1. IT Governance in SMEs:
Trust or Control?
Jan Devos
Ghent University Association
Co-authors:
Prof. Dr. ir. H. Van Landeghem, UGent, Industrial Management
Prof. Dr. ir. D. Deschoolmeester, UGent, Vlerickschool for Management
Keywords: SMEs, Agency Theory, Control, Trust, Case Study, Positivism,
IFIP 8.2 - CreativeSME – 2009, © J. Devos 1

2. Small and Medium-Sized
Enterprises
• Definitional problem
– Bolton Committee defines an SME as:
1) one that has a relatively small market share,
2) one that is managed by its owners or part owners in a
personalized way, not by an organized managerial structure and
3) one that is independent with the owners/managers having
control of the activities of the business.
– U.S. Small Business Administration (Size Standard)
depending on the industry of the SME
number of employees (<500) or the average annual receipts
independently owned and operated and not dominant in its field
of operation
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3. SMEs
• Definitional problem
– Europe
– Singapore
– New Zealand
– Australia
– Canada
– ....
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4. SMEs
Our Focus:
– Small companies (<<200)
– Family owned and managed
– Turnover < €20 million
– Cross sectional
– Small (domestic) markets and export
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5. IT and SMEs
• Different economical, cultural and managerial
environment (compared to corporate accounts)
– Resource poverty (financial, knowledge, IT, ...)
– Depend on external IT expertise
– Low IT capabilities and practices
– Central role of CEO (owner)
– Slow adopters of IT
• Lack of relevant IS research in SMEs
– Since 1978 (to august 2008): only 247 refereed A1-
publications (Devos, 2009; working paper)
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6. IT Governance
• IT Governance (IT Governance Institute)
to direct IT endeavors, to ensure ITs performance meets the following
objectives:
- for IT to be aligned with the enterprise and realize the promised benefits
- for IT to enable the enterprise by exploiting opportunities and
maximizing benefits
- for IT resources to be used responsibly
- for IT related risks to be managed appropriately
“Placing IT on the agenda of the board” (W. Van Grembergen)
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7. IT Governance and SMEs
• Outsourced IS Failure (OISF)
– A lot of failures (Standish Group, 2007)
– Theorizing on failures (Lyytinen & Hirschheim, 1987;
Sauer, 1993)
– OISF is a failure during an IS project in an
outsourced environment and an IT
Governance failure in SMEs (Devos et al, 2008)
• How and why do OISFs occur in SMEs?
• IT Governance: Control or Trust ?
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8. Research Methodology
(Positivistic) Retrospective Multiple-case Study
Cases has been selected where the phenomenon under investigation occurs
Ceteris paribus criteria: Outsourcing Project Management, SMEs, Missions Critical projects
Explanatory power of the cases
Case Sector Turnover Staff Type of Result Dispute
Project Resolution
Rockit Textile €11.64 million 67 ERP No failure -
Woody Trading n.a. < 200 SDI Process Failure Litigation
Mach Manufacturing €12.75 million 146 ERP Expectation Failure Litigation
Bupo Software €475000 8 SD Process Failure Litigation
Dybo Trading €15.65 million 16 SDI Process Failure Litigation
Stones Manufacturing €31.25 million 200 ERP Expectation Failure ADR
Boxcars Service €5.00 - €20.00 10-30 DIS Expectation Failure ADR
million
Hero Service €4.00 million 5 SDI Escalation Failure Litigation
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9. Research Methodology
Mapping propositions and observations
Positivistic approach (Yin, Lee)
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10. Theoretical Framework
Control Trust
• Homo economicus • Social interactions
• Agency theory • Shared moral values and
• Opportunistic behavior norms
(moral hazard / adverse • Competence – Relational
selection) trust
• Structured controls • Trust levels and trust
• Written contract building mechanisms
(outcome/behavior • Psychological contract
based)
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11. Theoretical framework
Agency Theory
 Principal = customer / determines the work
 Agent = contractor: ISV (Independent Software Vendor) or ERP
Implementor / undertakes the work
 Contract =
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12. Theoretical framework
(Inter)organizational trust
Agent Principal
Organization Organization
A1 P2
P1
A1 – Primary Boundary Spanner P1 – Primary Boundary Spanner
P2 – Secondary Boundary Spanner
A. Zaheer et al.
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13. Theoretical framework
(Inter)organizational trust
Written Psychological
Contract Contract
Unexpected
Changes
Structural Controls Trust
R. Sabherwal
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14. Theoretical framework
• Both theories are process theories
• Discrete outcomes (may not occur even when
conditions are present)
• Logical form with conditions as ‘necessary’ or
‘sufficient’ rather than ‘dependent’ and
‘independent’ variables
• Time is a crucial factor (trajectory of IS project)
• Falsifiable propositions
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15. Propositions
P1 – An OISF must happen if there are no structured controls implemented
P2 – An OISF must happen if the contract is not outcome-based
P3 – An OISF must happen if (there are no structured controls implemented
and the contract is not outcome-based)
P4 – An OISF must happen if (there is no trust between the principal and the
agent)
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16. Observations
Table 2. Overview and summary of the case observations
Case Foam Case Woody Case Mach Case Bupo
Principal Manufacturer (plastic Trader (lumber) Trader and ISV
foam) manufacturer
(veneered boards,
ceiling coverings, wall
planks)
Turnover €50 million n.a. €12.75 million €475000
Staff 100 White collars 146 (total) 8 white collars
450 Blue collars
IT Maturity CMM level 1 CMM level 1 CMM level 1 CMM level 1
Application ERP + customizing ERP development ERP + customizing Office application
Cost Original: €644000 €372000 €90000 €50000
Final: 1.290000
Litigation Yes Yes Yes Yes
Type of contract Outcome-based Outcome-based Mixed Outcome-based
Structural controls in contract and in project Yes/Yes Yes/Yes Yes/No Yes/No
External consultancy No No Yes No
Private information (agent) Yes Yes Yes Yes
Private information (principal) Yes No Yes No
Hidden actions agent Yes Yes Yes Yes
Hidden actions principal Yes No Yes No
Adverse selection No No No Yes
Prospect framing Positive Positive Positive -
Vendor lock Yes No No No
Lack of commitment (agent) No Yes Yes Yes
Lack of commitment (principal) No No No No
Level of trust Deterrence Deterrence Deterrence Deterrence
Trust deterioration Yes Yes Yes Yes
Trust-building mechanism No No No No
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17. Observations
Table 2. Overview and summary of the case observations (cont.)
Case Dybo Case Stones Case Boxcars Case Hero
Principal Trader and Manufacturer (stones, Dealer in cars Contractor (waste
manufacturer street furniture) removal)
(lumber)
Turnover €15.65 million €31.25 million n.a. n.a.
Staff 16 (total) 80 white collars - 5
120 blue collars
IT Maturity CMM level 0 CMM Level 2 CMM level 1 CMM level 0
Application ERP development ERP + customizing DIS + customizing Office and DB
application
development
Cost €50000 €750000 60x€75000 €75000
Litigation Yes No (dispute) No (disputes) Yes
Type of contract Mixed Behaviour-based Mixed Outcome-based
Structural controls in contract and in project No/No Yes/Yes Yes/Yes Yes/No
External consultancy No No Yes No
Private information (agent) Yes Yes Yes Yes
Private information (principal) No No No Yes
Hidden actions agent No Yes Yes No
Hidden actions principal No No No No
Adverse selection No Yes Yes No
Prospect framing - Positive Positive Positive
Vendor lock Yes Yes Yes No
Lack of commitment (agent) No No No No
Lack of commitment (principal) Yes No Yes Yes
Level of trust Deterrence Knowledge Deterrence Deterrence
Trust deterioration Yes No No Yes
Trust-building mechanism No No No No
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18. Discussion
Structural controls
OISF can be avoided without structural controls (P1)
Outcome based contract
OISF can be avoided without outcome-based contract (P2)
Structural controls AND Outcome based contract
OISF can be avoided without structural controls and
outcome-based contract (P3)
Trust
An OISF happens if there is no trust (P4)
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19. Conclusions
- Trust seems to be more important than structural
controls and outcome based contracts in SMEs
- Strong descriptive power of Agency theory
- Trust and control are may be not rivalry theories
- SMEs are different ?
family-owned and CEO centric
- IT Governance phenomena are complex
What about fairness, intuition and empathy ?
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20. Questions ?
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