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Trust or Control ?

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  • 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 operationIFIP 8.2 - CreativeSME – 2009, © J. Devos 2
  • 3. SMEs • Definitional problem – Europe – Singapore – New Zealand – Australia – Canada – ....IFIP 8.2 - CreativeSME – 2009, © J. Devos 3
  • 4. SMEs Our Focus: – Small companies (<<200) – Family owned and managed – Turnover < €20 million – Cross sectional – Small (domestic) markets and exportIFIP 8.2 - CreativeSME – 2009, © J. Devos 4
  • 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)IFIP 8.2 - CreativeSME – 2009, © J. Devos 5
  • 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)IFIP 8.2 - CreativeSME – 2009, © J. Devos 6
  • 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 ?IFIP 8.2 - CreativeSME – 2009, © J. Devos 7
  • 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 LitigationIFIP 8.2 - CreativeSME – 2009, © J. Devos 8
  • 9. Research Methodology Mapping propositions and observations Positivistic approach (Yin, Lee)IFIP 8.2 - CreativeSME – 2009, © J. Devos 9
  • 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)IFIP 8.2 - CreativeSME – 2009, © J. Devos 10
  • 11. Theoretical framework Agency Theory  Principal = customer / determines the work  Agent = contractor: ISV (Independent Software Vendor) or ERP Implementor / undertakes the work  Contract =IFIP 8.2 - CreativeSME – 2009, © J. Devos 11
  • 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.IFIP 8.2 - CreativeSME – 2009, © J. Devos 12
  • 13. Theoretical framework (Inter)organizational trust Written Psychological Contract Contract Unexpected Changes Structural Controls Trust R. SabherwalIFIP 8.2 - CreativeSME – 2009, © J. Devos 13
  • 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 propositionsIFIP 8.2 - CreativeSME – 2009, © J. Devos 14
  • 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)IFIP 8.2 - CreativeSME – 2009, © J. Devos 15
  • 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 NoIFIP 8.2 - CreativeSME – 2009, © J. Devos 16
  • 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 NoIFIP 8.2 - CreativeSME – 2009, © J. Devos 17
  • 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)IFIP 8.2 - CreativeSME – 2009, © J. Devos 18
  • 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 ?IFIP 8.2 - CreativeSME – 2009, © J. Devos 19
  • 20. Questions ?IFIP 8.2 - CreativeSME – 2009, © J. Devos 20