifecycle must be managed to ensure that deliverables of high quality be obtained. In fact, the term "project management" refers to the management of each individual project in order to ensure that high-quality results are delivered on time and within the budget. This is exactly what is obtained by means of this model.

* Determining ofthe successful completion ofa phase-The deliverables of the various phases are used as an aid to determine if a given phase was carried through successfully or not.

* Timesheets and progress reports-Timesheets and progress reports are the two most important inputs to the whole project control process.

Timesheets: Since the management team exercised strict control over all tasks or actions which employers had to execute, such appointment of tasks were introduced into the project management system. All timesheets were automatically generated weekly (pre-printed) for each member of staff, with a list of all the tasks on which the relevant person may work (according to the management team). This immediately supplied a checkpoint against under the counter-requests from the user side, or even internal delegation among personnel.

On a timesheet three main categories of time could be indicated, namely:

* time spent on projects

* time spent on maintenance actions

* time spent on unproductive activities, such as leave, training, idle, etc.

In the case of maintenance, a collection of codes was created for each product that was in operation, against which time could be accounted. By means of the correct management information, the unstable systems could be determined that would possibly not be cost effective for the bank any more.

Progress reports: Progress reports together with timesheets were handed in on a weekly basis. The purpose of these reports was to indicate "real" progress (as its name implies). By means of these reports, the necessary amendments to project schedules were done.

Other Project Management Techniques that were Applied

Time box management: In order to be able to restore user satisfaction as soon as possible, time box management was applied throughout all projects. The principle that was applied here is aptly described in the IEM documentation (1991): "... it is often better to obtain an acceptably complete, high-quality deliverable quickly than to wait for a long time for a more comprehensive deliverable" (p. 107).

Project planning and control: All user requests eventually reverted to projects were planned by the project management section in cooperation with the relevant project leader. To be able to apply project estimation in the most professional way, they had to establish and maintain a database of measuring instruments. This database was then used to measure the progress of each of the project teams as effectively as possible. As Tom Peters (1989) puts it in his article, "What gets measured, gets done " (p. 9).

The whole project management information system was developed on a microcomputer software package in order to be able to make management information of all development projects available.

Evaluation of Results

Although not all of the imposed objectives were met, the management team in general achieved positive results with their approach. The main reason why some of the goals were not achieved was perhaps because of the fact that the management team was too optimistic about achieving their goals over the short term. One such goal was to stabilize the high level of maintenance over a short term. This was difficult because of the complexity of the environment.

On the positive side end user satisfaction was much higher over a relatively short period of time and one could even say that the culture gap was smaller. This could have been the result of end users having been invited to become involved in all decision making, which created confidence and understanding among them for the IT environment. This way of bridging the culture gap is also sanctioned by Du Plooy (1995). In terms of better service and support, requests submitted by end users on the help desk were addressed more efficiently, which also created confidence. That was the case for old and new requests on the help desk. The backlog was reduced to an acceptable level, and IT professionals were much more positive and committed, leading to higher quality products from most IT professionals.

Beer et al. (1990) discuss six steps for successful change management. They are used as guideline to evaluate whether the management team was successful:

1. Mobilize commitment to change through joint diagnosis of business problems This step was vital to their strategy. Right from the beginning they realized that the only way to analyze the total business problem would have to be through a team effort that would require everybody's participation. As had already been stated, all personnel were involved with the analyzing of the problem, and it was evident that most of them were very appreciative of the fact that they (down to junior level) were all asked to participate in the analysis process.

2 Foster consensus for the new vision, competence to enact it and cohesion to move it along

Participating management was the pivot on which all decisions hinged. Matters on which general consensus could not be reached on management level or within a project team were held over for further discussion until an acceptable solution had been reached. Sound motivation of standpoints were always encouraged, to enable us to find the best possible answer to a given problem. As a result it often happened that long, but thorough debates were conducted with regard to such matters. The head of the department shared all information received from top management with the rest of the team. A staff meeting was held every week, during which personnel were fully informed about all decisions and visions that were communicated to him by top management.

3. Spread revitalization to all departments without pushing it from the top The modus operandi of the whole department and the various responsibilities of the personnel were communicated to all the departments within the bank. Especially as far as the problem management action was concerned, several work sessions were held with users to explain the advantages of the new modus operandi to them and to train them in using the system. All actions and efforts were appreciated in all respects, and they had the cooperation of everybody concerned.

4. Institutionalize revitalization through formal policies, systems and structures As already mentioned, it was the duty of each department to supply the necessary policy documents and procedures, in order to structure and give order to the whole process. These policy documents and procedures were explained to all personnel at the staff meetings mentioned.

Even before such policy documents and procedures were introduced, it had already been clear that the personnel urgently needed these guidelines. Each person was supplied with his own set of copies that was updated from time to time. Many frustrations, obscurities and inquiries were immediately eliminated by the release of these documents.

5. Monitor and adjust strategies in response to problems in the revitalization process Nothing is perfect-this they saw and experienced daily. Decisions that were made the previous day were often still-born the next morning, or withered and died soon afterwards. Then they were back at the drawing board.

It was always put clearly to all personnel that the management team was busy experimenting in many cases, and should they at all determine that a certain procedure or policy is not really efficient, or is not working, it would immediately have to be amended.

The management meeting that was held every day was used as a monitoring forum for feedback on all the activities of the previous day. In problem cases the necessary modifications were done to either policies or procedures.

It was imperative that the change process should not be monitored by the head of the department or division alone, but that it should be a shared responsibility. This is aptly put in the article by Beer et al. (1990): "Some might say that this is the general manager's responsibility. But monitoring the change process needs to be shared, just as analyzing the organization's key business problem does" (p. 164).

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

The actions taken by the management team to rectify most ofthe problems could be seen as very functionalistic. Little or no attention was given to softer issues like culture, motivation, commitment and trust, although one can argue that the actions they took definitely contributed to improving, for example, trust. Furthermore, the question could be asked whether the management team has really achieved quality service. To answer this question, it is important to briefly analyze the opinions of some researchers about what is meant by quality service.

Although much is available in the literature about how one should see or approach the issue of quality service, many of these discussions are also based on a very functionalistic approach or belief. Many discussions are based on the principle that one should follow a certain recipe or model or that the "doing right" of certain important things will ensure that a "quality" product will be provided. In the discussion that follows, functionalistic as well as non-functionalistic ideas are given and criticized to get a better perspective of the issue in terms of what the approach should be for delivering/providing quality service and support by participants working together in an IT-end user relationship environment.

Cortada (1995) states that there are many definitions of quality; however, they all accept the notion that quality is defined by the customer. Although Cortada describes a large number of functionalistic ideas about how quality could be achieved, he also introduces some important (non-functionalistic) philosophical principles in this regard which are of impor-- tance to the IT-end user relationship environment. He states that different companies craft their definitions around customers' perception of quality, rather than just performance to a set of standards. Definitions extend beyond quality products to quality in processes. Personal contact with the customer will for instance define quality in the mind ofthe customer. The same applies to a fellow employee. If the service an end user gets from your help desk is a positive experience, a quality service has been rendered. In other words: "Quality is created at the moment of performance, not in a factory designing in functional quality or just in the programming department" (Cortada, 1995).

This is sanctioned by Kinlaw (1989), stating that: "Systems do not produce quality, people do." In this regard Ciborra (1993) states that quality of a durable product can only be appreciated by using the product.

What is received is often the focus of quality, but so too is how someone receives quality-a crucial distinction for service organizations such as an IT department. In this regard many companies have crafted definitions which indicate that the view ofthe end user is eventually the dominant factor determining whether quality service is received or not. In this regard it is worth noting the words of the vice president of customer service at the Connecticut Mutual Life Insurance Company describing what IS had done for her: "We have set standards to which others in the financial services industry can aspire. And, we have changed the way in which information technology is used to provide world-class service. "

The core message in the literature on the topic of quality service and support, and which is sanctioned by practical experience, is that IT professionals who are on the front line working with end users (customers) should be both effective and efficient in their approach when executing service and support activities. In other words, quality service and support are imbedded in the principle of "doing the right things in the right way." The unfortunate side of this principle, however, is that the negative effects of an error in the action of giving service and support normally outweigh most or all of the positive results that have been gained by previous actions.

"All too often a small error makes an out-of-proportion effect on the quality of the whole. The drive to do everything well gives a sharp edge. Successful managers relentlessly search for better ways to do things, and they constantly build pride in the job. They adopt the value: do things right" (Woodcock & Dave, 1989).

The biggest challenge for the Cooperation Bank is to keep on building trust among end users and to ensure that all IT professionals stay committed to "doing right." The case is in fact an illustration ofhow difficult and time consuming it is to "correct" the damage that has been done because of "doing wrong" in the first place. In this regard Morris (1994) states, "The purpose of a business is to create a customer." These were the words of Peter Drucker in The Practice of Management. What is striking about this quotation, according to Morris, is that it was written more than 40 years ago. Drucker further states that the customer is the only reason for a business to exist. The essence of this message holds the philosophy of what is meant by service and support-if a company does not allocate and manage the necessary resources to give customers the service and support they need and ask for, those customers will seek help and support from somewhere else.

"Companies must learn to set management priorities, define strategies and allocate resources to hold on to their customer asset base " (Morris, 1994).

References

REFERENCES

References

Beer, M., Eisenstat, R.A. & Spector, B. (1990). Why change programs don't produce change. Harvard Business Review, (November-December), 158-166.

Ciborra, C.U. (1993). Teams, Markets and Systems Business Innovation and Information Technology. Cambridge, UK: Cambridge University Press.

Cortada, J.W. (1995). TQM for lnformation Systems Management. New York: McGraw-Hill. Du Plooy, N.F. (1995). Overcoming the culture gap between management and IT staff. Paper delivered at the conference on HR Management of IT Staff IEC, March.

Kinlaw, D.C. (1989). Coaching for Commitment: Managerial Strategies for Obtaining Superior Performance. City: University Associates.

Leonard, A.C. (1993). Factors that contribute to successful quality assurance management in a changing IT department environment: A case study. Presented at The First European Conference on Information Systems, Henley, Oxfordshire, March.

Martin, J. & Co. (1991). Information Engineering Methodology. City: Reston.

Peters, T. (1989). Making it happen. Journal of Quality and Participation, 12(1), 6-11.

References

Winfield, I. (1991). Organisations andInformation Technology. Oxford: Blackwell Scientific Publications.

Woodcock, M. & Francis, D. (1989). Clarifying Organizational Values. Englewood Cliffs, NJ: Prentice Hall.

AuthorAffiliation

A. C. Leonard

University of Pretoria, South Africa

AuthorAffiliation

BIOGRAPHICAL SKETCH

AuthorAffiliation

Having spent afew years in the private sector as systems analyst and designer and project leader, as well as several managerial positions, A. C. Leonard joined the Department of Informatics at the University of Pretoria as senior lecturer in 1992. He obtained a DCom degree (Informatics) in 1998. As a senior lecturer at the University of Pretoria he is involved in the education of lnformatics students as well as in research projects focusing of the use and application of information technology in the organizational environment.

Subject: Studies; Information technology; Technological planning; Competitive advantage; Strategic management

Location: South Africa

Classification: 9130: Experimental/theoretical; 9177: Africa; 5250: Telecommunications systems & Internet communications

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 488-503

Number of pages: 16

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198656424

Document URL: http://search.proquest.com/docview/198656424?accountid=38610

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 96 of 100

The QUIPUDATA case: Implementing a quality initiative in an IT organization

Author: Santana-Ormeno, Martin; Diaz-Andrade, Antonio; Serida-Nishimura, Jaime; Morris-Abarca, Eddie

ProQuest document link

Abstract:

This case study illustrates how a subsidiary company of one of the largest corporations in Peru, Backus Corporation, implemented a quality management model, got the ISO 9001:2000 certification, and evolved from an information technology support center to a center of benefits. It describes the evolution and development of the quality management model based on indicators used in QUIPUDATA and describes the steps followed to get a quality certification. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

This case study shows the way in which a subsidiary company of one of the largest corporations in Peru, Backus Corporation, charged with assisting in the use of information and telecommunications technologies, implemented a quality management model, got the ISO 9001: 2000 certification, and evolved from an information technology support center to a center of benefits. It describes the evolution and development of the quality management model based on indicators used in QUIPUDATA and also describes the steps followed to get a quality certification. Moreover, it details some of the technological developments within the corporation, including the information technology tool that supports the management model and the corporate network.

BACKGROUND

Backus Corporation

In 1876, Jacob Backus and Howard Johnston, two US. citizens, established an ice factory in Lima that would become the Backus & Johnston Brewery Limited in 1879. In 1890, this company was sold to an English interest.

Led by Ricardo Bentin Mujica in 1954, a group of Peruvian entrepreneurs bought the Backus & Johnston S.A. Brewery (CBJ) and originated a nationalization by a private initiative that resulted in a widely-held stock company and was followed by the upgrading of corporate facilities and investment diversification. New companies were purchased or created around Peru that would turn the Backus corporate group into one of Peru's leading corporations.

A solid economic group comprised of 19 diversified companies (see Appendix 1), operating in various industrial, agro-industrial and services sectors, the Backus Corporation operates both in Peru and other countries on the subcontinent.

The company's history shows that the business philosophy created by its founders at the middle of the 20th century is still alive and is the backbone of the principles and values put in practice by the Backus founders. Throughout the years, the Backus Corporation has demonstrated a strong commitment with the Peruvian social development, even in the worst economical and political crisis in the country that caused 30,000 deaths during the 1990s because of the terrorist violence.

This philosophy circles around an ongoing concern for personnel development and professional growth.

Inspired by such corporate thinking, the Backus corporation's mission has been defined as follows:

"Our general mission is to cooperate in achieving personal excellence, also called happiness, among all those who work with or are related to the Corporation. Our specific mission is:

* To produce and bring to market goods and services of the best quality, mainly in the foods and beverages industry, both for local and export markets.

* To satisfy the effective needs of our customers, with an emphasis on the product quality and service that go with them.

* To create a continued change process that will maintain modern, efficient, profitable and world-class competitive production units.

* To contribute to national development. "

Thus is characterized the dynamic Backus Corporation, where all components are driven towards better results measured through personnel development, enhanced business capabilities and better returns. A strong corporate commitment to Peruvian development and community solidarity translates into specific initiatives in education, culture, health, ecologic and environmental issues, and sports.

"[The] Backus Corporation counts on leading people with a social and human view of development and is directed at attaining better quality of living for people, " says Luis Calderon, Corporate Finance and Systems Manager.

QUIPUDATA

QUIPUDATA is the company charged with providing other units of the Backus Corporation with consultancy services in using information and telecommunications technologies, optimizing processes and organization, and developing a quality management system based on ISO-9000 and ISO-14000 standards. It also provides services for developing maintenance for computers, data processing, computer systems and for network design, set up and maintenance.

Although founded in 1978, QUIPUDATA started its operations on September 12,1979, in its headquarters at the district of Miraflores in Lima because it was necessary to create a whole IT capacity: trained personnel, suitable equipment, appropriate facilities, and communications infrastructure, particularly scarce resources during those years in Peru.

QUIPUDATA was founded as a data processing service company for the then Backus and Johnston Brewery. Before the former was created, the brewery outsourced its computer services, but the outsourcer was not experienced as was desired and the brewer's management view about the strategic value of information and supporting technology led to champion and support organizing QUIPUDATA to achieve total corporate independence in this area of key services. Such decision was made to organize an independent company, moving one step ahead in current service outsourcing trends during those years in Peru.

The creation of QUIPUDATA as a subsidiary company ofBackus & Johnston Brewery was a unique approach and there were not any other companies following this at that time in Peru. The justification to create it as another company different from the brewery was the top management wanted to avoid conflicts originated by the strong brewery union at that time, regarding the high incomes of information technology professionals. When QUIPUDATA was created, a clear definition of requirements and important investments were made.

QUIPUDATA has an outstanding history of IT management; its actions have evolved along two main guidelines: ongoing technological innovation and quality-oriented management. In 1981, the central computer was bought and the accounting and payroll systems were developed. One year later, QUIPUDATA provided batch data processing services to some subsidiaries and dealerships of the brewery. In 1986, the second central computer was purchased together with the first personal computer.

In 1987, QUIPUDATA took the initiative to organize the Corporate Wide IT Committee to design policies and establish IT project priorities; IT service decentralization started. It was identified two system development platforms, the central computer and networks. Two years later, PC assembly and maintenance business started and the first PC network was set up together with the first IT Technology Strategic Plan. In 1990, QUIPUDATA designed an IT development methodology; simultaneously, the data inputting was transferred to users. In 1991, the central computer was upgraded and electronic mail deployed across the corporation together with the Dealers Marketing System Development (SISCOD).

Although 1992 was an exceptionally difficult year due to the social violence caused by Shining Path in Peru, it marked a milestone in QUIPUDATA's history. Organization and methods services provided for Backus & Johnston Brewery launched the Continuous Total Quality Improvement Program (CTQI), and the optical fiber LAN/WAN network was installed.

A year later, Cerveceria San Juan S.A. in Pucallpa (450 kilometers east of Lima) and Cerveceria del Norte in Motupe (850 kilometers north of Lima) were provided with satellite connection. Backus & Johnston Brewery acquired Compania Nacional de Cerveza S.A. in 1994. Three years later QUIPUDATA's information systems were introduced at the latter and its subsidiaries. QUIPUDATA offices moved to the factory located in Callao and the Backus management model was put into practice for the first time in the whole corporation.

In 1998, QUIPUDATA installed a transactional server together with visual environment systems. This year Peru's National IT Association granted the Best Computer Network Award to QUIPUDATA. In 1999, the National Industrial Association granted the National Quality Award in the Comprehensive Program Category and the National IT Association awarded the Best Computer Center Prize.

In 2000, QUIPUDATA was runner-up in the Business Creativity Award organized by the Peruvian Science University in the IT track. The Backus Corporation computer systems were introduced at the recently purchased Cerveceria del Sur, and, in 2001, they were introduced at Embotelladora Frontera, a soft drink operation in Southern Peru.

SETTING THE STAGE

Ricardo Bentin Mujica, Backus and Johnston's Brewery founder, was persuaded that "companies that don't change, don't grow, and companies that don't grow, die. " The Backus Corporation and all of its subsidiaries, including QUIPUDATA, inherited this management philosophy that is now reflected in their "only through ongoing innovation can we be ahead of the future "slogan. It was under such premises that a business change process would take place.

An initial step towards introducing formal strategic planning processes for the corporation's businesses and companies took place in 1989. For the first time, the corporation's business model was designed and documented, including the corporate vision, mission, objectives and strategies, together with the statement of the underpinning business values and philosophy.

Since that year, annual strategic planning sessions, called CORBACKUS reunions, gather together corporate management to analyze, with support from specialized consultants, the evolution of business and explore windows of opportunity in new business areas.

In the meantime, QUIPUDATA experienced accelerated growth driven by strong service demand stemming from organizational changes and the corporation's domestic and region-wide growth.

During its life, the organization demonstrated its enhanced efficiency and productivity based on the unceasing standardization of its processes and services, and the disciplined introduction of continuous improvement and innovation in its business operations. Thanks to these characteristics, QUIPUDATA has been able to meet the growing service demand using the same personnel platform. Suffice to say, the number of workstations in the corporate network doubled from 1997 to 2001.

QUIPUDATA is organized around a flat structure that seeks flexible and smooth communication among the various company areas. Appendix 2 shows the company's organizational chart. Although structured as a functional organization, IT projects are executed by multi-disciplinary teams in a matrix organization that often includes its suppliers.

Corporate management is framed by the Annual Management Plan, including:

* Client service supply (Operational Plan);

* Product and services improvement and innovation (Quality Plan); and

* Strategic projects for new capacity generation (Strategic Plan).

The budgeting cycle is initiated in December and January, followed by a formal and exacting process before the Corporation's Executive Committee approves it. Servicing the computer infrastructure, the communication networks and providing for human resources makes up 65% of the company's budget. Internal audits, performed by the company's management, ensure that the management and budget plans are enforced. It is worth noticing that the corporation's IT budget amounts to 3% of total sales, i.e., the world average for manufacturing companies.

A firm believer in IT decentralization and the need for technological updating, Josd Martinez, QUIPUDATA's General Manager, says:

"My philosophy about information technology systems pushes for decentralization without loss of control; transfer of knowledge to users is one of our concerns. Also, we are persuaded of the need to create IT infrastructure, no just update it. To me, platform updating is not remarkable, it is just the inevitable consequence of natural evolution. "

CASE DESCRIPTION

In 1992, in line with the corporation's strategy to achieve management excellence within each of its companies, the Continuous Total Quality Improvement (CTQI) Program was launched with Holos TQC support, a Peruvian consulting company that originated during the 80s, specializing in quality management.

Introducing CTQI was not free from difficulties because of the various Backus Corporation units. QUIPUDATA, who was not oblivious to these difficulties, perceived the total quality process as an exceptional and additional task, on top of their everyday workload.

To overcome this resistance, the following implementation strategy was devised:

* Cascading from a top-down approach that would involve lower organizational levels only when the level immediately above them will be totally involved in and committed to the process. In the first sessions of quality policies, the top management had an active participation, including the Board of Trustees of the Backus Corporation. This approach sought systematically to overcome resistance to the process and to produce homogeneous and simultaneous progress within all companies, management level offices and divisions from the onset. No laggards would be allowed, regarding that all the companies at the Backus Corporation are vertically and horizontally, highly integrated in the value channel.

* Drivers-the planning, organization and methods, human resources and quality control areas-were assigned a specific improvement plan, together with their CTQI role, operating in harmony to develop the necessary capabilities in the long term.

* Attention was paid to the improvement of the organizational climate through ongoing assessments and the corresponding improvement initiatives.

Mechanisms for exchange and dissemination, such as competitive field days for workers, a Total Quality Fair, publication of the Logros (Achievements) newsletter and the outside dissemination of accomplishments were also put into place.

* Three implementation stages were identified: learning, consolidation and deepening. The learning phase was focused to educate managers and workers on quality concepts and techniques; besides, facilitators were appointed to disseminate the new ideas. Consolidation phase demanded a deeper training in techniques and tools use. In the last phase, a specialized training was provided on specific topics.

A mature CTQI allowed to choose an in-house management program in 1997 based on the criteria for performance excellence inspired by the U.S. Malcolm Baldridge Quality Award. Called the Backus Management Model, it was simultaneously introduced throughout the corporation's companies.

Figure 1 shows the model's seven components. The first six describe the requirements to achieve excellence as a "world class"--including best practices-company. The seventh component comprises results in all relevant aspects ofbusiness management, i.e., customer satisfaction, market positioning, economic and financial indicators, operational performance, personnel development and motivation, vendor integration, organizational image building, etc. Evaluating these results requires taking a representative period and identifying international benchmarks.

Programs in each of these fronts translate into specific scores awarded through external audits that assess the actions carried out and the corresponding results during the year. The audit's recommendations are included in the following year's management plan, thus enforcing Edward Deming's quality cycle (plan, do, verify and act) to preserve the level achieved and create a mechanism for continuous improvement.

Corporate philosophy was reflected in the management model enthusiastically put into practice using the "visible management" concept. Management, department and section quality committees involved all organizational levels in the unceasing search for excellence. The Senior Backus Corporation Management was always careful to disseminate the management model being enforced by exhibiting it on a diagram that was distributed to all group companies.

The Continuous Total Quality Improvement (CTQI) Program, as designed in 1992, went through a four-year implementation process shown in Chart 1.

The Continuous Total Quality Improvement (CTQI) was successfully implemented at QUIPUDATA because of the strong organizational culture focused on excellence achievement; nevertheless, it was necessary to overcome some small change resistance. It was a carefully detailed plan to convince everyone about the benefits of the new management model. Later, in 1997, the new Backus management model was adopted at QUIPUDATA and at all the corporation's companies. Jose Martinez recalls:

"Skepticism reigned at the beginning: our personnel doubted the proposed management model would be effective and had no confidence the results could be achieved. Having a homogenous company helped. We did monthly audits to monitor the project and worked hard to explain all company members the benefits we would achieve from this new management model. I think we made it. We enrolled everybody and gradually people became more and more committed to the process. "

QUIPUDATA thinks the management model not only complies with the corporation's guiding principles but is also a very advanced system that, when enforced, keeps all strings under control. Once the Backus Corporation at large had adopted and accepted the management model and QUIPUDATA, in particular, it became obvious that an IT tool was needed to create the company-wide and corporate facilities required introducing indicatorbased management and following up strategies.

In March 2000, QUIPUDATA launched a project to develop software to test the management model by providing follow-up for work-style practices introduced throughout the corporation, and the corresponding achievements. Appendix 3 describes this tool. The Backus Corporation's QDMonitor system is based on the principle that if results indicators are positive (shown in green), then the company or area's management is under control. Luis Calderon praises the advantages of the QDMonitor system: "Top management cannot be distracted by operational tasks nor be flooded by data; indicators will tell them about their management performance. "

At QUIPUDATA, the management model acquires a special significance because this organization manages information technologies that are the foundation of innovation. Together with strict enforcement of continuous improvements at all levels, it creates a significant competitive advantage; information technology is the means to facilitate the adoption of better managing practices. Management conducts ongoing investigation to adopt best management practices and technological breakthroughs, while exerting strong leadership in guiding the design and follow-up of business management plans.

Luis Navarrete, the Organization and Methods Manager, forecasts the impact of the main management model components:

"In [the] future, the management model's strengths will gain new meanings because shorter improvement cycles will allow to benefitfrom capacities created in new business areas, markets or aspects. Additional ty, identifying and including best management practices and technological breakthroughs will be faster and all these will contribute to better results and ever higherperformance across the company. "

QUIPUDATA strictly adheres to the guidelines created by all components of the management model. Some of the most relevant practices are:

1.Leadership: Management actively takes part in designing and following up plans for continuous improvement in management quality. It pays special attention to public recognition of outstanding people and projects, and strictly implements the plan for improving the role-played by management. Community outreach initiatives in education (traineeships and grants) and the environment (conserving natural resources) also get attention.

2.Strategic planning and goal deployment: Attention is paid to aligning the company's strategy (information technology) with the Backus Corporation's business strategy. A five-year strategic plan resulting from a formal design plan allows to spin-offstrategic process under individual managers' responsibility aimed at acquiring new capacities and/or entering new markets. A strict design and control process for the management plan is enforced, while external and internal audits are based on performance indicators discussed in overseeing meetings. The company's goals and plans are deployed and disseminated throughout the company, with the corporate Intranet efficiently contributing to this goal.

3. Customer satisfaction: A number of mechanisms have been put in place to capture the clients' requirements in each market segment. The customer satisfaction improvement program (for both internal and outside customers) includes surveys to gauge the quality of services rendered and the subsequent improvement actions. Also available is the customer claim system. Other mechanisms to manage client relations include project management, maintenance requests and service orders.

4. Human resource development: A modern personnel management system promotes growth and incentives for workers who are deeply involved in various committees, improvement and innovation projects, and contributes their suggestions, which are largely put into practice. QUIPUDATA counts on its team of facilitators to provide process support from its internal resources, and it also enforces a program for ongoing organizational climate improvement.

5. Process management: Based on indicators, process management has also developed a quality assurance system for customer care processes that seeks to improve the quality and reliability of the company's product and service offerings. Its innovation projects adopt technological breakthroughs while the supply management program incorporates suppliers and improves their contribution to value creation.

6. Indicators and information: QDMonitors' management indicator system provides information about the operating status of all company processes and allows control by exception through a graphic warning device. A benchmarking program provides updated information on results indicators and best management practices.

7. Results: Chart 2 shows some company-side indicators.

The above indicators stem from the company strategy. Relations among them have been identified over time. As an example ofthe benefits gained from the Continuous Total Quality Improvement (CTQI) Program, Figure 2 shows the fall of administrative expenses at QUIPUDATA as management quality scoring rose.

Figure 3 shows some of the improvements achieved at QUIPUDATA in key indicators.

In 2001, after a deep analysis of QUIPUDATA possibilities in the commercial market, its management decided to implement a quality system based on ISO 9001: 2000 to assure quality standards in its processes in order to gain competitiveness in the information technology services market. The goal was to guarantee that administrative processes could satisfy consumer services' levels.

Two phases were defined to implement ISO 9001: 2000 at QUIPUDATA:

Phase 1: This phase included the processes related to the central computer such as the central computer operation process and the data batch processing. These processes were priories to take advantage of the chance to serve local companies.

Phase 2: This phase includes the developing systems processes, user support and those related to audit management of the first phase processes.

To implement the quality system, work teams belonging to the different involved areas in the system were made up. An internal consulting group formed with trained personnel in system quality (lead auditor and facilitators) supported the implementation process. It was developed in the following stages:

1. Diagnosis audit to all QUIPUDATA areas in order to evaluate their level of accomplishment ofthe ISO 9001:2000 requirements and identification ofthose critical points where it was necessary to make improvements.

2. Planning to define the implementation strategy in a detailed work plan. The activities that must be accomplished, their deadlines, and their milestones were stated. Besides, the project organization and the roles of each of its members were defined.

3. In the carrying-out stage, all the personnel involved were trained in ISO 9001:2000 issues. The procedures to be regulated were identified and the requirements to achieve the norm exigency were stated. To avoid delays in the planned work and to correct any trouble, the leader of the project stated meeting sessions to track the progress.

4. Two internal audits and general revision by the directors were performed to verify the project advance and level of accomplishment within the ISO 9001:2000 requirements. 5. To get an independent feedback over the processes to be certificated, an external precertification audit was developed.

The final certification audit, carried out by an international acknowledged certifier company, was achieved without any discrepancy. The commitment of the top management with the ISO project and the strong cultural value shared across all the personnel at QUIPUDATA allowed this successful result. Regarding the qualified personnel and the experience gathered along the last years, the ISO certification took only 14 months and demanded just an investment of US$6,500 including the tracking audits.

The ISO 9001: 2000 implementation at QUIPUDATA allowed, among others, the following benefits:

* Productive and administrative processes efficiency improvements because they were now controlled.

* An improvement procedure was defined thanks to a preventive and corrective actions policy adopted to detect and eliminate the causes of discrepancies.

* Improvement in customers and suppliers relationships.

* Satisfied employees.

* Human resources and purchase processes were finally ordered and controlled.

The certification could be used as a sale argument.

CURRENT CHALLENGES

Introducing the quality principles and methodologies for QUIPUDATA's processes and services has made continuous improvement possible as shown by the various improvement projects, innovation projects, process scoring, process standardization and use of management indicators.

Through the organizational change process, QUIPUDATA has created new competencies among its personnel, developed methodologies and a range of software products while enhancing its main service offerings. All this has opened new opportunities for the future.

Ever since it was organized in 1978, QUIPUDATA was established as a cost center within the Backus Corporation. After building trust through good performance, Josd Martinez and his management team have devoted themselves to selling their products and services in the local and Latin American markets, hoping that, in the short run, QUIPUDATA will also become another corporate profit center. It has carried on the evolution of an information technology organization as shown in Figure 4.

Luis Calderon says "bringing QDMonitor to the market is one more Backus Corporation contribution to Peru. " He now sees a new challenge rising for QUIPUDATA:

"I expect to reach three goals for the corporation: no paper, single data record, no cash. I know we can count on QUIPUDATA and I trust that not much time will lapse before we can reach those very ambitious goals. "

In March 2001, Josh Martinez pondered all the goals achieved in recent years and the new challenges rising before the company. He had sufficient reason to be satisfied because in only a few years QUIPUDATA had been made over into a highly innovative company.

ACKNOWLEDGEMENT

The authors would like to express their gratefulness to the Backus Corporation and QUIPUDATA managers for their collaboration in this case and acknowledge the comments provided by the anonymous reviewers.

References

REFERENCES

References

Corporacion Backus (2001). Retrieved from http://www.backus.com.pe.

McNurlin, B.C. & Sprague, Jr., R. H. (1999). Information Systems Management in Practice (4th ed.). Upper Saddle River, NJ: Prentice Hall.

AuthorAffiliation

Martin Santana-Ormeno ESAN, Peru

AuthorAffiliation

Antonio Diaz-Andrade ESAN, Peru

AuthorAffiliation

Jaime Serida-Nishimura ESAN, Peru

AuthorAffiliation

Eddie Morris-Abarca ESAN,Peru

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Martin Santana-Ormeno is an associate professor of information technology at the Escuela de Administration de Negocios para Graduados (ESAN) in Lima, Peru. He holds a PhD in business administration from Florida International University and an MS in information systems from the Ecole des Hautes Etudes Commerciales in Montreal. His research interests include electronic business, systems development approaches, and conflict management in the development process. He has published in the areas of the use of global applications of information technology, the management of the systems development process, and the consequences of information technology in organizations.

AuthorAffiliation

Antonio Diaz-Andrade is an assistant professor of information systems at the Escuela de Administracion de Negocios para Graduados (ESAN) in Lima, Peru. He holds an MBA with specialization in Information Systems from ESAN and a BS degree in aeronautical

AuthorAffiliation

engineering from Escuela de Ingenieria Aeronautica, Argentina. His research interests include electronic business, and impact of information technology on economic and social issues.

AuthorAffiliation

Jaime Serida-Nishimura is an associate professor of information systems at the Escuela de Administration de Negocios para Graduados (ESAN) in Lima, Peru. He received his PhD in management information systems from the University of Minnesota. His research interests include electronic business, strategic impact of information technology, group support systems, and the adoption and diffusion of information technology in organizations.

AuthorAffiliation

Eddie Morris-Abarca is a senior lecturer of information technology at the Escuela de Administration de Negocios para Graduados (ESAN) in Lima, Peru. He holds a BS degree in information systems from Universidad National de Ingenieria (Peru). He is the CEO of InfoPlanning, a local consultant firm specialized in IS planning and business process reengineering. He is currently vice-president of the Peruvian Association for Computing and Information Systems.

Subject: Studies; Information technology; Quality standards; Subsidiaries

Classification: 9130: Experimental/theoretical; 5220: Information technology management; 5320: Quality control

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 504-520

Number of pages: 17

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198739964

Document URL: http://search.proquest.com/docview/198739964?accountid=38610

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 97 of 100

Spreadsheets as knowledge documents: Knowledge transfer for small business Web site decisions

Author: Burgess, Stephen; Schauder, Don

ProQuest document link

Abstract:

This case describes the creation of a practical decision support tool (using a spreadsheet) for the initiation and development of small business Web sites. Using selected literature from structuration theory, information management, and knowledge management, decision support tools are characterized as knowledge documents (communication agents for explicit knowledge). Understanding decision support tools as knowledge documents sheds light on their potentialities and limitations for knowledge transfer and assists in maximizing their potentialities. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

How should a small business decide whether and in what ways to use Web technology for interactions with customers? This case describes the creation of a practical decision support tool (using a spreadsheet) for the initiation and development of small business Web sites.

Headnote

Decisions arise from both explicit and tacit knowledge. Using selected literature from a structuration theory, information management and knowledge management, decision support tools are characterized as knowledge documents (communication agents for explicit knowledge). Understanding decision support tools as knowledge documents sheds light on their potentialities and limitations for knowledge transfer, and assists in maximizing their potentialities.

The case study deploys three levels of modeling: a high-level structuration model of the interplay between information management and knowledge management, a conceptual model of small-business decision-making, and an applied model - the practical decision support tool, itself.

An action-research methodology involving experts and stakeholders validated the development of conceptual categories and their instantiation in the practical tool.

SETTING THE STAGE

Target Group

This particular case involves the development of a model to assist small businesses to establish and maintain an Internet presence. It is based upon the premise that small businesses should perform a business analysis before commencing such a project and that this analysis should lead to "recommendations" for the business in relation to what should go on the Web site, how it should be implemented, how it should be promoted and how its success (or failure) should be measured. The knowledge required to convert the business analysis into recommendations is stored in a spreadsheet, which is used as the instrument to build the model.

The eventual target group for this project is small businesses. The case that this paper describes is the process that was followed in the development of the spreadsheet model (or "artifact") that was used as the vehicle for the storage of "business knowledge."

Structuration, Communication and Power in the Small Business-Customer Relationship

The structuration theory sees history as interplay between social action and social structure. Giddens terms this action-structure interplay the "duality of structure" (1996, p. 100). Any action, large or small, has the potential to change (strengthen, weaken or modify) the social structure in which it occurs. Ultimately, structuration is a theory of power, because the prevalent structural context at any point in time defines the scope ofaction that is available to individuals and groups. Structure both supports and limits actions by individuals and groups.

As an outcome, the distribution of power in society is a phenomenon of major concern in the structuration theory. However, the phenomenon that underlies the action-structure dynamic is communication. Before information technology (IT) intervenes, communication operates through co-present, synchronous interactions. IT enables the transmission and storing of information that makes possible remote and asynchronous interactions. In the world of physical objects, transportation and storage technologies play the same part as IT for electronic information. Techniques for the transportation and storage of grain or weapons empower an ancient kingdom to project its power to distant places. By developing symbolic systems for recording and transmitting knowledge (such as inscriptions on an obelisk or writing on papyrus), that ancient culture can project its ideas across both space and time, and influence social structure in the future. In this way, analogue and digital information technologies enable human groups to "bind" or bridge time and space. In Giddens' (1980) terminology, the "binding of space and time" reduces "space-time distanciation".

This case describes the development of a tool to assist small businesses to reduce space-time distanciation between themselves and their customers, while not placing either at a disadvantage relative to the existing power relationships between them; indeed, the preferred outcome is a sense of enhanced empowerment for both.

Structuration and the Research Design

Until quite recently, the research paradigm of the physical sciences was virtually the only one acceptable in information systems and information management research. However, in the present state-of-the-art, a wide range of research approaches is available. This broadened set of options has been called "post-positivism" (Evers & Lakomsky, 2001), and draws on the hermeneutic or interpretivist traditions of scholarship in the humanities and social sciences as well as on the hypothetico-deductive or positivist traditions of the physical sciences.

Today in information systems, information management or knowledge management, a project will not be condemned as "non-research" because it looks more like a history, or an anthropological fieldwork report rather than like a laboratory experiment. However, such freedom to choose approaches and methods brings with it responsibilities to justify the choices made (Williamson, 2000).

The structuration theory helps such justifications. It helps to deal with key ontological and epistemological issues that arise in a case such as that presented in this paper. Regarding ontology, all studies are based-even if only implicitly-on some orienting idea of what constitutes the "reality" under study. It, then, adopts an epistemology (a way of knowing) that the researcher judges to be congruent with that reality. The structuration theory-while not denying other concepts of reality-privileges the notion that reality is a social construct. Ontologically, social reality is constructed and re-constructed through time via the action-- structure dynamic acting upon stored knowledge or memory. Epistemologically, the way to "know" social reality is through the meanings constructed by actors. Giddens offers several key concepts of relevance:

The double hermeneutic. As explained above, the recursive mutual interplay between action and structure is called "the duality of structure". The double hermeneutic is a particular case of the duality of structure that relates to social researchers (Giddens, 1996). This concept addresses the relationship between researcher and researched. It elucidates the influence of research action on the social phenomena being researched, and vice versa. There is a mutual process of interpretation or hermeneutic involved. The concept is somewhat analogous to Heisenberg's uncertainty principle in quantum physics, namely, that the techniques available to measure the position and momentum of particles themselves affected the values of those variables (Berry, 1988). In this study, the choice of iterated consultation with experts and stakeholders to elicit subjective meanings finds its justification in the ontology of socially constructed reality. It does not claim objectivity but values subjective meanings and, therefore, "cuts with the grain" in relation to the double hermeneutic; researchers and researched collaborate in the identification and articulation of meanings. In other words, the mutual influence of meanings held by the researcher and the researched builds coherence and credibility in successive stages of the study.

Authoritative and allocative resources. Giddens (1996, pp. 100-101) describes authoritative resources as those structural artefacts, which embody the semantic and moral rules for social interactions. Allocative resources are those that govern how the rules are applied in the material world. This distinction was reflected in the research design by first exploring the literature to produce a high-level Information Management-Knowledge Management model (Figure 1) and then exploring stakeholder's interpretations or meanings to produce a conceptual model (Figure 2). These models constitute authoritative resources in structuration terms. The corresponding allocative resource in this case is the spreadsheet. The blank spreadsheet is a meta-document that can instantiate and apply, in a particular way, the general tenets of the authoritative resource. What to instantiate, and how to instantiate it, is discovered by eliciting and interpreting preferences arising from meanings held by experts and stakeholders. In every sense, the spreadsheet customized as a decision tool in this case study becomes a knowledge document, incorporating the best understandings of those who collaborated in its development.

Structuration-Based Perspectives on Small Business

Viewpoints in the current literature of small business research affirm that the environment that an organization is concerned with is made up of those groups that are important to the organization. These groups could be effectively labelled the "organizational field" for that organization. The participants in the group are important because they either maintain contact with the central organization or perform a similar role to them (competitors would do this) (DiMaggio, 1986). An organizational field is influenced by the groups within it, who are, in turn, influenced by the organizational field. As has been indicated, this interplay is described by Giddens as "the duality of structure." While overarching contexts or structures make up the environment that supports or constrains small businesses, the duality of structure holds that there is always a reciprocal impact. The organizational field or structure is strengthened if small businesses find it supportive and act in compliance with it. Conversely, it is weakened to the extent that small businesses - individually or collectively - act in opposition to it.

Small businesses differ from large businesses in a number of ways, particularly in relation to the resources (time, expertise and capital) that they can devote to the use of information technology (Burgess, 2002). As such, the composition of their organizational fields is likely to differ from that of larger businesses, and its potential influence on the structure or organizational field within which it operates is likely to be less than that for larger businesses. For a small business, an organizational field would typically include customers, suppliers, governments (perhaps), competitors, consultants and support groups.

A structuration approach to small business knowledge management is useful as it helps to identify characteristics that effect an organizational field and individual groups within the field separately. It is easier to identify the process of strategic change when it is realized that organizational fields can influence managerial decision-making within groups and that these decisions can, in turn, influence the central organization and the organizational field through the shared interactions and perceptions of other groups in the field (Bloodgood & Morrow, 2000).

Groups within a field can be influenced to change by a number of factors, including the number of organizations within the field that are changing, the direction they are heading in and the success (or otherwise) of the strategic change. While managers may draw from other experiences, many of their perceptions are taken from their current experiences within the organizational field. If one group within the field does something, others will take notice (Bloodgood & Morrow, 2000).

Knowledge Management

Grover and Davenport (2001, p. 6) discuss the various differences between data, information and knowledge. "Typically, data is classified, summarized, transferred or corrected in order to add value, and become information within a certain context." The technologies that facilitate this have been typically associated with the storage, processing and communication of data- resultant information has utility within that context. "Knowledge has the highest value, the most human contribution, the greatest relevance to decisions and actions, and the greatest dependence on a specific situation or context. It is also the most difficult of content types to manage, because it originates and is applied in the minds of human beings" (Grover & Davenport, 2001, p. 6). Knowledgeable people have the information and the ability to frame it within the context of their expertise, experience and judgement. From a business viewpoint, all new knowledge comes from people. It is, however, possible to incorporate knowledge into artifacts, such as processes, structures and technology (Grover & Davenport, 2001).

Knowledge management allows an organization to record and share the knowledge of employees, with a view to learning from employee experience and breaking down barriers between organizations, their departments and their people. In many instances, it is based around saving money or making money, rather than just producing a business that "knows" itself better (Management Today, 1999). In the latter part of the 20th century, organizations began to pour resources into the use of knowledge management as a strategic capability (Lesser & Prusak, 2001) as they realize that competitiveness hinges on the effective management of intellectual resources (Grover & Davenport, 2001). Effective knowledge management helps to identify the processes that are core to the business and the important knowledge flows within and external to the business (Davis, 2001).

Typical knowledge management applications offer a repository containing a specific type of knowledge for a particular function or process, such as (Grover & Davenport):

* Best practice knowledge within a business process or management function

* Knowledge for sales purposes

* Lessons learned in projects or in project development

* Knowledge around the implementation of information systems

* Competitive intelligence for strategy and planning functions

* "Learning histories" or records of experience with a new corporate direction or approach

In more recent times, smaller budgets and reductions in staff have put knowledge assets within the organization as risk. This occurs through knowledgeable employees leaving (often through voluntary departure programs), the demise of critical social networks, diminution of trust and reduced time available for knowledge transfer (Lesser & Prusak, 2001 ).

In an attempt to reduce the adverse effects on organizational knowledge assets, many organizations attempt to slow down the number of layoffs or spread the burden across all employees in an attempt to maintain social networks. Other organizations combine the use of video interviews and hyperlinks to important documents and reports on departure or retirement, or pay bonuses to departing employees willing to share working knowledge with their replacements (Lesser & Prusak, 2001).

Many small businesses have adopted practices of knowledge management without even realizing it. By their very nature, employees within small businesses tend to be more multi-disciplinary in nature, often sharing work across business "boundaries" (Management Today, 1999). However, like other businesses, small businesses face problems when experienced staff move on or retire (Davis, 2001). Modern IT can assist in the sharing and exploitation of information and experience through allowing communication between disparate groups, the use of collaborative tools (such as groupware) (Management Today, 1999) and the building of artifacts that replicate knowledge.

The view of the relationship between information management and knowledge management that informed the study is presented in Figure 1.

Spreadsheets, Knowledge Management and Small Business

Spreadsheets provide users with the capability to alter figures and to see the effects the alterations have on recommendations. Although spreadsheets have been associated with the concept of decision support for a number of decades (Stair & Reynolds, 1999), there are few documented examples of their successful use in small businesses. Much ofthe limited research into small businesses has investigated the success factors for information technology, based upon the current use of IT/DSS, or the design and development of specific DSSs for SMEs. Little work has been done specifically to identify those areas that have not been adapted to DSS, but show potential for its introduction for the small business (Duan, Kinman & Xu, 2002).

Spreadsheets have been used as decision support tools in many different ways. For instance, one recent example describes the use of spreadsheets to allocate production resources and combine raw materials in an optimal mix in wood panel manufacturing (Buehlmann, Ragsdale & Gfeller, 2000).

A 2001 study of 133 manufacturing small businesses in the UK (Duan, Kinman & Xu, 2002) revealed limited use of decision support systems. A lack of staff time to analyze needs and identify solutions was the primary reason given for the lack of use. Where used effectively, firms with a more "strategic" outlook implement them. They mainly take the form of previously developed packages, and most of them are targetted towards support routine decisions.

Because of these factors, there is an opportunity for effective decision support tools to make a real impact on small businesses (Duan, Kinman & Xu, 2002).

The uses of spreadsheets described so far have been limited to applications that are based around the storage of data to provide information for decision-making. The use of spreadsheets as "knowledge documents" has not been pursued in the literature, especially when the knowledge gained is imported into the business to cover a lack of resources within the business.

BACKGROUND

Some of the major issues facing small businesses in relation to their use of information technology are that:

* They lack basic knowledge of how to use information technology effectively

* They do not know how to measure the benefits of information technology

* They lack the skills to plan the long-term use of information technology in the business

These shortcomings typically translate to small business use of the Internet, particularly in relation setting up Web sites (Burgess, 2002).

In order to address some ofthese concerns, a project was commenced in 1999 to develop a model that small businesses could apply to assist them in their decisions relating to the development and maintenance of Web sites that they used to interact with their customers. The purpose of the model was to guide small businesses through the initial planning process to eventual setting up of the Web site.

At the conclusion of the first phase of the development of the model, a conceptual framework had been developed (Burgess and Schauder, 2000). The model outlined an iterative process based around a business investigation, formulation of Web site strategy, identification of Web site features, decisions relating to the method of Web site implementation, Web site promotion and the evaluation of Web site success. Figure 2 represents this conceptual model.

It will become apparent throughout the following discussion that the model relies heavily on the interactions between the various groups in direct contact with (the organizational field of) the typical small business. The participants in this field (that the small business is central to) are primarily customers and competitors.

CASE DESCRIPTION

Many of the skills needed to perform the business investigation, formulate the strategy, and carry out other sections of the intended model are not available in atypical small business.

The knowledge needed to carry out many of these functions needed to be embedded in the model. Thus, it was necessary to design the model such that the knowledge required was built into the artifact.

The challenge came to take the conceptual model developed in Phase one and convert it into an applied version - an effective decision support tool for small businesses to use when implementing a Web site to interact with customers. The initial idea was to develop a manual or book that small businesses could work through and use to "record" the results of the analyses that they carried out along the way. This would then lead to recommendations as to what Web site features they should implement. There were two major concerns with this approach. The first was that if a small businessperson wished to go back and alter any of the data entered, he or she would have to use an eraser or "liquid paper." The second concern was how to lead the person to the eventual recommendation once the analysis was completed. The need to follow the somewhat complex paths that were designed through to the various recommendations might have been enough to drive the small businessperson to distraction and, as a subsequent decision, to abandon the process. It was finally decided that the spreadsheet package, Microsoft Excel, was the solution. Most small businesses that have computers use a spreadsheet package, and the majority of spreadsheet packages in use are Microsoft Excel. The spreadsheet has long been recognized as a tool that can be used to support basic decision-making. In this case, it provided a means by which the complex path from analysis to recommendation could be handled automatically by the software.

The following case describes the development of the spreadsheet model, and its subsequent refinement by a series of focus groups of small business counsellors.

A Model for Small Businesses to Interact with Customers Using the Internet

Burgess and Schauder (2000a) identified a number of steps that are common to models that can be used to assist firms to identify strategic IT ideas (such as Porter & Millar, 1985; Barton & Peters, 1990; Osterle, 1991) and/or electronic commerce opportunities (Marchese, 1998; Al Moumem & Sommerville, 1999). These steps included a need for a thorough business investigation. This is typically the first step in any model and needs to occur to increase the likelihood that decisions to be made later in regards to Web design and content are based upon a sound knowledge of the firm. Typical analysis tools used at this stage are Critical Success Factors (CSFs) and SWOT Analysis.

The SWOT analysis has been traditionally used in the marketing or economics areas of the business. The term SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. An analysis is performed on the various areas of the organization to identify current or potential strengths and weaknesses when compared with other competitive forces. From this analysis, the organization identifies actual or potential opportunities to gain strategic advantage or threats to the organization's well being. Actions taken by the organization to take advantage of an opportunity are proactive. Actions taken by the organization to combat a threat are reactive (Kotler et al., 1989). The SWOT analysis also works well with the idea of the structuration theory, as it helps to examine the relationships between participants in the organizational field.

Electronic commerce is seen as away in which small businesses can compete with large businesses (DIST, 1998; Penhune, 1998), but small businesses have little time or resources to address potential changes to their current activities. Many lack the availability of technical expertise and avoid proper planning techniques to help them to take advantage of opportunities thatmay present themselves (DIST, 1998; Engler, 1999; Conhaim, 1999; Conroy, 1999). In order to address some of these problems facing small businesses that wish to use the Internet to interact with customers, particularly those relating to a lack of proper planning techniques, a conceptual version of a model to guide small businesses was proposed by Burgess and Schauder (2000b). Figure 2 shows the model that was developed.

The model is based upon the major steps in other IT and e-commerce models. It represents an attempt to address the specific needs of small businesses (refer to Burgess & Schauder, 2000a) by guiding them through a proper planning process that is relatively easy to comprehend.

The initial stage of the model, the business investigation, involves a modified SWOT analysis. The firm's internal and (some) external forces are examined. Internally, the firm's resources in relation to time, money and expertise are examined, as well as the characteristics of the firm's goods and services. The firm's overall strategy is also examined, as a firm wishing to grow in size may require a more "aggressive" Web strategy than a firm that is satisfied with its existing customer base.

Externally, the Web sites of competitors are examined, as well as the ability of customers to access the firm's Web site.

Other steps of the model after the business investigation refer to identification of the firm's overall Web site strategy, what Web site features they are going to implement, what method they use to implement these features, how they promote the Web site and how they evaluate its success.

The next stage was to develop it into a more detailed, "usable" model. This applied version of the model consisted of two major components: a procedures manual (showing the various steps of Business Investigation, Strategy, and so forth) and a spreadsheet program, for recording the results ofthe analysis provision of recommendations. It is this model which is being tested in this study.

The Choice of a Spreadsheet

The major problem faced in this project was how to take the conceptual model and turn it into the applied model. The initial idea was to develop a manual or book that small businesses could work through and use to "record" the results of the analyses that they carried out along the way. This would then lead to recommendations as to what web site features they should implement. There were two major concerns with this approach. The first was that if a small businessperson wished to go back and alter any of the data entered, he or she would have to use an eraser or liquid paper. The second concern was how to lead the person to the eventual recommendation once the analysis was completed. The need to follow the somewhat complex paths that were designed through to the various recommendations might have been enough drive the small business person to distraction and a subsequent decision to abandon the process.

It was finally decided that the spreadsheet package, Microsoft Excel, would provide the solution. Most small businesses that have computers use a spreadsheet package, and the majority of spreadsheet packages in use are Microsoft Excel. The spreadsheet has long been recognized as a tool that can be used to support basic decision-making. It provides users with the capability to alter figures and to see the effects the alterations have on recommendations (Stair & Reynolds, 1999). In this case, it provided a means by which the complex path from analysis to recommendation could be handled automatically by the software.

The programming language that is part of Microsoft Excel, Visual Basic for Applications, provided the flexibility to alter the software and the interface easily, based upon the suggestions of the micro focus group participants.

The Decision Making Process

As was mentioned earlier, small business counsellors were asked to identify and measure a number of elements within the business and external to the business. It was considered important that small business practitioners, particularly those that have dealt with many small businesses in a range of areas (business planning, marketing, and so forth), should review the model. This was to expose the model (developed in an academic environment) to "real" small business applicability. The model was presented to small business consultants via three separate "micro" focus groups.

The small business consultants were all from the Small Business Counselling Service (SBCS). This is a service provided by a section of the Victorian State Government, Small Business Victoria, Australia. The majority of the counsellors are aged 50 or over and have had vast experience in the counselling areas identified.

Note: the eventual target group for this model is small businesses. This paper describes the development of a spreadsheet application as a tool for knowledge management in small businesses. The counselors were selected to assist in the refinement of the model due to their vast experiences in relation to dealing with small businesses. Some of them are using the spreadsheet model in its various forms currently, but the counselors are not the eventual target group-small businesses are.

Focus Groups

A focus group involves an organized discussion with a selected group of individuals to gain information about their views and explore their experiences of a topic area. A focus group relies on the insight and data produced by the interaction between participants. The main reason for using a focus group as a research tool is to examine participants' attitudes, feelings, experiences and reactions in away that would not be possible, say, with one-to-one interviewing, observation or surveys. They are more likely to be revealed via the social gathering and interaction that occurs when participating in a focus group. The interaction is important as the interactions highlight the participants' views of the topic and the language that they use to discuss the topic. The interaction allows participants to ask questions of each other and to re-evaluate and reconsider their own views (Gibbs, 2000).

One of the major difficulties associated with organizing focus groups is to arrange for participants to be at the same place at the same time, especially if the participants have a busy schedule. This is particularly the case for counselors in the SBCS, who often find themselves traveling to meet with their clients at a time that suits the clients. This was a factor in the number of responses received after the initial request for participation email was sent out.

The number of participants in a focus group are usually six to ten, with as high as fifteen and as low as four (Gibbs, 2000). Ifa group is too small, there is a chance that one or two group members may intimidate the group (Zikmund, 2000). Given the age and experience ofthe SBCS counselors, it was felt that the interaction provided (even in groups of three and four participants) would be so valuable that the sessions should continue. The first two groups had three participants and the third group had four participants. As such, they have been dubbed "micro-focus groups." Langer (1999) observes that "mini-focus groups" of four to six respondents have their place, especially where participants are highly opinionated, perhaps self-important, shy or hard to control. Another use of the mini-focus group is where detailed probing of participant responses occurs.

Small Business Victoria provided a list ofthe SBCS counselors and their email addresses to the researcher. From the list of 40 Counselors, 33 had email addresses. An email message was sent out on November 2000 to all counselors with email addresses to participate in the focus groups, with a choice of three possible attendance dates. Of the 33 messages that were sent out, six were returned as invalid email addresses. Of the 27 remaining, 13 responses were received in total. Six counselors responded that they were unable to attend due to lack of time (three), distance to travel (two) or personal reasons (one). Responses were received from seven counselors willing to attend. In the final analysis, three counselors agreed to attend on Saturday, November 25, 2000 (the first "micro" focus group) and four agreed to attend on Saturday, December 9,2000. One counselor did not attend on December 9' (leaving three in the second "micro" focus group). Each counsellor was made aware that the sessions would be taped (audio) and that his or her contributions would be anonymous. Minor refinements of the model were made between the first micro focus group and the second micro focus group. After the December micro focus group, a final combined group was arranged for February 3, 2001. Two members from the first group and two members from the second group attended this session. Of the others, one had a prior commitment and the other was unwell on the day. A number of alterations were made in the time between the second micro focus group and the final, combined group.

Two of the elements that affected the decisions made by the model in relation to the cost of implementation of the Web site and the skills needed to implement it were the financial outlay that the business was prepared to make and the skill level of employees.

Financial Outlay

In determining the mechanisms for asking small businesses to estimate the capital that they were prepared to commit to the Web site, users were provided with a range of four "typical" options as the estimated financial outlay for the project, ranging from the inexpensive (a small Web site) to the most expensive (a larger Web site with interactive features). A range of setup and maintenance costs was provided for each option in the accompanying manual. In this way, some guidelines were provided for the small businesses as to what they would get for their money.

Employee Expertise

This section allowed the expertise level of employees who would be associated with the Web site to be entered. Again, a range of choices were provided and explained in the manual. Users of the model would then select the option related to the "most skilled" employee that would be working on the web site.

Cost of Implementation and Skills Needed to Implement the Web Site

The Cost of the Web Site

This section allowed the user to accept or reject the recommendations of the previous section for each Web site feature. Upon choosing to implement a feature, a judgement was made by the system as to whether or not it could be implemented within budget. This is based upon the costs of the Web site being affected by the following (Burgess & Schauder, 2001):

* The cost of hosting basic information provision features is relatively small. This statement does not take into account the time taken to transfer the information to the Web site initially and the time needed to update it.

* The ongoing cost of providing product catalogues does tend to rise as the firm increases the number of products listed on the Web site.

* The ongoing and transaction-based costs increase when online payment features are introduced.

* Options that allow some interaction with the Web site (more than just viewing information) require a greater outlay.

The various Web site features were divided into the following categories (these can be viewed as "Cost Drivers" in the Implementation screen ofthe software). Each Web site feature was assigned a value from "1" to "7". The ability to implement the feature was based upon the outlay selected in the Financial Outlay section of the Business Investigation. These outlays were given a rating ranging from "1" for the most inexpensive (a small Web site developed with a package or wizard) to "4" for the most expensive (a larger Web site containing a number of interactive features).

The screen (refer to Figure 3) allowed users to select particular Web site features for implementation, based upon the recommendation made in the previous section. It then made a judgement as to the ability of the firm to develop the site internally, based upon entries that had been made in the Financial Outlay and Employee Expertise sections of the Business Investigation stage.

The model provided a recommendation on whether it was considered possible to implement the Web site. Table 1 shows the logic behind the recommendation: based upon the cost driver, number of online products, transactions per month and the level of outlay chosen. This represented some of the "knowledge" embedded in the artifact.

Skills Needed to Implement the Web Site

This section also provided a recommendation as to how the Web site could be developed, internally or externally. The recommendation was based upon the employee expertise identified in the Business Investigation stage and the highest rating cost driver (as per Table 1) for the Web site features that were selected by the user.

Table 2 represents the logic used. Ifthere was no internal experience at developing Web sites, the recommendation was that the Web site be developed externally. If there was some internal experience (either by the development of simple HTML pages or the use ofa package or wizard), the option was provided to develop the Web site internally, provided that it does not contain any features that require IT expertise. If there was internal IT expertise, the option was provided to develop the Web site internally irrespective of the level of difficulty. Again, the use of a spreadsheet package allowed this knowledge to embedded within.

CASE STUDY SUMMARY

Spreadsheets applications are often employed to support business decision-making. At a practical level this case study traces the development of a spreadsheet that can be used to support two aspects of small business decision-making: how much they should outlay on a Web site and where they should access the skills to implement the Web site.

While in this case the customized spreadsheet emerged as a knowledge document through a deliberate and reflective process of action research, in many workplaces such tools (whether based on spreadsheets, databases, or word-processing files as their meta-document type) "just grow." People have a need and put together a tool. Others amend it. Although it has arisen spontaneously, it is none the less a "knowledge document"-in Giddens' terms an allocative or even an authoritative resource.

This case study bases its action-research processes on the tenets of structuration theory as manifested in information and knowledge management. It attempts to demonstrate the deep ontological and epistemological roots of a knowledge document as everyday and familiar as a customized spreadsheet tool.

The underlying belief of the authors, which they hope the case study demonstrates, is that the development of analytical tools can benefit through consideration of relevant social theory such as structuration. Such theory provides concepts to guide the designer of a tool through the labyrinths of information and knowledge management, and ensures that the reality reflected in the tool is that which the designers wish to reflect. In this case, the subjective meanings and preferences constructed by experts and stakeholders.

CURRENT CHALLENGES/PROBLEMS

A tool such as the one described in this case study helps to formalize the planning process involved in developing and maintaining a Web site, but there are a number of other areas that the small business will need to develop expertise before the Web site can be effectively employed. If the model recommends that external expertise is needed to set up the Web site, the business will be required to search out external consultants that can provide the required expertise at the right price. Arrangements will need to be made to support not only the initial development, but also ongoing maintenance of the Web site. It will be necessary to charge an employee with the task of maintaining the content of the Web site so that it is up to date, vital and relevant to customers. Although the model makes recommendations regarding how the Web site should be promoted, the business will still need to know how to set up and maintain the business' domain name, how to register the Web site with search engines and how to approach other businesses to swap banner advertisements. Finally, decisions will be have to be made regarding the length oftime between SWOT analyses - that time when it is necessary to go through the entire planning process again.

As was mentioned earlier, from a business viewpoint all new knowledge comes from people. It is, however, possible to incorporate knowledge into artifacts, such as processes, structures and technology (Grover & Davenport, 2001). The "knowledge document" described in this case study does provide a useful starting point for small businesses wishing to establish a Web presence by incorporating some of the knowledge into the spreadsheet application (artifact). There is still a challenge for small businesses to supplement this knowledge with the additional expertise described in the previous paragraph to make the Web site operational and effective.

References

REFERENCES

References

Al Moumen, S. & Sommerville, I. (1999). Marketing for E-Commerce. 10" International Conference of the Information Resources Management Association, Hershey, PA, USA, May.

Barton, P. S. &Peters, D.H. (1991) A synthetic framework for describing the use of information technology for competitive advantage. Australian Computer Conference 1991 Proceedings, October, 47-62.

Berry, M. (1988). Uncertainty Principle. In A. Bullock & S. Trobley (Ed.), The Fontana Dictionary of Modern Thought, London: Fontana Press, 882.

Bloodgood, J.M. & Morrow, Jr., J.L. (2000). Strategic organizational change within an institutional framework. Journal of Managerial lssues, 12(2), Pittsburgh, Summer, 208226.

Buehlmann, U., Ragsdale, C. T., & Gfeller, B. (2000, October). A spreadsheet-based decision support system for wood panel manufacturing. Decision Support Systems; 29(3), 207227.

References

Burgess, S. (2002). Information technology in small business: Issues and challenges. In S. Burgess (Ed.), Managing Information Technology in Small Businesses: Challenges and Solutions, Hershey, PA: Idea Group Publishing.

Burgess, S. & Schauder, D. (2000a). Interacting with customers on the Internet: Developing a model for small businesses. Challenges of Information Technology Management in the 2131 Century, Proceedings of the 2000 Information Resources Management Association International Conference, Alaska, USA, May, 517-521.

Burgess, S. & Schauder, D. (2000b). Refining a model to assist small businesses to interact with customers on the Internet: A Delphi study. Working for E-Business: Challenges ofthe New E-conomy, Proceedings ofthe 1st. International WE-B Conference, School ofManagement Information Systems, Edith Cowan University, Nov. 30-Dec. 1, 1 - 11.

Burgess, S. & Schauder, D. (2001). Web site development options for Australian small businesses. 2001 Information Resources Management Association International Conference Proceedings, Toronto, Canada, May.

Conhaim, W. W. (1999). The business-to-business marketplace. Link-Up, 16(1), Jan/Feb, 512.

References

Conroy, A. (1999). Evolving E-Commerce: Solutions for SMEs.Australian PC World, May, 88-92.

Davis, B. (2001). Knowledge is power. Professional Engineering, 14(17), Bury St. Edmonds, Sept. 19,49-50.

DiMaggio, P.J. (1986). Structural analysis of organizational fields. In B. M. Straw & L. L. Cummings (Eds.), Research in Organizational Behaviour, Greenwich, CT: TAI Press, 335-370.

DIST (Department of Industry, Science and Tourism) (1998). Stats: Electronic Commerce in Australia: April 1998, Commonwealth of Australia, Canberra.

References

Duan, Y., Kinman, R., & Xu, M. (2002). Use of decision support systems in small businesses. In S. Burgess (Ed.), Managing Information Technology in Small Businesses: Challenges and Solutions, Hershey, PA: Idea Group Publishing.

Engler, N. (1999). Small but nimble. Information Week, Issue717, January 18,57-62.

Evers, C. & Lakomsky, G. (2001). Theory in educational administration: Naturalistic directions. Journal of Educational Administration, 39(6), 499-520.

Gibbs, A. (2000). Focus groups. Social Research Update, Nineteen, University of Surrey, USA, [http://www.soc.surrey.ac.uk/sru/SRU I9.html], Accessed 22 January, 2000.

Giddens, A. (1981). A Contemporary Critique of Historicad Materialism. London: Macmillan.

Giddens, A. (1984). The Constitution of Society: Outline of the Theory of Structuration. Berkeley: University ofCalifornia Press.

Giddens, A. (1996). In Defence of Sociology: Essays, Interpretations and Rejoinders. Cambridge: Polity Press.

Grover, V. & Davenport, T. H. (2001). General perspectives on knowledge management: Fostering a research agenda. Journal of Management Information Systems, 18(1), Amonk, Summer, 5-21.

Kotler, P., Chandler, P., Gibbs, R., & McColl, R. (1989). Marketing in Australia (2nd ed.), Victoria: Prentice-Hall.

References

Langer, J. (1999). 15 myths of qualitative research: It's conventional, but is it wisdom? Marketing News, 33(5),13-14, Chicago, March 1.

Lesser, E. & Prusak, L. (2001). Preserving knowledge in an uncertain world. MIT Sloan Management Review, 43(1),101-102, Cambridge.

Management Today. (1999). It Pays to Know Yourself London, March, p. 102.

Marchese, L. (1998). Brand recognition. Internet World 98: Australia Pacific Conference Proceeding on CD-ROM, Kirby Network Services, NSW.

Osterle, H. (1991). Generating business ideas based on information technology. Australian Computer Conference 1991 Proceedings, October, 153-165.

Penhune, J. (1998). A quiet revolution: Technology fuels the entrepreneurial dream. Forbes, Buyers Guide Supplement, Fall, 12-15.

Porter, M. E. & Millar, V. E. (1985). How information gives you competitive advantage. Harvard Business Review, 63(4),149-160, July-August.

Stair, R. M. & Reynolds, G. W. (1999). Principles of Information Systems (41 ed), Course Technology-ITP, USA.

Williamson, K. et al. (2000). Research Methods for Students and Professionals: Information Management and Systems. Wagga Wagga, Centre for Information Studies, Charles Sturt University.

Zikmund, W. G. (2000). Business Research Methods (6'h ed.), Dryden Press.

AuthorAffiliation

Stephen Burgess

Victoria University, Australia

AuthorAffiliation

Don Schauder

Monash University, Australia

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Stephen Burgess (MBus RMIT, PhD Monash) is a senior lecturer in the School of Information Systems at Victoria University, Melbourne, Australia. His PhD is from Monash University, Australia, in the area of small business to consumer interactions on the Internet. His research and teaching interests include the use ofIT in small business, the strategic use of IT, B2C electronic commerce and Management IT education. He has recently edited a book through Idea Group Publishing, Managing Information Technology in Small Business: Challenges and Solutions and is track chair in the area of small business and

AuthorAffiliation

information technology at the IRMA international conference (www.irma-- international.org). Stephen is a co-founder of the new research group and IRMA Special Research Cluster on Small Business and Information Technology (www.businessandlaw.vu.edu.au/sbirit/).

AuthorAffiliation

Don Schauder (MA Sheffield, MEd, PhD Melbourne) is professor of Information Management in the School ofInformation Management and Systems, Monash University, Australia. He is also associate dean (Research) of the Monash Faculty of Information Technology. Dr. Schauder is chair of the Information & Telecommunication Needs Research Group, and of the Centre for Community Networking Research. He has been director ofseveral libraries, most recently RMIT University Library. As one of the pioneers of electronic publishing in Australia, he founded INFORMIT Electronic Publishing (now part of RMIT Publishing). He was co-founder of VICNET.- Victoria's Network, based at the State Library of Victoria. Throughout his career, he has maintained an active commitment to information access for people with disabilities. His teaching and research focus on: the development of information products and services that benefit individuals, organizations and society; facilitating the transfer of knowledge among people; and reducing the "digital divide" between information, rich and poor.

Subject: Studies; Spreadsheets; Decision support systems; Web site design; Knowledge management

Classification: 9130: Experimental/theoretical; 5250: Telecommunications systems & Internet communications

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 521-537

Number of pages: 17

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198656574

Document URL: http://search.proquest.com/docview/198656574?accountid=38610

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 98 of 100

Software vendor's business model dynamics case: TradeSys

Author: Rajala, Risto; Rossi, Matti; Tuunainen, Virpi Kristiina

ProQuest document link

Abstract:

This case describes the evolution of a small software company through three major phases of its life cycle. During the first phase, the business was founded within a subsidiary of a large multinational information technology company. At the second phase, the business evolved as a spin-off from the initial organization through a MBO (Management Buy-Out) into an independent software vendor. Finally, at the third phase, the business has established software and consulting businesses. This case highlights the challenges of business in the three major turning points in its life cycle and the major changes in the business model, accordingly.

Full text:

Headnote

EXECUTIVE SUMMARY

This case describes evolution of a small software company through three major phases of its life cycle. During the first phase, the business was founded within a subsidiary of a large multinational information technology (IT) company. In the second phase, the business evolved as a spin-off from the initial organization through a MBO (Management Buy-Out) into an independent software vendor. Finally, in the third phase, the business has established itself as a vertically-focused business unit within a publicly-quoted company operating in software and consulting businesses. These three phases are termed introduction, growth and maturity as defined by Cravens (1987, 376)1.

The company described in this case, called TradeSys, Inc. (pseudonym), develops and sells software for trade unions and unemployment fund organizations. The business model of TradeSys, Inc. (later TradeSys) has evolved through a typical life cycle of product-oriented software companies in Finland. First, it was comprised of business information systems consultation and a proposition of systems solution to a few major customer organizations. This led to customer-initiated product development. Consequently, the deliverable of the very first project was developed as a solution to the needs of a single customer, which was later worked into a universal software product along with several customer projects. During all three major phases, the company had to rethink its business model and value propositions. At each stage, the ownership of the business has also changed. This case highlights the challenges of a business in major turning points in its life cycle and the major changes in the business model accordingly.

INDUSTRY AND ORGANIZATION BACKGROUND

Finland is a small but characteristically open market for software companies. In this Northern-European country, there are a little more than five million citizens and over 220,000 companies. Since 1995, Finland has been one of the member states of the European Union. During the past decades, Finland has rapidly shifted from being a producer of forestry and industrial goods into an exporter of high technology goods and services. According to Statistics Finland, the proportion ofhigh technology exports surpassed 23% of all the exports of Finland in 2000 (Statistics Finland).

General readiness to adapt new technologies and a good established IT infrastructure characterize the Finnish market for software products and services. Many large foreign or multinational companies, though, have traditionally considered Finland as too small of a market for building up local operations and support networks for software businesses. This is especially true with companies providing software for narrow market segments. While Finland might not be that attractive market area for foreign companies, Finnish software companies are typically seeking to expand their operations abroad and, hence, concentrating on narrow solution domains to focus their efforts. Thus, as compared to their international rivals, local vendors focusing on narrow domains might be able to sustain superior competitive advantages related to software deployment, local support and insight into customers' needs.

In this case, we follow the evolution of TradeSys, a Finnish software vendor that has focused its operations on developing and selling software for Finnish trade unions and unemployment fund organizations. Development of TradeSys products started within a local business unit ofa U.S. information technology (IT) giant, Unisys, in 1996. Around 1996, when Unisys was globally re-directing its strategy from product-orientation towards IT servicing, the management team of the current TradeSys decided to acquire the rights to the assets that became the core product of their business. The co-founders of TradeSys believed in the business and the product they had been creating and made a Management Buy-Out (MBO) to prove that the ideas they had been developing could be turned into profitable business. With the MBO, the business including software licenses as well as project liabilities were transferred to the two co-founders of TradeSys. Also, eight of the key persons having been part ofthe development team within Unisys transferred to the new company as old employees. Now, since April 2000, the company has been part of PublicSys, Inc. (a pseudonym). PublicSys is a publicly quoted information systems consulting house, which has actively acquired small and medium-sized software companies since it became listed at the Helsinki Stock Exchange in Finland in 1999.

LEARNING OBJECTIVES

This case is intended for Master's level students. The case highlights the challenges faced by a software production company in various stages of its life cycle. We discuss the evolution of the company, its product offerings and consequent changes in its business model.

In this case, we use a systematic framework, derived from earlier literature and verified with empirical research in companies, for evaluating the business model ofa software product company. This business model framework, which is documented in (Rajala et al., 2001) is based on Kotler's (1991) whole product concept and Cravens' (1987) product life cycle ideas, and used to analyze the options available for a software company. After completing the case, students should be able:

To define the business models of software companies

To evaluate the options available for a given company, related to its:

product development model

revenue logic

distribution and sales model

servicing and implementation model

To discuss both growth and product strategies of software companies

CASE DESCRIPTION

The company introduced in this case has its origins in the Finnish subsidiary of an American IT giant Unisys, within which the two soon-to-be-founders of TradeSys worked on information systems consultation projects for trade unions.

The trade unions have had a long established relationship with payment institutions in Finland, because the trade unions have collected their membership fees as a deductible from the salaries of members, who have given their permission for doing this. The move to this arrangement happened at the same time as larger companies started to favor the payment of salaries directly into workers bank accounts instead of cash or cheques. The companies and trade unions soon noticed that they need systems for handling the transactions and balances, and banks seemed to have systems that could be utilized here. The trade unions turned toward a state owned bank, which was quite happy which was quite happy to handle the transactions. The trade unions and unemployment funds had, at that time, practically only this one choice for a system supplier that could manage all the functions related to their membership-service needs and payment transactions. Postipankki had developed over the years a comprehensive set of tools for handling these. The bank exercised its monopoly position and bundling of the service to charge premium prices for the transactions from the trade unions.

Trade unions in Finland have a quite large member base (in some cases in hundreds of thousands) and they need different kinds of information services, not just the payment management. The first consultation projects by the co-founders of TradeSys (at that time working for Unisys) were carried out in 1993 to improve the management and handling of membership data of a trade union organization.

One of the TradeSys co-founders describes the situation as follows:

"Other banks and trade union organizations were tired of the situation, where there was only one supplier of the trade union operations management systems in the market. The system was provided by a state-owned bank which had bundled the information system with its banking services and, thus, forcing the customers [trade unions] to keep their assets in that particular bank's accounts. "

The developers went ahead and developed a competing package. However, its introduction was far from easy. The state owned bank did not want any competitors and it tried to undermine the developments in various ways. Also, the trade unions were (and in many cases still are) quite conservative organizations, and they did not see the need to change the existing ways of doing things.

The development of this emerging business was not straightforward as the parent company was not interested in this type of software product business. On the contrary, Unisys re-directed its strategy from product-orientation into IT servicing and consulting, and began cutting out all the businesses that were outside its strategic focus in 1996. A small vertical market in a small country was not seen lucrative enough by the U.S. head quarters. The head of product development (one of the co-founders) at TradeSys describes the situation as follows:

"The development of a product business like this just did not work in a big organization, which was not committed to a product business like ours - even if we managed to carry out the first customer cases with at least reasonable success, Our customers were eager to continue and one of the biggest privately-- owned banks in Finland was interested in seeing the development ofour solution in order to benefit from a competitive solution in the existing market situation. "

The strategic change ofmind ofthe international information technology conglomerate forced the co-founders of TradeSys to consider their personal career ambitions as opposed to the corporate management's will to divest all its product businesses. The founders strongly believed in the product that had already been formed out of the consulting assignment, and there were potential buyers for the package. The following quotation is from the head of product development at TradeSys:

"That time I had a difficult position at Unisys, which was cutting off all its product businesses and I had just committed to start consulting a solution with some big customers in the trade union segment. This consulting contract had led into a continuous development of a solution, and was emerging into a product concept."

So, the TradeSys co-founders were confident that they could run this as an independent business. They wanted to be able to introduce a competitive solution for the industry. Furthermore, one competing bank was willing to finance the new venture. They wanted to exploit the opportunity, because the new system gave the trade unions the possibility to use any bank of their choice for the transactions. So they went ahead and acquired the business to their possession in 1996 to prove everybody - including themselves- that the product ideas they had been developing could be turned into profitable business.

They proved to be right, as they were able to gain a market share to a degree that TradeSys has become a major player in its market segment. After the MBO, the turnover of TradeSys has grown steadily from a very small start into over 1.8 million euro in 2000. Concurrently, the company has grown from a small product team of 10 persons into a leading vendor of trade union software and the second largest unemployment fund systems provider in Finland with about 20 employees in 2000.

TradeSys was sold later in 2000 to a publicly quoted software company PublicSys. The owners of TradeSys became shareholders and members ofthe board ofdirectors at PublicSys. Currently, they continue to develop the business facing the challenges of growth and maturity of the current market segment.

Evolution of the Business Model

TradeSys was founded around a business proposition for a narrow and clear market niche. The original business model evolved around the identified opportunity to serve the initial customer's information system needs by a software solution. The business model then focused on personal sales and very close customer services, because the success of the business relied on the implementation of the system projects together with the first customers.

Later, especially after the MBO, the company has been actively seeking for more customers and implementing a clear product-oriented business model in the selected vertical market segment, where it aimed at being a market leader. As a matter of fact, the company is already the leading software vendor in its segment of operations management systems for trade unions in Finland (see Figure 1). To strengthen its efforts in both product development and customer services, the organization was divided into separate teams specializing in product development, customer support and customer projects.

Currently, since TradeSys has become a part of PublicSys, the strategic focus of the company has shifted to maintaining profitable business and a reasonable market share in its selected product areas. The management has realized that the current small vertical market is not sufficient considering future growth, and, that new customers are needed to keep up funding the continuous product development.

In the following, the evolution of the business model of TradeSys is discussed by the four key elements (presented in more detail in Appendix 1: 1) Product development approach, 2) Revenue logic, 3) Distribution model, and 4) Servicing and implementation model.

Products and Product Development

The initial idea for TradeSys' product development came about through customers' needs that were discovered along with first customer projects for trade unions. However, even in the first phase of the business life cycle, when the business was conducted within Unisys, the basic idea was not to develop customer-specific solutions, but more universal or at least parametrizable software products for several customers. The founders of TradeSys say that the main emphasis of the product development was put on the development of parametrized systems based on Oracle RDBMS (Relational Database Management System). In the second main phase, as the business was separated from Unisys and growing as an independent software house, main focus was directed to developing product development methods in order to be able to deliver universal solutions to customers in different customer projects.

The head of product development of TradeSys says that the aim to bring about software products was clear from the very beginning of the business:

"Even if the first deliverables were based on direct solutions to customers ' needs, we had the idea to bring about universal solutions to the marketplace, to be sold as software packages to customers with similar needs. "

So, right from the start TradeSys has emphasized the use of good software engineering principles. This has meant that the developers have been guided to use development method and case tools while developing the systems. Also the components and their interfaces have been carefully designed and the development management has enforced their use. This approach to product development has been challenged many times throughout the history of the business. In the first major phase of the business, for instance, it would have been alluring to reduce overhead costs of the company by just answering customer's core needs without investing in product development. On the other hand, much determination was needed in the growth phase to carry out careful deployments of the products and not to invest in product development only, even if the growth through successful product development seemed lucrative. In the mature phase, questions have risen whether or not the selected market segment is sufficient to justify the focus of product development efforts to that solution domain only.

The current product family of TradeSys consists of integrated system solutions for associations, trade unions and unemployment funds, The systems Alpha and Beta are designed for trade unions and the system Theta for unemployment funds, each including subsystems that can be hidden or taken into use by system parameters. These parameters allow the slight modification of the final system along with the delivery and installation of the products.

The software products Alpha and Beta form together an integrated information system designed to fulfill the various information management needs of trade unions, associations, organizations and various other societies. They provide trade unions with a view to managing information on union members, their employers and the organizational hierarchy, as well as the collection of union membership dues.

Software product Theta is an integrated system designed for unemployment funds. The system manages the calculation and payment of member benefits.

The whole product family of TradeSys is based on the same technology. The software is mainly developed with Oracle Developer (Forms & Reports) and utilizes Oracle RDBMS as a host database. All the development is done using proven software engineering principles and a systematic modeling approach. This has kept the product family easy to maintain and left possibilities open to develop it further to suit the needs of new markets.

The system Alpha/Beta includes subsystems for member management, employer management, organization services, and membership fee management. It also includes extensions for election management, course management, vacation management and magazine subscriptions. Some customers also need the extension for strike coordination and different Web services for member organizations.

The system Theta contains modules for operation management of unemployment fund organizations, including member management, benefit payment management and statistics. It can be extended with subsystems for telephone services, mobile phone messaging, electronic mail, and task management. Also, it includes extensions for claim management, various Web services and executive information subsystems, all directed for the operations management of unemployment funds.

The product-oriented offering is what differentiates TradeSys from its direct competition. The main competitor, a state-owned bank, provides an outsourcing model with large mainframes and terminals located in a service center. The director of product development of TradeSys believes that the approach of TradeSys allows for a more holistic service portfolio and better responsiveness to changes in customers' needs, while a outsourcing or service providing model may be initially less demanding for the customer. However, as compared to the competition, the TradeSys solutions enable unions and funds to deal with their daily routines by themselves. The software also enables the use of a centralized database via the Internet.

TradeSys has always stressed the quality of its development process and clear definition of the modules and their responsibilities. One of the cornerstones of TradeSys's approach has been continuous enhancement of the development processes. The company has tried to streamline its process by avoiding the need to develop tailored solutions for individual customers. Instead, the needed modifications have been implemented as options in the base package.

Revenue Logic

Profitability has been a clear business target throughout the entire history of TradeSys. Growth of business, instead, has been a secondary target. Does this seem like risk avoiding strategy? Maybe, because the steady but modest growth of TradeSys has always been financed with the operating revenue of the product business. It is worth mentioning that Finland was experiencing a severe recession in the early 1990s, and it was not as easy to raise funding to finance a rapid growth of a small software vendor operating in a narrow vertical segment as it later was for a number of start-ups in Internet business. So, creation of revenue and right pricing of offering have been important issues all the time in maintaining growth and, simultaneously, financing all development work. It is notable that all along, the company has priced its offerings based on the value of the service, rather than on the basis of the effort put into the development of the products.

Software license sales have formed the foundation of the revenue logic in the growth phase of the business as shown in Figure 3. The product offering has been priced so that the initial purchase equals approximately to 100,000 euro per customer organization. Maintenance and support creates then an annual cash flow of about 15-20% of the initial purchase. Other sources of revenue such as training, accessory sales, in which revenue comes from selling books, manuals, CDs, etc., have been be of minor importance during both the introduction and growth phases. This is apparently due to the small number of end users (and small installed base of software) in the early stages of the business life cycle. In the maturity phase of the business, the proportion of license sales has not grown as rapidly as during the earlier stages. Furthermore, in the recent phase the fraction of consultation has diminished, whereas training and support have grown in importance.

Distribution and Sales

The small vertical market of TradeSys allows the company to keep sales highly centralized. In fact, the managing director takes care of the marketing and sales functions almost alone, utilizing the resources of both customer services and product development units in different marketing occasions. Throughout its entire history, TradeSys has maintained direct contacts with its customers without any middlemen.

The sales model is strongly based on personal relationships and a good general understanding of customers' needs. This may have its advantages in creating an in-depth understanding of customer's needs in the selected domain, but, simultaneously, it raises questions about growth opportunities, because direct contact with customers is highly labour intensive from the software vendor's point of view.

Despite of the fact that the selling approach of TradeSys is very customer-oriented, it aims at selling only solutions that can be implemented on the basis of the existing, uniform products and not customer-specific or tailored solutions. The head of product development of TradeSys explained that in the vast majority of customer organizations, the products are customized only if the customer-initiated modifications can be turned into standardized features or add-ons in the existing products, or into new products of the product family.

Servicing and Implementation

The management of TradeSys has focused on the servicing and implementation part of their business model from the very early stages of their business. This part includes all the installation and deployment activities required to achieve working solutions based on the software products. For large systems, like the ones that TradeSys sells, this is an essential part of the success of the product. It can also make a major portion of the revenue in the latter stages of the product life cycle. In the early phases of the business of TradeSys, the product development engineers and the technical specialists in the customer service were actually same individuals or at least belonged to the same organizational unit.

Due to the fact that TradeSys is carrying out all the customer projects, including software installations and training, by itself and without employing any partners, the individual responsible for customer projects have been encumbered with several delivery projects, simultaneously. In the growth phase, a customer project organization of one to seven system specialists was detached from other operations to carry out all the delivery and implementation projects with customers.

The project organization has carried out various integration projects in which the software products of TradeSys have been integrated to customers' existing systems. However, as said earlier, no customer-specific tailoring has been made to the products so far.

Especially in the growth phase of the business, main focus areas of the customer support and project operations of TradeSys have been in the successful deployment of TradeSys' products to customer environments. Also, systematic gathering of customer feedback to further development of products, maintenance of high quality standards of product deliveries and the development of deep insight into solution domain in all customer operations have been the key objectives of the customer project organization. In the latest phase, maturity, the project organization is facing new challenges in generating continuous cash flow from software maintenance and support functions with the existing customers.

CURRENT CHALLENGES FACED BY THE ORGANIZATION

TradeSys faces now a dilemma: it has acquired a dominant position in its vertical market and there are very few growth opportunities there. So, a choice has to be made between staying in that market and focusing on customer service and service contracts making the current customer relationships deeper and so by increasing the average return per user (ARPU), or moving into new markets, meaning either new vertical markets, or the same vertical market in different market areas.

Staying in the acquired niche assumes very little growth, but as TradeSys products provide clear benefits for the customers and switching costs are relatively high, this is also a relatively safe choice. The company can expect modest growth through selling new features to the existing customers, and, on the other hand, steady stream of service fees.

To expand, the company has two choices:

1. Diversifying into new markets

One possibility to expand is to diversify into new markets with software packages that are general enough to be sold to other types of associations that have to manage their membership and payments. These could be, for example, large trade associations, national youth or sports associations, etc.

2. Exporting to foreign trade unions and unemployment funds

The other possibility to expand is to export the software into European markets and try to acquire market share there. However, the different national legal frameworks as well as business traditions need to be accounted for.

Technically, the systems of TradeSys are componentized in such a way that it would be possible to develop new features needed in either of the new markets suggested above. The current technical challenges involve moving the services to web-enabled and mobile environments.

Footnote

ENDNOTES

Footnote

1 Cravens has adapted this analysis from Ben M. Enis, Raymond La Grace, and Arthur E. Prell, "Extending the Product Life Cycle," published in Business Horizons 20 (June 1977), Copyright by the Foundation for the School of Business at Indiana University.

References

FURTHER READING

References

McHugh, P. (1999). Making It Big in Software - a guide to success for software vendors with growth ambitions. Tiverton, Devon, NW: Rubic Publishing.

Moore, G. A. (1991). Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers. HarperBusiness.

SEI, The Software Engineering Institute. (2000). A Framework for Software Product Line Practice - Version 3.0. Carnegie Mellon University Retrieved on January 26, 2001 at URL: http://www.sei.cmu.edu/plp/frame_report/what.is.a.PL.htm.

Shapiro, C. & Varial, H. R, (1999). Information Rules, A Strategic Guide to the Network Economy. Boston, MA: Harvard Business School Press.

Steinmueller, E. W. (1996). The U.S. software industry: An analysis and interpretative history. In D. C. Mowery (Ed.), The International Computer Software Industry: A Comparative Study of Industry Evolution and Structure. New York. Oxford University Press.

References

REFERENCES

References

Cravens, D. W. (1987). Strategic Marketing. Homewood, IL: Richard D. Irwin.

Kotler, P. (1991). Marketing Management: Analysis, Planning, Implementation and Control (7th ed.) Englewood Cliffs, NJ: Prentice Hall.

Rajala, R., Rossi, M., Tuunainen, V. K., & Korri, S. (2001). Software business Models, A framework for Analyzing Software Industry: 76. Helsinki: TEKES.

Statistics Finland (2002). http://www.stat.fi/tk/tp/tasku/taskue_yritykset.html.

AuthorAffiliation

Risto Rajala

Helsinki School ofEconomics, Finland

AuthorAffiliation

Matti Rossi

Helsinki School of Economics, Finland

AuthorAffiliation

Virpi Kristiina Tuunainen

Helsinki School of Economics, Finland

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

Risto Rajala, MSc (Econ) is a PhD student in the Helsinki School of Economics (HSE) Majoring in Information Systems Science in Finland His current research is.focusing on

AuthorAffiliation

business models and product development strategies and methods of software businesses. Prior to his doctoral dissertation project he has been working as a software development practitioner at the Nokia Research Centre and Fujitsu ICL. As a co-author he has recently published a technology review "R. Rajala, M Rossi, V.K. Tuunainen and S. Korri: Software Business Models-A Framework for Analyzing Software Industry, Tekes Technology Review 108/2001. "

AuthorAffiliation

Matti Rossi, PhD (Econ) is an acting professor of information systems at Helsinki School ofEconomics (HSE), Finland. He received his PhD degree in Business Administration from the University of Jyvaskyla in 1998. He has worked as research fellow at Erasmus University Rotterdam and as a visiting assistant professor at Georgia State University. His research papers have appeared in journals such as Information and Management and Information Systems, and more than a dozen of them have appeared in conferences such as ICIs, HICSS and CAiSE. He was an organizing committee member CAiSE '95 and ECOOP '97, organizing committee member and technology chair for ICIS'98 and minitrack chair for Hawaii International Conference on Systems Sciences 98 - 01. He has been the principal investigator in several major research projects funded by the technological development center of Finland and Academy of Finland.

AuthorAffiliation

Virpi Kristiina Tuunainen is professor (act) at the department of information systems science and director of GEBSI (Graduate School for Electronic Business and Software Industry) of Helsinki School of Economics (HSE), Finland. She received her PhD (Econ) degree from the HSE. She has been a visiting scholar at the Erasmus University Rotterdam (The Netherlands) and University of Texas at Austin (USA), and a visiting researcher at the Business School and at the Department of Computer Science of University of Hong Kong. Her research focuses on electronic commerce, inter-organizational information systems and economics of IS. She has published articles in journals such as MIS Quarterly, Journal of Management Information Systems, Journal of Strategic Information Systems, Information & Management, Journal of Global Information Technology Management, International Journal of Electronic Markets, Australian Journal of Information Systems, Information Technology and People, Information Technology and Tourism and Scandinavian Journal of Information Systems. Her research papers have also appeared in a number of international conferences. She is member of the editorial boards of Scandinavian Journal of Information Systems, JITTA, and EM Electronic Markets.

Subject: Studies; Models; Software industry; Strategic planning

Classification: 9130: Experimental/theoretical; 8302: Software & computer services industry; 2310: Planning

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 538-549

Number of pages: 11

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198680010

Document URL: http://search.proquest.com/docview/198680010?accountid=38610

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 99 of 100

Application of an object-oriented metasystem in university information system development

Author: Smolik, Petr C; Hruska, Tomas

ProQuest document link

Abstract:

This case presents experience from design and implementation of a university information system at the Brno University of Technology. The newly built system is expected to provide students and staff with better tools for communication within the university's independent faculties, departments, and central administration. This case describes the initial success of the project and the subsequent shortcomings that still have to be resolved. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

This case presents experience from design and implementation ofa university informa-- tion system at the Brno University of Technology. The newly built system is expected to provide the students and staff with better tools for communication within the university's independent faculties, departments, and central administration. An object-oriented metasystem approach was used by the IT department to describe the services offered by the university information system and to generate needed program code for run-time operation of the system. This approach so far produced good results over the period of two years when the pilot project started, nevertheless there are some shortcomings that still have to be resolved.

BACKGROUND

This case comes from a large and very old organization. The organization was established by a decree of Kaiser Franz Joseph I in 1899, and, since then, it has grown to be the third largest state owned organization of its kind in the Czech lands. Currently with almost 2,000 employees and around 15,000 full-time students, the Brno University of Technology is institution ofhigher education with eight independent faculties: Faculty of Civil Engineer-- ing, Mechanical Engineering, Electrical Engineering and Communication, Architecture, Business and Management, Fine Arts, Chemistry, and Information Technology-Offered degrees range from bachelor's to master's to PhD's and MBA's.

During their rise, information technologies found increasingly their place in some parts of the school. Some computers were used for research in various departments, some found their place at the central accounting and personnel department. The Internet took the school by storm and the more IT oriented departments slowly started offering some content on the Web. Development of some department level or faculty level information systems started. These systems have been used either by the staff to report research and teaching activities or by students to obtain the class requirements. Apart from the central economic agenda, faculties started attempts to use software to organize the student agenda. Further, the university has been slowly forced to provide electronic reports to the Ministry of Education in order to get desired annual funding.

There was growing need to organize the information systems into one compound information system or into a set of flexibly communicating systems. As opposed to other universities in the area, where faculties are very tightly centrally controlled, the faculties at this university are very independent and the central control is low. Regarding information systems, this might be an advantage for the stronger and more technical faculties, since they have enough strength to bring up their own systems that meet their needs. Nonetheless, the smaller faculties become more dependent on the centrally-offered information technologies. Therefore, the decision to centralize or decentralize IT could not be made, and it is probable that both need to be supported at once.

So who is the one to work on solving these issues? Of course, there is a central IT department that for many years dealt with these issues and took care of the unquestionably central agendas and computer networks. The IT department is placed right under the school's top management, though it has no power to force the faculties to make any particular decisions about their IT. The IT department is there purely to offer services both to the central administration and the diverse faculties.

SETTING THE STAGE

A few years ago in 1999, the university found itself in a situation that "just something had to be done with the university information systems". The amount of paperwork reporting had been increasing and the general acceptance of information technologies, as something available to do something about, grew. Three of the eight faculties managed to develop their own Web-based systems for their staff and students, and were able to provide electronic reports to the central administration. Student agenda was behind, since it was all paperwork, and, at the same time, some data were entered into the faculty instances of student agenda software, which, in turn, did not provide much output to anyone, especially not the students. This was a good time to think about the issues of centrality vs. decentrality of the future solution for the university information system.

There were several players. The IT department, the one expected to do something about it, was the major player. The other players formed during the time. A Committee for University Information System was formed on the "right below top" management level and was the one to make the IT department to act. Later, in order to get individual faculties involved more closely, system integrators were established at individual faculties. These integrators then started meeting with the IT department at regular meetings. Thus, the cooperation was initiated with enough room for debate.

The committee decided that the IT department should use XML technologies to enable faculties communicate data with the central information system. This was the time (Summer, 2000) when the IT department decided with the committee to do a pilot project on the technologies forming the XML-able central information system. At that time, there was a great need for science and research management system, and because it was not overly complicated, it was selected to be the pilot project. It was good system to start with also because the system has many levels of checks and reporting all the way up through the school administration to the Ministry of Education.

Now, with the planned pilot project came the last player, the technology provider. A local IT company provided expertise in implementing XML based e-business systems and suggested how to go about implementing the whole university information system. The company presented a first draft version of the software to the IT department and the cooperation on the pilot project started.

Requirements for the pilot project were the following:

* Web user access to central storage of science and research activities (HTML)

* user authentication and authorization for access to specific resources

* interfaces for existing systems to submit and request data on-line (XML)

* utilization of open technologies and relative database independence

* further extensibility both on the side of the center and the different faculties

CASE DESCRIPTION

University information systems are specific in the scale of various data produced and processed by different groups of users. E-business systems used by companies to commu-- nicate their business data with their partners usually exchange just a few types of business documents, such as orders, stock quotes, or invoices. Even though these documents change a little over time, there is no dramatic need to keep adding new types of them to cover other business needs. Nevertheless, in the university environment with many diverse and changing activities, there is high demand for information system flexibility. New services for new groups of people need to be designed and redesigned continuously. Therefore, there is need for effective means to build user-to-system or system-to-system interfaces. An on-- going growth of the information system has to be taken care of.

In order to manage a growing system, it might be useful to have a metasystem that defines and manipulates the underlying information system. Information systems usually contain one or several databases where data are stored. For each piece of data in any of the databases, the metasystem would need to have a description (metadata) (Tannenbaum, 2001). There exists an object-oriented mechanism that may be used to define the metadata and provide means to access the data based on the descriptions.

The information system that is being developed at the Brno University of Technology uses the concept and concept view definitions presented in this case. Concepts are used to describe data in object-oriented fashion and concept views are used to describe more complex views on interrelated data (Amble, 2001). Since the definitions are always accompanied with human readable navigation and support texts, it is possible to use them as metadata for generation of Web enabled services for human users or for system-to-system communica-- tion.

It is expected that using a metasystem to define, redefine, refine, and generate underlying system speeds implementation time and improves quality of the resulting expanding system. This is because it should enable the project team to focus on the services that need to be offered to users instead of continuously having to program the services at low level with many chances of mistake.

The IT department decided to base the solution on open technologies. The main one of them is XML (Extensible Markup Language) used for platform-neutral representation of complex data(Smolik, 1999; Birbeck, 2001; Ray, 2001; Extensible Markup Language (XML), 2002; Learn XML, 2002). Since there was just a little experience with XML, the IT department requested expertise from the local company that had already two years experience using XM L in commerce applications. The company provided its Java, XML, and XSL based Web-- application framework with extension that enables XSL style-sheets to be used for generation of the XSL style-sheets used to provide the system Web-pages (McLaughlin, 2001; Tidwell, 2001; XSL Transformations (XSLT), 2002).

Since the system developed is always defined in metadata on the metasystem level, it is possible to generate application not only for the provided applications framework, used for the pilot, but for other available application frameworks or servers. That ensures independence of the resulting solution on a specific platform.

The whole business model is built on the provider company's model of information system development where there are two fundamental partners. One is an experienced technology provider but knows a little about the problem domain of the resulting application. And the other has very good know-how in the problem domain, but doesn't have much experience with the technologies. Either of the partners may, for specific projects, outsource the knowledge and work of the other. In the case of this pilot project, the IT department contracted the provider to outsource the technologies, but itself it is taking care of defining the university information system know-how.

The following subsections provide closer look on the technologies used to satisfy all the project requirements.

Conceptual Model

This section presents the fundamental mechanism that has been used for object-- oriented description of data for the pilot project and later for the whole university information system. It might get little more technical, but on the other hand, may serve as a good background for understanding the implementation side of the case.

The metasystem uses descriptions, called concepts, to provide static views of systems it defines and generates. The concept definitions were first employed in the G2 objectoriented database system. The G2 model of concepts provides the most complete picture of what could be implemented at the metasystem level to describe data of processed in systems. Even though the current version ofthe metasystem implements only part of the specification, it is presented here in the full scale.

Concept Definition

CDL (Concept Definition Language) is the specification language for the conceptual object modelling ofG2 system applications. It exists in two syntax forms - the textual form and UML. The object model consists of objects. An object is an ordered tuple ofproperty values. Each property has name and data type. Concept is the Cartesian product of the named property data types. For the time being, concept is equivalent to the well-known notion of class, but with expanded semantics. Each property can be parameterized, i.e., each property can have an arbitrary number of parameters. Each parameter must also have some name and data type.

Because concepts define both objects and collections of objects, there is one name for a single object (concept name) and another name for the collection (concept collection name). In the example, one person is defined under the name Person and the collection of people under the name People. To be able to distinguish between properties of a single object and of its collection, the Where attribute may be used in the property definition. This attribute can have values Alone, Col, or (Col, Alone). It means that the property belongs to a single object, to a collection, or to both. Usually, most properties belong to a single object, and therefore the Where = Alone attribute is implicit.

An extends a very important collection type ofthe model. It is a collection of all objects of the same concept. The database system maintains this collection automatically. Extents are the main entry points to object-oriented databases.

Relationships are defined as properties with a data type equal to either concept name or a concept collection name. If the concept name is used then the 1:1 relationship is established and ifthe concept collection name is used then the IN relationship is established.

In the above example, the relationship Father is 1: 1 relationship to the object Person and the relationship Children is 1 :N relationship to the collection of People.

Object-Oriented Data Access

The previous section shows how data in a system may be described on the metasystem level using the concept descriptions. This section will explore way how the data may be expressed as instances of concepts (objects) and how collections of interrelated objects may be expressed (Dodds, 2001). Further, the XML Data Access (XDA) query language will be shown. XDA was developed at the technology provider company and has been used on several e-commerce and e-business projects (Smolik, 2000). The system realized at the Brno University of Technology uses XDA to enable flexible data access to various types of databases. Moreover, XDA is complemented with a web services access control methodology (WSAC) that allows limiting access to objects based on user and group rights to services and objects within those services. WSAC was also developed by the provider company and will not be explained within the scope of this case, nevertheless it is very useful for controlling access ofmany different groups ofpeople to various parts of a university-wide information system.

Expressing Objects in XML

There are two ways how data in a database might be accessed. Either they could be accessed directly by application objects via an object interface, or they could be accessed externally through an XML interface.

Each object or a collection of objects of a certain concept may be expressed in XML exactly as defined in the concept definition (Carlson, 2001). The property values of the objects are enclosed in elements tagged with the corresponding property names. All the property value elements are then enclosed in an element tagged with the name of the corresponding concept. For example, a sample object of the Person concept may look like the following:

These were just simple examples of concept and concept view queries demonstrating the object access mechanism usable to access data in a database. This exact mechanism was used for the pilot project to provide XML-based access to data in various relational databases and has been used both as the XML interface for the faculties to the central system and as source of data from the databases to be visualized in the user interface that was built.

Web Services

Web services could be considered as either human or machine interfaces to information systems. Web services are accessible over the Internet where human users use browsers to view HTML pages or other systems communicate XML documents. XDA mentioned in the previous section serves as a Web services provider for other systems to access data in the central university system, and it also enables the business logic tier to access data in an object-oriented fashion.

Figure 1 shows general Web services provider architecture. On the right side, each Web service accesses data in various data sources, such as databases or directly accessible enterprise information systems. On the left side, each Web service communicates with the outside world. It could present its services directly to users via the Presenter, which transforms the pure data into appropriate Web pages, and to other systems, it provides its services via the Listener, which listens for service requests and provides service replies. All communication with the outside world is based on the HTTP protocol, and the data is represented either in some visualization format for users (HTML, ...) or in XML for other systems. Any Web service may use other Web services to obtain necessary information or to have computations done. Web services are mostly seen as services provided by a machine to another machine, nevertheless, they could be also seen as services directly offered to human users, because the logic of the service is equivalent in both cases, only the visualization part is being added for the comfort of the user. And further, if there is a good service description then it means that the graphical user interface could be easily generated. Web services therefore might be considered as both machine and human accessible.

Web services enable communication of data among companies or independent parts of an organization (i.e., business entities) (Cerami, 2002; Oellermann, 2001; A Platform for Web Services, 2002). Each business entity may offer their Web services to other entities. Because the use of Web services has to be easy and connecting to new services needs to be simple, there will be standard ways to describe, offer, and find services. The most promising language for description of Web services is the XML-based Web Services Description Language (WSDL) jointly developed by Microsoft and IBM. Further, the Universal Description, Discovery and Integration (UDDI) specification describes Web services and programmatic interface that define a simple framework for describing any kind of service, and finally SOAP as the transfer wrapper (Graham, 2001; Universal Description, Discovery and Integration (UDDI),2002).

As mentioned earlier, there are two generic types of a Web service. Ones that provide access to data and ones that do computations. Example of the first case could be sending and an order or receiving an invoice. Example of the second case could be requesting price for sending a package of specified size and weight from place A to place B. Web services that access data could be defined in terms of concept views that were presented above. Web service could, therefore, be defined as a concept view enriched with documentation texts and other information related to level of access to objects within the service. This enriched description could be considered as the service description. Each service thus defines what view of interrelated objects is available within that service. For each concept in the service definition defines what operation (list, create, edit, delete) is allowed. The service may define implicit filters on accessible objects and other information needed for proper documentation or visualization. Further constraints on what objects could be accessed by what users within given service are put by a separate mechanism (Web services access control) mentioned earlier.

Metasystem

Previous sections discussed ways to represent data about a system (metadata). From the metasystem point of view there are several types of metadata:

* metadata that define the data in the systems (concepts)

* metadata that define views on data with their hierarchical relationships (concept views)

* metadata that define Web services (service descriptions)

In a way, service description in its complete form may take form of a personal process. Personal process is then the activity that the user performs in order to take a full advantage of a service, for example, the service "Send purchase order." From the data perspective, an XML document containing proper order head and order items needs to be sent. For any user, preparing such a document is a process of entering order-head information and adding items. This personal process information would be also needed as part of the service description, so that suitable editor may be generated for each service.

In the future, attempts to add metadata that would define organizational processes should be made. Organizational process could be seen as the process of using different Web services by different users in order to reach an organizational goal. Usually, organizational processes are executed by individual users implicitly, and they have no explicit definition, or they are hard-wired in the system implementation. By making organizational processes explicit by representing them on the metasystem level, it could be expected that the continuous growth of the underlying system could be better controlled.

The current implementation of the metasystem, as shown on Figure 2, uses concept definition to define objects manipulated by the system, uses service descriptions (with concept views included) to define Web services with their corresponding personal processes. Using the Generator, metasystem generates several parts of a system. The XML interfaces to services are the full-blown Web service listeners presented in the previous section. The User interfaces to services are the user Presenters for each Web service. All the system parts are generated from a universal description to a specific system program code using the Generating styles. There are special styles for generation into different target environments. The current version of the metasystem generates XML service descriptions and XSL style sheets used by the provider company's applications framework, but it is possible to add generating styles to generate applications in Java, JSP, ASP, PHP, WebSphere, WebLogic, or Oracle AS.

Based on both concept definitions and service definitions, the metasystem is able to generate not only proper interfaces, but also documentation. In development and mainte-- nance of a system offering wide range of services and encompassing many different types of data, there is a high need for good documentation. For this reason, the concept definitions are further complemented with human readable descriptions of all properties and concepts themselves, so the complete information as what the data means is presentable.

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

The pilot project went relatively well. The technologies proved their usability and a science and research reporting system is in operation. The smaller faculties that have no information system in place use the generated central Web-based access to the university information system and the larger faculties are making attempts to communicate the required data from and to their systems via the XML interface. The system has been appended with other functional areas and slowly even some parts of the student agenda have been added.

Nevertheless, there are problems as with any information system that should serve such diverse needs and the needs of thousands of users within a university. The primary problem is the lack of people taking part on building the system resulting in slow movement in adding new functions and functional areas to the system, which results in groups of unsatisfied users.

There are two major reasons for the lack of IT personnel: insufficient funding and the difficulty to employ experienced developers at the university. IT professionals are very expensive, and it is almost impossible to employ ones in the university environment, since it poses political problem of them having higher salary than maybe the dean himself.

Furthermore, the university is not able to afford a regular IT project from its budget. So far, the project has been an inexpensive one since it employed only part-time consultant from the technology provider company, one internal IT department employee (also not full time), and one system integrator that helped to define the central system metadata. Regarding this fact, the project has obtained almost miraculous results within about one year from the start. The two internal university staff have defined over a hundred of database tables and their descriptions in the metasystem, and defined the suitable Web services for user and system access to various areas of the data for different groups of users (including many other services than just the ones related to the pilot science and research). The part-time consultant ensured that the metasystem functioned properly and implemented some required improvements, which proved that the technology provider business model seems to work well.

Even though, the question how to go further in the university information system development stays unanswered. Apart from the funding problems, there are also other problems with the further development. The technologies employed are very advanced and seem to really speed up the development, but there are just few professionals that understand them, thus they are also very expensive. On the other hand, it is possible to employ bigger number of cheap inexperienced programmers to do the job in more simple technologies and by raw people force, which would probably result in much less elegant and harder to maintain solution. These questions will not be answered in this case and they are now open even for the case actors themselves.

References

REFERENCES

References

Amble, S.W. (2001). The Object Primer. Cambridge Univ Pr (Trd).

Birbeck, M. (2001). Professional Xml (Programmer to Programmer): 2nd Edition. Wrox Press, Inc.

Carlson, D. (2001). Modeling XML Applications with UML: Practical e-Business Applications. Addison-Wesley.

Cerami, E. (2002). Web Services Essentials (O'Reilly XML). O'Reilly & Associates.

Dodds, D. & Watt, A. (2001). Professional XML Meta Data. Wrox Press Inc.

Extensible Markup Language (XML). (2002). Retrieved January 30, 2002, from http:// www.w3.org/TR/REC-xml.

Graham, S. (2001). Building Web Services with Java: Making Sense of XML, SOAP, WSDL and UDDI. Sams.

Hruska, T. (1998). Multiple class objects. ISM 98 Workshop Proceedings, 15-22.

References

Hruska, T. & Macel, M. (1999). G2 - Component architecture of object-oriented database system. ISM99 Workshop Proceedings, 119-124.

Learn XML, XSL, XPath, SOAP, WSDL, SQL, HTML, Web Building. (2002). Retrieved June 16,2002, from http://www.w3schools.com/.

McLaughlin, B. (2001). Java & XML, 2nd Edition: Solutions to Real-World Problems. O'Reilly & Associates.

A Platform for Web Services. (2002). Retrieved January 30, 2002, from http:// msdn.microsoft.coni/library/techart/Websvcs_platform.htm.

Oellermann, W.L., Jr. (2001). Architecting Web Services. APress.

Ray, E.T. (2001). Learning XML. O'Reilly & Associates.

References

Smolik, P. (1999). The importance of Extensible Markup Language. ISM 99 Workshop Proceedings.

Smolik, P. & Tesacek, J. (2000). Data source independent XML data access. ISM Conference 2000 Proceedings, 17-22.

Tannenbaum, A. (2001). Metadata Solutions: Using Metamodels, Repositories, XML, and Enterprise Portals to Generate Information on Demand. Addison Wesley Professional.

Tidwell, D. (2001).XSLT. O'Reilly& Associates.

Universal Description, Discovery and Integration (UDDI). (2002). Retrieved January 30, 2002, from http://www.uddi.org/.

XSL Transformations (XSLT). (2002). Retrieved January 30,2002, from http://www.w3.org/ TR/xslt.

References

This work has been done within the project CEZ: MSM 262200012 "Research in Information and Control Systems" and also supported by the Grant Agency of the Czech Republic grant "Environment for Development, Modeling and Application of Heterogeneous Systems," GA 102/01/1485.

AuthorAffiliation

Petr C. Smolik

Brno University of Technology, Czech Republic

AuthorAffiliation

Tomas Hruska

Brno University of Technology, Czech Republic

AuthorAffiliation

BIOGRAPHICAL SKETCHES

AuthorAffiliation

After completion of his BS in Computer Science at the Valdosta State University, Valdosta, Georgia, Petr C. Smolik continued at the Faculty of Information Technologies of the Brno University of Technology, Czech Republic. There he completed his MS and continued in the PhD program since 1998. During that time he divided his duties among teaching parts of the information systems and object modeling courses, and real-world implementation of new e-business solutions for local companies. He continues to put his research interests in metasystems for description, generation, and maintenance of information systems into real-world solutions not only at the Brno University of Technology but also at one of the largest local banks.

AuthorAffiliation

Tomas Hruska graduated from the Brno University of Technology, Czech Republic. Since 1978, he has worked in the Department of Computers (Faculty of Information Technology - FIT), Brno University of Technology. At present, he is the dean of FIT. From 1978-1983, he dealt with research in the area of compiler implementation for simulation languages. From 1983-1989, he concentrated on design and implementation of both general-purpose and problem oriented languages. Since 1987 he has participated in the project of C language compiler. Since 1990, he has worked on the implementation of information systems. He deals with an implementation of an object-oriented database systems as a tool for modern information systems design now.

Subject: Studies; Object oriented programming; Information systems; Systems development; Colleges & universities

Classification: 9130: Experimental/theoretical; 5240: Software & systems; 8306: Schools and educational services

Publication title: Annals of Cases on Information Technology

Volume: 5

Pages: 550-562

Number of pages: 13

Publication year: 2003

Publication date: 2003

Year: 2003

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 1537937X

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references

ProQuest document ID: 198722199

Document URL: http://search.proquest.com/docview/198722199?accountid=38610

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 100 of 100

Nationwide ICT infrastructure introduction and its leverage for overall development

Author: Pale, Predrag; Gojsic, Jasenka

ProQuest document link

Abstract:

This case describes a 10-year effort of creating an information and communications technology infrastructure in Croatia. Although initially an independent agency, five years after it began operation, the Croatian Academic and Research Network (CARNet) had been transformed into a government agency. The case explores the question of whether or not CARNet has truly been successful and seeks to answer the question of whether the initial goals have been realistic and achievements sufficient, considering the low penetration of ICT into the Croatian society. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

This paper describes ten years of efforts in introducing the state-of-the-art information and communication technologies (ICT) and development of ICT infrastructure on the national level. The aim of the project was to build Internet in Croatia and to foster its leverage in the broad range of activities of public interest in the society as a whole. The prime target group was academic and research community, as a vehicle for the overall development in the society.

Croatian Academic and Research Network (CARNet) had been started as a project in 1991, and, after five years, it was transformed into a government agency. A broad range of activities had been started, from building and maintaining private nationwide communication and computer network to information services, user support, education, pilot projects and promotion.

The academic community has been treated not only as the main customer, but also as an active partner in developing and providing services.

CARNet has been fully funded by the state budget for ten years, without any participation of the commercial sector, domestic donations or international financial support.

Although CARNet is treated as Croatian success story, recognized inside and outside of the country, the question is whether the initial goals have been realistic and achievements sufficient, considering the low penetration of ICT into the Croatian society.

Likewise, budget cuts, continuous struggle for political recognition and authority, as well as fights with national telecommunication monopoly, have created an array of questions to be answered at the beginning of the second decade of this highly ambitious endeavour.

BACKGROUND

The late eighties ofthe 20th century had found Croatia as apart of the former Yugoslavia, with relatively poorly developed national telecommunication infrastructure and absolutely no academic network infrastructure. Due to the extremely difficult economic situation, the academic and scientific community had almost no access to the international scientific publications as well as scarce resources for traveling.

CARNet initiators perceived the Internet, and computer networks in general, as the possible way around this crucial obstacle to scientific and professional activity and development.

In 1990, Croatia had declared its independence from the former Yugoslavia, which triggered military intervention of the former Yugoslavian army and eventually led to a fullblown war.

CARNet initiators had three guiding principles regarding the future of the country. Firstly, the future Croatian independence was to depend significantly upon the strength of its economy. Secondly, the modern economy was to be information-based and future industry was to heavily depend on the scope, level, intensity and quality of application of information technology. Thirdly, much as in developed and progressive countries, implementation and deployment of new technologies were to be trusted to scientific community.

Those three principles led to a natural conclusion that Croatia needed a change agent. As a step forward, the national computer network was to be built in the academic community. The community was supposed to use it for its own education and work as well as to gain experience in pilot projects in various areas of human activities, and then to use the gained knowledge, skills and experience in helping industry and society as a whole to embrace and leverage the information technology for the development and strengthening.

This conclusion had been made by a small group of very young scientists already involved in computer networking development and deployment on the small scale. They prepared a simple proposal and approached Ministry of Science and Technology (MST), basically advocating establishment ofnational educational and scientific computer network. The Ministry accepted the proposal, the initial group and project director had been appointed and the seed money of $ 1 million was allocated. The project was dubbed "Croatian Academic and Research Network - CARNet."

In the first year of the operation, basic computer infrastructure and connectivity for about 40% of the community were established and were included in the Internet. From that point on, the project grew significantly, not only in the number of institutions to be connected, but also in introducing new activities and services like education, information services, pilot projects, etc.

This required technological and organizational changes in the project, as well as repositioning the whole project within a more operational institution than the Ministry was.

SETTING THE STAGE

In order to understand the environment in which the project CARNet has been launched and developed over the course of a decade, basic information on the political situation in Croatia, its market, telecommunication market and academic community seems to be required. In addition, the development in academic and research networking in Europe needs to be kept in mind as well.

Croatia

Croatia is a Mediterranean state located in the central Europe. It covers 57,000 square km. of land with 2,000 km. of land borders and 6,000 km. of coastline along the Adriatic Sea, its 1,185 islands being its special geographical beauty.

Croats had their own state already in 9th century. After that, they had been the constituent nation in various states from Austro-Hungarian Empire, Kingdom of Yugoslavia and, finally, Socialist Federative Republic of Yugoslavia (SFRY). SFRY had been constituted of six federal republics. By constitution, those republics had a right to decide on separating from SFRY. In 1990, in Slovenia and Croatia referendums were held and a vast majority voted for their respective independence. However, Croatia did not decide to separate from Yugoslavia immediately; it would have rather sought for more autonomy within SFRY, especially in independent self-deciding how to spend large sums of money it was to donate to less developed areas of Yugoslavia. It was only after Yugoslavia had launched into a military intervention in Croatia (September 15, 1991) that the Croatian parliament declared complete autonomy and separation from the rest of SFRY (October 8,1991). European Union and United Nations soon recognized Croatia as a sovereign state during 1992. However, Croatia, who had to continue fighting off Yugoslavia, was pushed to defend its independence, and the war lasted until 1995.

During the war, one third of the territory was occupied and the population of barely 4.5 million had to accommodate over 700,000 displaced persons and refugees. As much as 30% of companies were destroyed either directly in the war operations or indirectly having had transportation routes or electricity supply cut off for several years.

Present-day population of Croatia is 4.3 million. About one fourth lives in the capital, Zagreb. GNP fell from 24.4 billion USD in 1990 to 11.86 billion USD in 1993, rising to 24.9 USD in 2000 (Source: Croatian Bureau of Statistics).

Market

Croatia is a parliamentary democracy with guaranteed private property and a marketoriented economy. However, 50 years of planned economy in Yugoslavia cannot be erased overnight, certainly not from the heads of people nor from the ways of doing business, which is offering very little readiness to integrate into global trends.

Previously, state-owned companies had been privatized, although it did not automatically bring changes in their product and services portfolios, internal organization or working practices. The Yugoslav market had been lost, and the buying power of domestic market had been tremendously weakened in the years of war.

Croatia inherited a monopoly in telecommunication market. By law and in effect, all telecommunication was in the hands of a single, state-owned company: Croatian Post and Telecommunications (HPT). Yugoslav Telecommunications were not in bad shape, though still far from developed, especially with regards to the services. During the war, Yugoslav army had been advised to destroy telecommunication infrastructure. Although it was having a monopoly, HPT had heavily invested in development of infrastructure. In early 90s, they decided to rebuild a major infrastructure with new technology: fibre optical cables. Despite the war, Croatia soon had the whole national telecommunication infrastructure rebuilt and upgraded, and it was all optical.

In 1999, HPT had been divided into two companies: Croatian Post and Croatian Telecom ("Hrvatske telekomunikacije-HT" = <<Croatian Telecommunications>>) with government declaring intention to have them privatized. Soon after, Deutsche Telecom became the strategic partner in HT, but the state kept controlling the significant package of stocks. In 2001, the government sold more stocks to Deustche Telecom, which made them the majority stockholder. The first deal was kept secret by both sides, and the public never got to know under what conditions their most profitable company and asset was sold. The situation was further mystified by the fact that government prolonged its monopoly period for an additional year (until December 31, 2003) as a part of the second deal. Neither was it ever clear whether Deutsche Telecom had bought the "holes in the ground," i.e., the infrastructure which could easily accept additional cables potentially from other providers, once the telecomm market in Croatia got fully de-monopolized. This is of particular importance as Croatia does not seem to have any other telecommunication infrastructure at present, not even for military, police or other public sectors of special interest. As a potential market entrant, Croatian electricity and power grid company did lay some fibres along their power lines but they have been far from ever representing a network, as it is far from any possibility of commercialization.

In contrast to the public expectations and political rhetoric, Deutsche Telecom did not enlarge investments in HT. Actually, they have been minimized. All investments seem to have even been stopped from the very first day. The prices for the services have remained very high despite some initial understanding of the possible reduction.

Academic and Research Community

The Croatian academic community consists offour universities: Rijeka, Osijek, Split and Zagreb. The universities are weak and formal unions, while real power lies in individual constituent Faculties (schools). Faculties are legal bodies with their own property, status and autonomy. There are 20+ public research institutes, but the majority ofresearch is performed on the Faculties. The community counts some 12,000 staff and 100,000 students. The cooperation within the academic and research community is very weak.

The cooperation with commercial companies does exist, but it is far from the required level. This is partly the result of generally very low level of investments in research and development within the industry and partly due to enterprises' intentions to have their own research facilities not trusting the competence of academic and research community, in general.

As a consequence, the largest financing ofthe academic and research community comes from the state budget. Only 3% of the budget, or approximately US$200 million, is spent on all activities in the academic and research community each year.

In higher education, the law (1996 Act) allows privately owned educational institutions at all levels. However, the majority is still ownedby the government and the higher education is free for all citizens of Croatia. Students do pay for textbooks, food and lodging. Still, those expenses are partly subsidized by the state budget. The overall quality of higher education is considered to be traditionally high, and proof can be found in the fact that Croatian diplomas are readily recognized in most developed countries. The Croats who have graduated in Croatia easily get employed and prosper in the developed world. This is especially true for technical and natural sciences fields. However, there is a growing opinion that Croatian higher education needs redefining and restructuring in order to prepare students better for the information age and global economy. Unfortunately, the solution has to rely on slow formal processes, and it means mostly waiting for changes in legislation. There is no exploitation of possibilities for fast changes in spite of targeted developmental programs and projects, campaigns and experimental facilities.

Research is being financed by the budget through about 1,500 research projects with very low participation of industry. In addition, the tendering process run by Ministry of Science and Technology, typically re-launched every three to five years, does not specify practical problems to be solved but rather invites researchers to propose topics they find attractive to deal with.

There is almost a decade old program in place, aimed at rejuvenating the academic population by financing 1,000+ young scientists, in the period of up to 10 years, to achieve their master and doctoral degrees and attend the postdoctoral studies. Their salaries have been financed directly by the state budget through the Ministry of Science and Technology. They have been chosen among 10% of best graduates in their respective field and assigned to existing research projects, on the request of the project leaders.

Government Initiative

Croatian government consists of about 20 ministries that are to administer and divide the budget of approximately $6 billion. The budget is allocated predominantly to activities not projects. Although ministries are supposed to propose their budgets based on projects, once funds have been allocated there is virtually no project follow-up, and financing is based on activities rather than on results. In fact, in projects that last for several years, financing is provided for the next year, even if no results had been achieved in the previous years, largely due to the lack of monitoring.

Although officially CARNet project is a government initiative, it was actually an initiative of five engineers who were supported by a university professor, recently appointed deputy minister of science, at the beginning of the war. The project quickly (in the course of one year) generated large and visible results, and from that point on, it had been progressing using the so-called "avalanche" effect. Thus, despite overall lack of vision and guidance on the part of the government, and ministries of education, culture, and public health total lack of interest, the project was growing and remained present maintaining influence over a decade.

Academic and Research Networks

The idea of academic and research network was not invented in Croatia. It was spontaneously launched in late eighties in the developed countries of Europe and coordinated in the collective effort under the overall Framework of Research Programs of European Union.

EU recognized the importance of information technology and the need not to lag behind the development in the USA. Therefore, significant funds had been provided with the aim to develop new technologies and to build national but also pan-European academic and research computer network. In the later stage, funds had been provided to eligible countries from the Central and Eastern Europe (CEE) for connectivity of their national networks to panEuropean infrastructure.

Although specific and different, most of national academic and research networks (ARNet) were similar in their basic goals and operations. A typical ARNet was set to establish international connectivity and national backbone. Connectivity of individual institutions to the backbones was to be left to ambition and finances of individual institution. A minimum of services would then be provided just to support the basic activity, help desk, basic communication and information services, targeted research as well as information packages. Extensive information services, databases, large scale educational activities, pilot projects and promotion were not considered to be part of their tasks and duties. This view remained throughout the major part of 90s. As a contrast, the CARNet initiative, from the beginning, had a broad range of services in vision. Main differences between the typical academic and research network (ARNet) development scheme from a country in transition and Croatian are summarized in Bartolini (2000).

In addition, a typical ARNet would be strictly focused on academic community leaving the rest of population to commercial developments. Since, academic community was only the first phase ofCA RNet vision and, in many instances, a tool for overall national development, CARNet believed there is much more to just providing communication infrastructure.

CASE DESCRIPTION

As initially envisioned CARNet role was twofold: to provide infrastructure, services and support to the academic and research community (ARC) as well as to act as a change agent for the society as a whole. In order to fulfill the first role, CARNet initiated full range of activities of an ARNET (Bekic, 2000). The milestones are listed in Appendix 1. The second role could be fulfilled in two ways: by increasing the ICT and managerial competence of individuals (not only in academic community) and by CARNet's active involvement in implementation of ICT in national projects and systems.

Network Infrastructure

The technical concept of CARNet had been created at the end of 1991 (Pale, 1992). It was the time of the European Community's COSINE and IXI projects. TCP/IP protocol was considered too American and too old to be used in future European network infrastructure. X.25 & X.400 were foundations of European efforts (CISCO, 2002).

However, CARNet designers recognized that X.25 and X.400 products were still scarce and thus expensive. X.25 required specific interface in computers. Users needed more services from their computers and networks. It was recognized that TCP/IP was old, meaning reliable, that it was available for virtually every computer platform, that it would operate via RS-232 interface available in just any computer. It provided all services users needed e-mail, file transfer, network file systems, remote terminals and many others. It fully erased the difference between local and global networks from the user's and computer's point of view. The fact that it was completely license-free only sealed the first decision. Despite European trends and recommendations, CARNet was going to be an Internet network.

National public network infrastructures in Europe were built on PSDNs (Public Switched Digital Networks) mostly using X.25 infrastructure. Although such a network was available in Croatia (CROAPAK), it was scarce and expensive, and it only offered user speeds of up to 4,800 bps. CARNet was aiming at higher speeds: 9,600 bps. at least and 19.200 bps. preferably.

Thus, the second decision of the first phase was to build CARNet as a private network based on leased (copper) lines.

Phase One (1991-1994)

CARNet communication nodes were established in all university cities acting as local centers of a hierarchical, star-shaped network topology. Due to the lack of funds, speed of deployment and public telecommunication network being the frequent target of the wartime operations, planned redundant lines were never established. Thus, the established network topology was hierarchical with one major node (in Zagreb) and three regional nodes (in Rijeka, Osijek and Split). Despite that, the network operated with surprising reliability and availability. Within the first year of the project, the national backbone had been established and connected with the rest of Internet. In two years 60% and in three years 100% of academic and research institutions had been connected in CARNet.

Phase Two (1994-1996)

At that time (1994), the connecting speeds of 19,200 bps became insufficient, and, in some instances, bottlenecks were showing up. In addition, a single major node of the network (at Zagreb University Computing Centre - SRCE) was a continuing source of concern due to its vulnerability. As a single point of failure, it could bring the whole network down. It was clear that new backbone was required.

Most of European Academic and Research (but also other) networks had already switched to Internet technology and used 64 kbps and 2 Mbps leased digital lines, mostly via TDM (Time Division Multiplex) technology (Behringer, 1995).

It was difficult to obtain such resources in Croatia, and they were largely expensive. There was also one other concern: CARNet designers were fully aware that upgrade of the backbone would take between 18 months and two years. They did not want their new backbone to become obsolete again, before or at the time it becomes operational. It was already clear that multimedia was going to be in demand, that voices and moving pictures were going to take up the major part of network traffic in the middle of 1996 when new backbone was going to be operational. Thus, the network backbone for the future, not for the current needs, needed to be established. Such a network had to be capable of transferring both, packet data and isochronous signals, like video and audio.

Fortunately, there was some good news. Firstly, new technology, called ATM (Asynchronous Transfer Mode) was emerging, aimed at unifying transfer of packet data (e-mail, file transfer, etc.) and of isochronous signals (audio, video, etc.) in one communication infrastructure. Secondly, Croatian telecommunication monopoly HT had been rebuilding public communication infrastructure using fibre-optical cables. They had plenty of raw bandwidth (<<dark fibre) and virtually no customers.

As a consequence, two strategic deals were made. The first one with HT, allowed CARNet, in the future, to use "dark fibre" (fibre optical cable between two CARNet nodes without any HT equipment in between) for a small and fixed charge. The second agreement, with CISCO, delivered CARNet the first available ATM equipment ata very favourable price which included education, replacements with next generation of equipment and other important benefits. In this way. CARNet, in the second phase, built a new broad band backbone at the speed of 155 Mbps with ATM technology that enabled audio and video conferencing throughout the country. The cost was 60% of the price that needed to be paid for the technology used on the backbones by other academic networks, offering speed of only 2 Mbps and no ability to do video conferencing.

In addition, the core of the backbone has been fully redesigned (Appendix 2). Instead of a single node, the core of CARNet backbone is now an "unfinished" cube (Appendix 3). Major academic and research institutions act as nodes, interconnected at 622 Mbps. Other, regional parts of national backbone are connected each to another node of the cube, at 155 Mbps. The core of the backbone is now fully redundant and reliable at the utmost.

Phase Three (1998-Present)

In the third phase, the connectivity of individual institutions (Appendix 4) to the backbone needed to be significantly upgraded. However, the dark side of telecommunication monopoly started to get prevalence. HT did not want to sell cheap copper-leased lines any more and allow CARNet to install xDSL modems thus effectively boosting up connectivity to 2Mbps or more. They forced CARNet to buy expensive 2 Mbps digital connections, but even with the contract signed, they did not deliver service. CARNet ended in an unacceptable situation: state of the art high-speed multimedia backbone, and obsolete connectivity of many members at speeds of 19,200 bps, sometimes even slower ones. Besides that, despite the signed contract, HT did not want to connect new institutions nor new locations of already connected institutions. The main reason was that HT perceived CARNet as a competition. Unable to attract other customers, HT wanted academic and research institutions as their customers at prices they could freely set.

Services

Initially, at the time when appropriate communication infrastructure on national scale was not available, the focus was on establishment of the backbone and on international lines. However, as the backbone deployment was well under way it became clear that it was not the only task, more needed to be done.

Connectivity Services

Deep in the foundations of the project was the goal to have as many institutions and individuals using the network as soon as possible.

Other national ARNETs, especially in developed countries, concentrated on establishment of backbones. They relied on the institution's motivation and financial resources to buy a connection from a telecommunications operator to the backbone. However, in Croatia, the situation was significantly different. Because of the weak and war-tom economy, academic and research institutions were almost exclusively financed from the budget. This financing was insufficient even for the basic operations. Other major unresolved problems in the academic community were outdated equipment, brain drain (towards the commercial sector and other countries), and the physical infrastructure (buildings) damaged. Besides, the Internet was a fairly unknown term in 1991, even in the academic community.

Therefore, CARNet couldn't count on their motivation, much less on their money. CARNet had to reach out much further than most other ARNETs, so its connectivity service included permanent communication line from an institution to the backbone. If an institution had multiple locations, multiple lines were needed. Services included purchasing and installing equipment for the institution's central node were communication (modem, router) and computing (UNIX server) equipment offering mail and web services to all students and staff of the institution. If the institution had no system administration capabilities, CARNet could offer such services (limited to the basic functionality of the central node), as well.

Individuals, who were members of the academic community, had rights and possibilities to access the Internet through modem pools distributed throughout the country paying only the minimal local communication cost.

In this way, CARNet provided "connectivity to the door" both to institutions and individuals, and it was free of charge for them, as end users. This initial infrastructure deployment was performed much in a centralized, planned fashion, almost without end-user involvement. The Internet and its services were simply given to them, regardless of whether they asked for it or not. However, this model proved to be very successful in bypassing the traditionally slow reaction and conservative approach of university managements. Pioneers and early adopters in community were embracing the "gift" and quickly spreading the "gospel". It was a kind of bottom-up approach with (extensive) external help.

Communication, Information and Data Services

As expected, a number of pioneers were found in the academic community who were to discover new communication services early on and to implement them for the sake of research, curiosity or prestige. However, CARNet quickly learned that services born in such spontaneous way would have the form, quality and lifespan according to the interests of individuals who started them, not according to the needs of those who would use them. Industry was fully unaware of the Internet and its (commercial) potential. The first commercial ISP started operation in 1996. Thus, the fundamental CARNet goal, to make the latest communication technologies and services available to every member of the community in the sustained way with guaranteed level of quality of service, cannotbe fulfilled if it means letting "someone else" establish and run the service, i.e., hoping that someone would do it and do it in the proper way. Much more deliberation, planning and larger resources are required.

Therefore, a strategic decision had been made early on - that CARNet has a duty to take care that such services do exist and that they are available to everyone. CARNet should also do its best to make the services free of charge to end-users (discussed in the "Finance" section) and to guarantee a level of quality of services.

It was felt that this approach will be chosen in other aspects of academic networking as well. As much as creators, financers and executors of this policy were convinced of the nobility of the goal itself and sure of the method to pursue it, they also believed that it would be wrong to try to provide those services from within the CARNet organization. Instead of increasing the size ofthe organization (potentially endlessly) and competing with (imperfect but innovative) services provided spontaneously by innovators and pioneers, it was decided to build on cooperation.

As a consequence, CARNet had encouraged individuals and institutions in the academic community to explore new services and to propose them for support by CARNet. CARNet was, then, jointly with them and potential users, to define the service, provide necessary equipment and money for sustained provision of the service. CARNet was also to promote the service and monitor its quality. In this way, the provider of the service was to get substantial supply ofmoney for additional education of staff, salaries and other needs. They were also to get promotion of their work and thus visibility in domestic and international community. The equipment could be used for other academic purposes as well. Perhaps the most important benefit academic entities would get was the experience in providing a service and cooperation under "commercial" contract- something they did not have and very much needed in order to gain survivability in market economy.

If a partner for desired service could not be found in academic community, it would be sought in the commercial environment. It was believed that in such a way CARNet would serve as an active agent in modernizing Croatian economy, supporting development of the new services. CARNet's activities were to be focused on precise definition of service, tendering, financing, promotion and quality control.

In this way, CARNet had always established new communication services like news, list server, IRC, video conferencing, etc. The aim was to provide the academic community with new services as soon as they were introduced somewhere in the world and to provide at least one service in the country that would be impartial, non-commercial and public, at least to the ARC.

Communication services enabled users to communicate among themselves, with international community and to create virtual communities thus enhancing their work and increasing its efficiency. Similarly to communication services, a range of information services had been established like directory services, public ftp, web hosting, search services, PGP, media on demand, etc. They improved not only group but also individual work.

Communication and information services, amazing though they may be, left many potential users with the question "and what now?" unresolved in their minds. Majority of users, especially from non-technical areas were actually seeking data. Relevant (scientific) data had to be provided to start the process of acceptance ofnew technology and recognition of its benefits which would hopefully lead to later overall and universal leverage ofthe Internet and related technologies in all aspects.

Communication services in their essence offered communication means not content, or at least it was not provided by CARNet. Information services did contain data, but they were provided mostly by users. In addition, CARNet launched a range of data services, and they were all about third-party data. They contained scientific databases (Current Content, MEDLINE, Inspec; ...), referral services or portals (www.hr).

Providing a data service requires a technological base (computer servers and high speed connections), data itself and data maintenance. These components are usually provided by different parties. The content was either purchased by the Ministry of Science and Technology (MST) or produced by the service contractor. CARNet role was to organize all the parties in a homogeneous service, to promote the service and to offer user support.

User Support

People usually expect other people to be like them: to share values, attitudes, believes and to behave in the same way. CARNet was launched by pioneers, and they expected everybody else to behave like one: to grab the opportunity, to use new technology and to figure out how it works and how it can be used in most part by himself (Moore, 1999).

Soon, it was discovered that pioneers constitute a very small fraction of academic community and that a whole new track of activities needs to be established in order to attract and involve at least a major part of, if not the entire, academic community (Bates, 1999). Information in the form of brochures, manuals, interactive CDs, Web materials explaining benefits and usage of ICT were provided for different users groups. Merely providing infrastructure and services did not guarantee its successful implementation and users due to continuous upgrading and changing of tools and technologies needed training and support. Training of end users was found to be crucial for adoption of technologies and development of skills, and it was organized by CARNet. It was accompanied by a general purpose helpdesk.

Institutions needed on-site technical support and maintenance. The technology was new and academic salaries were low, so it was very difficult to get eligible technical staff: system engineers. Therefore, CARNet developed dedicated educational track for system engineers and organized suitable separate helpdesk support. To assist system engineers in their work and relieve them of some common activities shared with others, CARNet contracted development and maintenance of standardized set of operating systems, server software and other tools intended to be used in every CARNet node. System engineers were supplied with regular updates of these packages.

Cisco Networking Academy, as the first program for broad professional audience, was introduced, in order to raise the number of skilled technical staff and lower the entry barriers for broader implementation of ICT.

Again, the actual delivery of individual courses was left to educational professionals, but CARNet staff was identifying users needs, defining course outlines, recruiting trainers or contracting institutions and providing funds.

Information technology was new in society and was not part of the curriculum in the formal education. Even when it was, it was in rudimental form and very theoretical. In the first four years, more than 35,000 people were educated in more than 50 different courses and the demand for the participation in courses grew. It became apparent that CARNet couldn't provide sufficient training for the community of 100,000 students and 12,000 staff with educational activities in their present form, especially considering new students enrolling in the universities each year (30,000 students in 2001).

In 1998, it was decided to continue with courses as before but introduce the limit on the number of participants from each institution. A parallel activity, training the trainers system was established, enabling institutions to train their employees and students as future trainers to run courses for all other employees and students in their institution. In such a way, if an institution wanted to have larger number of staff and students trained, they had to make some effort: to find future trainers, to motivate them, to devote some space for a special classroom. CARNet and Ministry of science and technology helped them to get appropriate equipment.

In addition to infrastructure, services and education, users needed a variety of software tools and in order to efficiently use them, they also needed continuous assistance. Typical and widely used tools (statistics, modeling, math libraries, etc.) were to be identified. Institutions were sought which had substantial expertise in leverage of the tools. Contracts were, then, signed with them, making them referral centers to provide support to users community. In such a way, user community would serve itself in an organized manner. Referral center would organize education for the specific software tool, provide helpdesk, organize workshops, seminars and conferences and also negotiate with vendors for community-wide licenses. CARNet would be monitoring the quality of service, promoting the service and providing funds.

In implementation of new information technologies in a variety of applications and in a complex infrastructure like the CARNet, there arose a huge number ofproblems that needed to be resolved or agreed upon. Usually, this is a task for special interest groups. CARNet invited users to conceive such groups and offered assistance in the form of meeting space and support, travel expenses for representatives to respective international meetings, publishing and promotion of results. However, up to the present moment the response was close to none. Except for a low, activity loose and informal association of system engineers, there had been no user interest group formed.

Visibility of user results, exchange of experiences, checking on new ideas and an easy way to get introduced in "whys and hows" were the goals to be achieved by the CARNet User Conference, the annual event initiated in 1999. The attendance had been continuously growing and the satisfaction of attendees had been very high. Despite the low support from taxation laws, conference managed to attract significant sponsorships. They enabled the organizers to award best papers, presenters and presentations with prizes like PCs, palm computers and travels to international conferences. The conference started to act as a hub for other related events that were to take part immediately before or after the conference or would run in parallel.

In the world of the Internet, it seems to be very easy to convey any information to a large number of people. So, one would not expect much trouble for CARNet to announce new services, products and opportunities to the members of academic community. However, there is a catch: how to tell someone about e-mail, by e-mail if they do not use e-mail yet? There is a problem in the reverse communication as well: if a number ofpeople from an institution are suggesting or demanding one type of service and the other group is advocating something exactly opposite, what should CARNet do?

In order to assure appropriate dissemination of information to end users in institutions a network of CARNet co-ordinators has been established. Every institution appoints an employee as a CARNet coordinator whose primary role is to act as a liaison officer. News, plans and other information sent from CARNet are relayed to employees and students. Likewise, problems, suggestions, needs and events in an institution are consolidated within the institution and communicated back to CARNet. All coordinators together constitute "Users Council" who has an advisory role to CARNet management influencing annual programs and strategic plans.

Since 1997, CARNet member institutions have been reporting annually about the usage of resources available through CARNet services (Appendix 5). In 2000, the total of 164 institutions submitted reports. Comparison across years indicates speed of ICT penetration and the level of its utilization and is differentiated across specific user groups. It also addresses importance of individual CARNet services and activities to end-users. The annual reports about the usage of CARNet infrastructure and services and institution's needs have been filed by CARNet coordinators and endorsed by top management of individual institutions. Thus, the reports are considered as official feedback from users.

Change Agent

The far-reaching goal of the CARNet activities was to make impact on the national level, outside academic community. Academic community on institutional and on the individual level was to be the partner, CARNet acting as a coordinator and organizer.

CARNet aim was to collect knowledge and experience in the field of information technology and implement them into academic network. The use of global information infrastructure such as the Internet and the Internet-based information services was the prime interest.

It was expected that after graduation students would leave the academic community, trained to use information technologies, and be willing to build or require that type of infrastructure at their working places. It was also expected that academic and research community would gain experience in implementation of ICT in their respective professional areas and thus be capable to act as consultants or contractors in implementation outside of academic community in areas like education, judicial or health care system, public administration or culture. However, in order to gain the competence, academics needed hands-on experience on real-life problems.

Therefore, in order to support pioneers in implementation of ICT in different areas, to solve a particular problem using ICT, or to make a first step in a big project, CARNet ran a range of pilot projects (www.CARNet.hr/projects) in a broad area as a complementary segment of its activities. Their goals were to prove and measure the benefits of ICT implementation, to discover the limits and estimate the costs, while building the knowledge, experience and thus competence of academic community. Projects were performed by groups and institutions from academic and research community on the contractual basis. CARNet was tendering assignments or accepting proposals, financing, monitoring and promoting projects and results.

Every occasion was used to promote usage of information technology. Upon request from organizers, CARNet participated in various events, including non-academic, providing infrastructure like Internet access, videoconferencing or streaming, technologies that were not commercially accessible. Presenting overview of the technology and trends, gaining experiences in different projects or new services, CARNet was promoting ICT to different professional and user groups.

As an independent, non-commercial agency, CARNet had initiated and maintained several national services important for whole Croatian Internet community. With this act, CARNet ensured specific infrastructure service, common for the Internet service providers sector, enhancing their operation while lowering the costs. The most important services are Domain name service (DNS), Croatian Internet Exchange (CIX) and Computer Emergency Response Team (CERT).

Defining the policy of Croatian Internet top-level domain ".hr", administration of domain names (DNS) under it, coordinating operation, promotion and legislation, is the role for a non-profit, impartial body, and thus CARNet assumed it. To motivate the industry to create national information space, domains are assigned to users free of charge.

Exchange of the traffic among Croatian ISP's through Croatian Internet Exchange (CIX), lowers the burden for networks outside Croatia and decreases the communication costs.

CARNet CERT (Computer Emergency Response Team) ensures cooperation among ISPs, users, legal bodies and international community, on the topics of education, prevention and response on security problems in the network on the national scale.

More active methods were possible and expected as CARNet tasks in the further development of public information systems: strategy development, project design, project management, executors supervision, etc.

Organizational Development

During the ten years of CARNet, its organizational form (Mintzberg, 1993) was continuously changing (Appendix 6). However, the metamorphosis can be grouped in four phases.

First Phase (1991 -1995)

CARNet started as a project. In the first phase of stable, ongoing operation, CARNet was fully run by University of Zagreb Computing Centre (SRCE), financed and coordinated by the Ministry of Science and Technology.

Young enthusiasts worked in SRCE, dedicated to provide good service to academic community, performing all communication, computer, user-support and information services. State-of-the-art technology and noble mission, in the time of war and overall depreciation, made them eager and curious to show they could make a difference. That was a time for learning and cooperation, without strong organization, planning and sustained financing.

CARNet project was initiated by a young (age 31) engineer who was immediately appointed the project director. Two years letter, in 1993, he was invited and appointed Deputy minister of science in charge of information technology. This gave the project the next boost in importance and financing. He continued to be in charge of the project.

Second Phase (1995-1998)

SRCE was the computing centre of one of four Croatian universities. Although SRCE was implementing CARNet in all universities political conditions did not allow to change its constitution and broaden its mission or "jurisdiction".

Only one-third of all SRCE employees were engaged in CARNet operation. The company as a whole was not supportive to further challenges, such as international cooperation, public relationships and customer management. The project was growing and spreading. Management in terms of project management and human resource management was becoming the predominant part of CARNet activities and SRCE management was neither competent nor ready for these non-technical types of activities. Marketing and promotion were on the edge of blasphemy in the low-salaries, engineers dominated culture. Therefore, managing tasks were spontaneously organized and performed by the Ministry of science's newly formed department for Information technology. Young engineers also populated this department but they started understanding that the key of future success of the project lies in professional management and completely new working culture. It was clear that a major change needed to take place.

In 1995, CARNet agency was put in operation. It was fully owned and financed by the government but largely independent from other state authorities. The idea was to create an organization in charge of organizing the potentially huge and endless numbers of projects. The actual work of running communication infrastructure, services, education and other activities was to be outsourced to academic community or to the market (Kowack, 1995).

A young engineer was appointed for CEO. He was a good engineer but without any managing experience. It was believed that he will learn flying on his own. He was very systematic and professional. His inclinations laid in strong hierarchy and a rigorous financial control, which were established.

CARNet operations were run by CARNet Executive Committee (CEC) formed from CEO and four deputies, leading four departments: infrastructure, services, R&D and special projects. CARNet was still very much relying on enthusiasm and learning by doing. It was impossible to find such people outside of community, so three deputies were appointed from the "inside": SRCE and Ministry, joining CARNet on the contractual basis. It was clear that this dual role (and sometimes conflict of interest) would pose the problem but it was also hoped that it would generate some benefits. Besides, it was expected to last only a few months, a year at most until "real" deputies were found.

The Deputy Minister, founder and godfather of CARNet, was the chairman of the CARNet Board. He was always present at the CEC meetings, and all strategic, especially technological decisions, were strongly influenced by him. He was deeply involved, and was sheltering young agency from the outside problems.

All those dual roles produced continuous tensions between development and operation (CARNet and SRCE), future and present priorities (Ministry's and CARNet's), "doing right things" and "doing things right" cultures.

Third Phase (1998-2000)

CARNet didn't have its own building. It was dispersed in four locations, instead. Management was caught by surprise when four different subcultures evolved within one organization. In 1997, it was becoming obvious that CARNet organised in four divisions, with four different cultures, priorities and strategies, and only about 30 people altogether could not deliver what had been required from it. Besides, full time management staff was required, among other things, to employ fully all the employees and partners potentials. The first CEO, after three years of building an organization almost from scratch, got tired from management and decided to leave.

For the expected development of organization and nationwide role, to fight scarce resources and passive environment, for further pushing of ICT into the public sector, the position was offered to chief of operations in the Ministry. She was already responsible for special projects, corporate culture and human resource management in the period of strong divisions. Engineer by education, manager by her aspirations and leader by the nature, she was the choice.

She moved from Ministry to CARNet and was appointed CEO soon to be followed by the deputy for services who was transferred from SRCE to CARNet to become vice CEO. The new, flat organization was chosen (Appendix 6) believing it could be better accommodating for project type of work and intensive knowledge sharing it required. Almost everybody was given responsibility for his or her segment of job. All of a sudden there were no (big) bosses anymore and everyone was the (small) boss.

Employees belonging to more structural departments, like infrastructure and research and development, had a rough time. Their safe haven was gone, and teamwork and responsibility has put a lot of burden on them.

At the same time, project organization was emerging, providing the platform for the multidisciplinary teamwork and more structural involvement of non-employees (partners, part-timers). Strategy was to outsource and contract all the operation, even ("hard core") research and development. That meant, "real work" and success were given to other organizations, and only "dirty administrative tasks," like running the projects and writing project documentations and contracts, remained in CARNet.

Many good engineers left CARNet in this period (Appendix 8). Only those who liked fast drive and high risk stayed in CARNet. That was time of learning new skills, large investment in non-technical education of employees, transformation from all-engineers organization in multidisciplinary organisation. It was also the time of building alliances and fighting for the sufficient budget to preserve the pioneering position among national networks.

Fourth Phase (2001-Present)

Numerous, complex, different activities and lack of strict formal structure imposed project work as the natural way of doing things. Those who resisted "administrative project management work" left. Support functions were developing. More people began to work for CARNet as contractors, employees of partner organisations or part-timers.

In the flat organization, a small management group became a bottleneck. Many parallel projects required distributed responsibilities, but still intensive cooperation.

It was time to introduce new rules of the game - adhocracy (Appendix 6). Adhocracy (Waterman, 1992) with its inefficient mutual adjacent coordinating mechanism, with lots of liaison functions, with no operational core, had become the new stage of CARNet evolution.

Majority of senior employees became managers, mentors and coordinators. Even more, responsibility was distributed among employees, especially those who were in positions of project managers.

Most of the services were formally outsourced, in the first place to SRCE, the oldest and still the most important partner. Skills in negotiation, contracting and coordinating became natural requirements for CARNet employees.

Acquisition ofthe new skills, like knowledge management, alliance building and fundraising had progressed. Unfortunately, emphasis on the non-technical competences caused animosity and lack of purpose and focus by engineers. A strong chief technical officer became necessary, to add technical view and priorities to the management team, as well as to link technical teams and their goals with overall goals.

Financing

CARNet was a governmental agency, financed directly by the state budget. The benefit it offered was a planned and secure "income" allowing efficient planning of activities. CARNet budget was to be also stable over the course of years, which would make long term planning possible.

However, experience had shown that execution ofthe budget rarely reached the planned sums and that it varied throughout the year. In addition, every new government administration needed to be familiarized with CARNet role and needs. This took time and usually caused disruptions in financing (Appendix 9).

Budget expenditure limits also limited salaries while not recognizing particularities of ICT professionals and high market demand for them. Expenditures were also limited in case of education, travelling and other items characteristic for young and new types of organizations.

Despite the problems, CARNet managed to increase, although not continuously, its budget over the years. However, a major part of the budget went for telecommunication services. Legislation was still supporting the monopoly of the national telecom operator, which allowed it to keep much higher prices than those in deregulated markets. CARNet was not successful in making its activities a state priority, which would force the monopoly holder to treat CARNet differently from other consumers.

From the day one, all CARNet services were completely free of charge for end users, both institutions and individuals. Other national networks often charged academic institutions for access to the Internet. CARNet considered there would be no benefit from it since, almost all academic and research institutions were government owned and financed from the budget. If they had to pay for services, they would put pressure for the increase of their budget. Thus, the money would come from the same source but encumbered with more administration, control and accounting expenses while giving up benefits of economy of scale.

Croatian economy had barely survived the war losses but was on the way to recovery. Companies and universities alike were still trying to figure out what the market economy was all about. Many decision makers still lived in the past, in the concepts on the benefits of the planned economy. Tax regulation did not favour donations and sponsorships for educational or scientific purposes.

In addition, advanced services were not always the priority for expenditure decision makers in many academic institutions. Thus, the plan was made to finance communication infrastructure and services centrally from the budget and then to transfer the responsibility of financing on to users and their institutions at the moment when the critical demand had been created in users community (Jennings, 1995). This would mean that CARNet would have to start charging for those services.

There were some suggestions, mostly from the Ministry of finance who is in charge of state budget, that CARNet should increase its budget by selling its services on the market to non-academic users as well. There were examples of similar behaviour in some Central European countries. However, CARNet was opposing and resisting these suggestions for several reasons. Firstly, CARNet had much broader range of activities than any other national networking organisation. Most of those services were oriented strictly to academic users, which chronically lacked funds to pay for services. Secondly, based on its non-profit and academic status, CARNet was eligible for significant discounts in purchase of hardware, software and services, both on domestic and international markets. If CARNet was to buy them at commercial prices, it would never manage to sell advanced services at an economical price. Thirdly, CARNet role was to be a pioneer and to cater to pioneers. This is almost always not profitable.

While most of Central and Eastern European countries enjoyed benefits of EU funds for development of academic networking, due to the war and political relationships, Croatia did not appear to be eligible for them. Thus, in the whole period, CARNet did not receive any significant international donation or support of any kind. In addition, international connectivity, sponsored by EU for other countries, had to be acquired, from the national monopoly holder, at extremely high prices despite big education discounts.

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

Network Infrastructure Consolidation

CARNet's 1995 projection was that, after deregulation of telecommunication market (in 2003), major part of its connectivity services will become commodity products and, due to the economy of scale, would be available at a price on the market. This, however, meant that CARNet would have to cease to operate its communication infrastructure as a private network, and be buying the service. The only exception would be much smaller experimental test bed used for piloting new technologies and services not yet available on the market.

However, this did not and will not happen in the next several years (to 2004 and beyond).

There are several reasons for that, all mutually intertwined and interdependent:

usage of ICT did not grow as expected and penetration to various activities was still very low, making the market still weak;

government has not initiated informatization ofpublic services, which would stimulate consumption and development of public networking infrastructure; and

monopoly has been prolonged (to 2004) allowing high prices.

Therefore, CARNet has to continue operating and enhancing its private network. However, this is becoming increasingly difficult due to the fact that:

after privatisation of the national telecomm operator (HT) the monopoly period has been prolonged. Private owner (Deutsche Telekom) has increased prices and shows no interest for special arrangements with CARNet. Instead, CARNet is treated as its competitor;

HT is technically and organizationally not able to provide advanced services;

HT does not want to sell low level services like copper lines or dark fibre (unbundling the local loop) which would allow CARNet to install its own advanced equipment; and

HT is forcing CARNet to use its medium level services like 2 Mpbs digital lines, but even with the contract signed, HT does not deliver them at all, or does so with unacceptable delays of more than six months.

Continuation ofthis situation is making CARNet network obsolete fast. A solution must be found and implemented quickly. Currently, CARNet has been seeking its own way out in two directions: technological and legislative.

Technologically, CARNet has been piloting wireless LAN/MAN sub-networks (2.4 GHz spread-spectrum de-regulated solutions). On the legislative side, CARNet is exploring cooperation with other would-be providers after complete de-monopolization of telecommunications that is expected to occur in the coming years, as well as possibility to partner with owners of eligible infrastructure even before de-monopolization. For example, the town sewage company owns drainage system connecting every building in the town. Thus, a pilot project is running exploring technical, organizational and legal aspects of using sewage system to deploy CARNet's own fibre infrastructure within the city. Further, the national power company has already laid fibres in the cables of the power lines connecting cities. Partnering with them would enable CARNet to have alternative supplier of connections on the national level.

These potential alternative telecommunication providers appear to be showing some interest, though it does not seem to be strong enough probably because they do not yet know where to start. In addition, all of those companies are still state owned and are waiting for the privatisation decisions from the government.

On the international level, in these ten years, CARNet has been a user of European networking infrastructure, being connected to the node in Vienna. It has always been CARNet's vision to become the connecting network between the neighbouring countries. However, it has not been possible due to the lack of traffic interest among the western neighbours as well as due to the lack of political will to approach the eastern neighbours. Fortunately, new EU project GEANT has decided to establish a POP (Point Of Presence) in Croatia, thus connecting CARNet with the Austrian and Hungarian Networks. This gives hopes and represents a foundation for possible establishing of connection between CARNet and other networks in the eastern countries.

The Level of ICT Usage in ARC

Deploying a national networking infrastructure and establishing a wide range of services was a huge enterprise with no previous example in the country. CARNet was concentrating on fulfilling those tasks and believed that all users will eagerly embrace and use them as soon as they were available.

It did not seem to be the case, so CARNet had decided to shift the emphasis to facilitating and stimulating the usage and implementation of ICT in the academic community's life and work. In a number of surveys, CARNet was asking users about their ideas of innovative usage of ICT in what they do. The response was more than weak. It seems they may lack knowledge and experience to answer the questions regarding their primary needs or problems that ICT can fulfil or solve, not yet being able to consider how to plan to use ICT.

However, CARNet cannot fulfill this assignment alone. Students are the key alliance, because their requirements towards universities will create the demand and need for ICT. University administrations and Ministry can and should influence the change by launching projects and imposing various standards and requirements on level and quality of education and research.

Change Agent

The soft, passive role by promoting, influencing market, students and graduates and educating project leaders have been assumed by CARNet. This role should be intensified by increasing the number of employees, organization partnerships and omnipresent promotion.

However, the active form basically has not been used. Government did not launch into "informatization" of public systems like health, education, government administration or judicial system (European Commission, 2000). Those who initiate similar projects on institutional level seem not to understand the importance of project preparation and management and/or to recognise CARNet as eligible partner and resource of knowledge and experience.

As an example, primary and secondary school system is not only very similar to academic community but also naturally connected. CARNet experiences, infrastructure and services could be easily used, multiplied, cloned for the educational community. So far, there have been no requirements towards CARNet from the authorities despite CARNet showing willingness to take part and sending active messages regarding it.

The issues are:

how to raise awareness ofauthorities for the needs ofhuge ICT systems and CARNet's possible role in their establishment;

when awareness becomes present and demand for CARNet participation significantly outgrows CARNet's current capacities, should a new agency be formed, commercial spin-offs stimulated or CARNet repositioned and reshaped; and

all activities performed by CARNet so far are only a small fraction of the change agent's activities. In Croatia there is no other example of a change agent and even on the global scene there are few with the nationwide role. Thus, the question is: where to gain required knowledge in order to become a true and successful change agent on the national scale.

Human Resources

From the very first day of CARNet, people were the primary resource. CARNet always looked forward to "people flow" through the organization since it helps influencing society and transferring knowledge and organization at culture. However, to run efficient services and projects and to create, develop, maintain its own culture and transfer it to the novices, an organisation needs a core of "old" professionals. Market demand for such people is tremendous and their price is rocketing. CARNet has not even begun to fill all the job vacancies, especially in top management positions.

CARNet, being financed by the budget, has serious limitations not only in the area of salaries but also in a number of other expenditures like education, travel, equipment, office comfort, etc.

The issue, at present, seems to be how to attract and retain key personnel. So far, motivation was based on challenging projects, learning and education, warm-hearted atmosphere. However, the key personnel that grew with CARNet and is getting older, forming families, thinking about the career seems to be shifting emphasis on the importance of financial compensations.

This need can be met in two ways:

CARNet should ensure some kind of additional income that could be used for increasing salaries and other expenses or

key personnel should have reduced working hours and be allowed to earn additional income working on projects both in CARNet and outside.

Financing

There is a range of reasons to commercialise some of CARNet services:

getting all required finances from the budget is becoming increasingly difficult with growing suggestions to commercialize some of the services;

there appear to be emerging potential customers outside academic community interested in some of the services like education, connectivity, consultancy, project management, etc.;

there are views that if academic community were to pay for some of the services, they would value and use them more; and

some of human resources requirements could be fulfilled with additional, non-budget income.

The negative sides of commercialisation cover:

the fear that budget sums might be decreased even more because of false expectations that everything could be commercialised, which is not true for the backbone and international connectivity;

discounts for educational and non-profit organizations currently used might no longer be applicable;

tensions among employees working on profitable projects and those on budget would be developing; and

the basic role of academic and research community is centred on the area which is rarely profitable which transposes to corresponding ARNET activities.

There is evidence and examples on international scene that there exists interest in charitable and non-profit financing of activities similar to CARNet's. This might prove to be a significant source of income and replacement for expected budget cuts. The issue is whether to establish a fund raising department or to form a separate trust or foundation that would primarily finance CARNet's activities.

Sidebar

INTERNET SITES

Sidebar

CISCO. (2002). Internetworking Technology Handbook. http://www.cisco.com/univercd/ cc/td/doc/cisintwk/ito-doc/index.htm.

Croatian Bureau of Statistics. www.dzs.hr.

References

1-100	101-200	201-300	301-400	401-500	501-600	601-700	701-800	801-900	901-1000	1001-1100	1101-1200	1201-1300	1301-1400	1401-1500	1501-1600	1601-1700	1701-1706

Please use { Ctrl and F } simultaneously and enter kayword to find the Cases

List of Cases available in ABI INFO PROQUEST COMPLETE

Table of contents, 1301- 1400