C IO Best Practices & Rubric IT Jonathan Hujsak’s chapter on “sustainability’ really tails Hugos closely as it does the previous chapter on green. Many of the arguments in both previous chapters are reincarnate in this chapter. I do not see much value in re-discussing electricity and the carbon footprint. I was struck by several aspects of this chapter. The author writes (187): “Information technology holds the promise of revolutionary improvements in global enterprise sustainability that will dramatically enhance enterprise agility, increase operational efficiency, and even turn cost centers into profit centers.” Several innovations in data management are reshaping the IT landscape. These are discussed in the chapter: server virtualization, storage virtualization, desktop virtualization, and the near future network virtualization. As an executive, the question raised by the chapter regarding virtualization as a sustainability strategy is less than a yes/no, but a when/how. We will ask ourselves, and discuss, the extent to which the virtualization of processing portends the removal of a dedicated IT staff. We will discuss the extent to which the CIO is no longer the manager of a dedicated expert staff, but fully engaged in vendor management and service oversight. Finally we should ask ourselves the extent to which bricks and mortar will even define the corporation as an entity. The corporation, or at least its administrative wing, is more of an abstract. Does it matter if the processing engine of your corporate data is in Bangladesh or Nairobi? Does it matter what flag the vendor’s employees salute or what god they worship? Once we have achieved global network infrastructure stability and redundancy, we may find ourselves seriously questioning our understanding of “corporation” or even employment. Read the articles to answer the question. Please No Plagiarism or Verbatim but you MUST use a lot of quotes from the articles.  Academy ol Managwneni Review. 1989. VoL 14. No. i, S7-7i Agency Theory: An Assessment and Review KATHLEEN M. EISENHARDT Stanford University Agency theory is an important, yet controversial, theory. This paper reviews agency theory, its contributions to organization theory, and the extant empirical work and develops testable propositions. The conclusions are that agency theory (a) offers unique insight into in- formation systems, outcome uncertainty, incentives, and risk and (b) is an empirically valid perspective, particularly when coupled with complementary perspectives. The principal recommendation is to in- corporate an agency perspective in studies of the many problems having a cooperative structure. One day Deng Xiaoping decided to take his grandson to visit Mao. "Call me granduncle," Mao offered warmly. "Oh, 1 certainly couldn't do that. Chairman Mao," the awe-struck child replied. "Why don't you give him an apple?" suggested Deng. No sooner had Mao done so than the boy happily chirped, "Oh thank you. Grandunc ...

1. C IO Best Practices & Rubric IT
Jonathan Hujsak’s chapter on “sustainability’ really tails Hugos
closely as it does the previous chapter on green. Many of the
arguments in both previous chapters are reincarnate in this
chapter. I do not see much value in re-discussing electricity and
the carbon footprint. I was struck by several aspects of this
chapter. The author writes (187): “Information technology holds
the promise of revolutionary improvements in global enterprise
sustainability that will dramatically enhance enterprise agility,
increase operational efficiency, and even turn cost centers into
profit centers.” Several innovations in data management are
reshaping the IT landscape. These are discussed in the chapter:
server virtualization, storage virtualization, desktop
virtualization, and the near future network virtualization. As an
executive, the question raised by the chapter regarding
virtualization as a sustainability strategy is less than a yes/no,
but a when/how. We will ask ourselves, and discuss, the extent
to which the virtualization of processing portends the removal
of a dedicated IT staff. We will discuss the extent to which the
CIO is no longer the manager of a dedicated expert staff, but
fully engaged in vendor management and service oversight.
Finally we should ask ourselves the extent to which bricks and
mortar will even define the corporation as an entity. The
corporation, or at least its administrative wing, is more of an
abstract. Does it matter if the processing engine of your
corporate data is in Bangladesh or Nairobi? Does it matter what
flag the vendor’s employees salute or what god they worship?
Once we have achieved global network infrastructure stability
and redundancy, we may find ourselves seriously questioning
our understanding of “corporation” or even employment.
Read the articles to answer the question. Please No
Plagiarism or Verbatim but you MUST use a lot of quotes from
the articles.

2. Academy ol Managwneni Review. 1989. VoL 14. No. i, S7-7i
Agency Theory: An Assessment
and Review
KATHLEEN M. EISENHARDT
Stanford University
Agency theory is an important, yet controversial, theory. This
paper
reviews agency theory, its contributions to organization theory,
and
the extant empirical work and develops testable propositions.
The
conclusions are that agency theory (a) offers unique insight into
in-
formation systems, outcome uncertainty, incentives, and risk
and (b)
is an empirically valid perspective, particularly when coupled
with
complementary perspectives. The principal recommendation is
to in-
corporate an agency perspective in studies of the many
problems
having a cooperative structure.
One day Deng Xiaoping decided to take his
grandson to visit Mao. "Call me granduncle,"
Mao offered warmly. "Oh, 1 certainly couldn't
do that. Chairman Mao," the awe-struck child
replied. "Why don't you give him an apple?"
suggested Deng. No sooner had Mao done so
than the boy happily chirped, "Oh thank you.
Granduncle." "You see," said Deng, "what in-

3. centives can achieve." ("Capitalism," 1984, p.
62)
Agency theory has been used by scholars in
accounting (e.g., Demski & Feitham, 1978), eco-
nomics (e.g., Spence & Zeckhauser, 1971), fi-
nance (e.g., Fama, 1980), marketing (e.g., Basu,
Lai, Srinivasan, & Staelin, 1985), political sci-
ence (e.g., Mitnick, 1986), organizational behav-
ior (e.g., Eisenhardt, 1985, 1988; Kosnik, 1987),
and sociology {e.g., Eccles, 1985; White, 1985).
Yet, it is still surrounded by controversy. Its pro-
ponents argue that a revolution is at hand and
that "the foundation for a powerful theory of or-
ganizations is being put into place" (Jensen,
1983, p. 324). Its detractors call it trivial, dehu-
manizing, and even "dangerous" (Perrow, 1986,
p. 235).
Which is it: grand theory or great sham? The
purposes of this paper are to describe agency
theory and to indicate ways in which organiza-
tional researchers can use its insights. The pa-
per is organized around four questions that are
germane to organizational research. The first
asks the deceptively simple question. What is
agency theory? Often, the technical style, math-
ematics, and tautological reasoning of th©
agency literature can obscure the theory. More-
over, the agency literature is split into two
camps (Jensen, 1983), leading to differences in
interpretation. For example, Barney and Ouchi
(1986) argued that agency theory emphasizes
how capital markets can affect the firm,
whereas other authors made no reference to

4. capital markets at all (Anderson, 1985; Demski &
Feitham, 1978; Eccles, 1985; Eisenhardt, 1985).
The second question is. What does agency
theory contribute to organizational theory? Pro-
ponents such as Ross (1973, p. 134) argued that
"examples of agency are universal." Yet other
scholars such as Perrow (1986) claimed that
agency theory addresses no clear problems,
and Hirsch and Friedman (1986) called it exces-
sively narrow, focusing only on stock price. For
economists, long accustomed to treating the or-
57
ganizatjon as a "black box" in the theory of the
firm, agency theory may be revolutionary. Yet,
for organizational scholars the worth of agency
theory is not so obvious.
The third question is. Is agency theory empir-
ically valid? The power of the empirical research
on agency theory to explain organizational phe-
nomena is important to assess, particularly in
light of the criticism that agency theory is
"hardly subject to empirical test since it rarely
tries to explain actual events" (Perrow, 1986, p.
224). Perrow (1986) also criticized the theory for
being un realistically one-sided because of its
neglect of potential exploitation of workers.
The final question is, What topics and contexts
are fruitful for organizational researchers who
use agency theory? Identifying how useful

5. agency theory can be to organizational scholars
requires understanding the situations in which
the agency perspective can provide theoretical
leverage.
The principal contributions of the paper are to
present testable propositions, identify contribu-
tions of the theory to organizational thinking,
and evaluate the extant empirical literature. The
overall conclusion is that agency theory is a use-
ful addition to organizational theory. The
agency theory ideas on risk, outcome uncer-
tainty, incentives, and information systems are
novel contributions to organizational thinking,
and the empirical evidence is supportive of the
theory, particularly when coupled with comple-
mentary theoretical perspectives.
Origins of Agency Theory
During the 1960s and early 1970s, economists
explored risk sharing among individuals or
groups (e,g.. Arrow, 1971; Wilson, 1968). This
literature described the risk-sharing problem as
one that arises when cooperating parties have
different attitudes toward risk. Agency theory
broadened this risk-sharing literature to include
the so-called agency problem that occurs when
cooperating parties have different goals and di-
vision of labor (Jensen & Meckling, 1976; Ross,
1973). Specifically, agency theory is directed at
the ubiquitous agency relationship, in which
one party (the principal) delegates work to an-
other (the agent), who performs that work.
Agency theory attempts to describe this relation-

6. ship using the metaphor of a contract (Jensen &
Meckling, 1976).
Agency theory is concerned with resolving
two problems that can occur in agency relation-
ships. The first is the agency probl&m that arises
when (a) the desires or goals of the principal and
agent conflict and (b) it is difficult or expensive
for the principal to verify what the agent is ac-
tually doing. The problem here is that the prin-
cipal cannot verify that the agent has behaved
appropriately. The second is the problem of risk
sharing that arises when the principal and
agent have different attitudes toward risk. The
problem here is that the principal and the agent
may prefer different actions because of the dif-
ferent risk preferences.
Because the unit of analysis is the contract
governing the relationship between the princi-
pal and the agent, the focus of the theory is on
determining the most efficient contract govern-
ing the principal-agent relationship given as-
sumptions obout people (e.g., self-interest,
bounded rationality, risk aversion), organiza-
tions (e.g., goal conflict among members), and
information (e.g., information is a commodity
which can be purchased). Specifically, the
question becomes. Is a behavior-oriented con-
tract (e.g., salaries, hierarchical governance)
more efficient than an outcome-oriented con-
tract (e.g., commissions, stock options, transfer
of property rights, market governance)? An over-
view of agency theory is given in Table 1.
The agency structure is applicable in a variety

7. of settings, ranging from macrolevel issues such
as regulatory policy to microlevel dyad phe-
nomena such as blame, impression manage-
ment, lying, and other expressions of self-
interest. Most frequently, agency theory has
been applied to organizational phenomena
58
Table 1
Agency Theory Overview
Key idea
Unit of
analysis
Human
assumptions
Organizational
assumptions
information
assumption
Contracting
problems
Problem
domain
Principal-agent relationships should
reflect efficient organization of

8. information and risk-bearing costs
Contract between principal and agent
Seif-interest
Bounded rationality-
Risk aversion
Partial goal conflict among participants
Efficiency as the effectiveness criterion
Information asymmetry between principal
and agent
Infonnation as a purchasable commodity
Agency (moral hazard and adverse
selection)
Risk shanng
Relationships in which the principal and
agent have partly differing goals and
risk preferences (e.g., compensation,
regulation, leadership, impression
management, whistle-blowing, vertical
integration, transfer pricing)
such as compensation (e.g., Conlon & Parks,
1988; Eisenhardt, 1985), acquisition and diversi-
fication strategies (e.g., Amihud & Lev, 1981),
board relationships (e.g., Fama & Jensen, 1983;
Kosnik, 1987), ownership and financing struc-
tures (e.g., Argawal & Mandelker, 1987; Jensen
& Meckling, 1976), vertical integration (Ander-
son, 1985; Eccles, 1985), and innovation (Bolton,

9. 1988; Zenger, 1988). Overall, the domain of
agency theory is relationships that mirror the
basic agency structure of a principal and an
agent who are engaged in cooperative behav-
ior, but have differing goals and differing atti-
tudes toward risk.
Agency Theory
From its roots in information economics,
agency theory has developed along two lines:
positivist and principal-agent Censen, 1983). The
two streams share a common unit of analysis:
the contract between the principal and the
agent. They also share common assumptions
about people, organizations, and information.
However, they differ in their mathematical rigor,
dependent variable, and style.
Positivist Agency Theory
Positivist researchers have focused on identi-
fying situations in which the principal and agent
are likely to have conflicting goals and then de-
scribing the governance mechanisms that limit
the agent's self-serving behavior. Positivist re-
search is less mathematical than principal-
agent research. Also, positivist researchers
have focused almost exclusively on the special
case of the principal-agent relationship between
owners and managers of large, public corpora-
tions (Berle & Means, 1932).
Three articles have been particularly influen-
tial. Jensen and Meckling (1976) explored the

10. ownership structure of the corporation, includ-
ing how equity ownership by managers aligns
managers' interests with those of owners. Fama
(1980) discussed the role of efficient capital and
labor markets as information mechanisms that
are used to control the self-serving behavior of
top executives. Fama and Jensen (1983) de-
scribed the role of the board of directors as an
information system that the stockholders within
large corporations could use to monitor the op-
portunism of top executives. Jensen and his col-
leagues (Jensen, 1984; Jensen & Roeback, 1983)
extended these ideas to controversial practices,
such as golden parachutes and corporate raid-
ing.
From a theoretical perspective, the positivist
stream has been most concerned with describ-
ing the governance mechanisms that solve the
agency problem. Jensen (1983, p. 326) described
this interest as "why certain contractual rela-
tions arise." Two propositions capture the gov-
ernance mechanisms which are identified in the
positivist stream. One proposition is that out-
59
come-based contracts are effective in curbing
agent opportunism. The argument is that such
contracts coalign the preferences of agents with
those of the principal because the rewards for
both depend on the same actions, and, there-
fore, the conflicts of self-interest between princi-
pal and agent are reduced. For example, Jensen

11. and Meckiing (1976) described how increasing
the firm ownership of the managers decreases
managerial opportunism. In formal terms.
Proposition I: When the contract between the
principal and agent is oufcome based, (he
agent is more likely to behave in the interests of
tbe principal.
The second proposition is that infonnation sys-
tems also curb agent opportunisn:i. The argu-
ment here is that, since information systems in-
form the principal about what the agent is actu-
ally doing, they are likely to curb agent oppor-
tunism because the agent will realize that he or
she cannot deceive the principal. For example,
Fama (1980) described the informcrtion effects of
efficient capital and labor markets on manage-
rial opportunism, and Fama and Jensen (1983)
described the information role that boarc^ of di-
rectors play in controlling managerial behavior.
In formal terms.
Proposition 2: When the principal has informa-
tion to verify agent behavior, the agent is more
likely io behave in the interests of the principal
At its best, positivist agency theory can be re-
garded as enriching economics by offering a
more complex view of organizations (Jensen,
1983). However, it has been criticized by orga-
nizational theorists as minimalist (Hirsch,
Michaels, & Friedman, 1987; Perrow, 1986) and
by microeconomists as tautological and lacking
rigor (Jensen, 1983). Nonetheless, positivist
agency theory has ignited considerable re-

12. search (Barney & Ouchi, 1986) and popular in-
terest ("Meet Mike," 1988).
Principal-Agent ReBearch
Principal-agent researchers are concerned
with a general theory of the principal-agent re-
lationship, a theory that can be applied to em-
ployer-employee, lawyer-client, buyer-supplier,
and ether agency relationships (Harris & Raviv,
1978). Characteristic oi formal theory, the prin-
cipal-agent paradigm involves careful specifi-
cation of assumptions, which are followed by
logical deduction and mathematical proof.
In comparison with the positivist stream, prin-
cipal-agent theory is abstract and mathematical
and, therefore, less accessible to organizational
scholars. Indeed, the most vocal critics of the
theory (Perrow, 1986; Hirsch et al., 1987) have
focused their attacks primarily on the more
widely known positivist stream. Also, the prind-
pal-agent stream has a broader focus and
greater interest in general, theoretical implica-
tions. In contrast, the positivist writers have fo-
cused almost exclusively on the special case of
the owner/CEO relationship in the large corpo-
ration. Finally, principal-agent research in-
cludes many more testable implications.
For organizational scholars, these differences
provide background for understanding criticism
of the theory. However, they are not crucial
Rather, the important point is that the two
streams are complementary: Positivist theory
identifies various contract alternatives, and prin-

13. cipal-agent theory indicates which contract is
the most efficient under varying levels of out-
come uncertainty, risk aversion, information,
and other variables described below.
The focus of the principal-agent literature is
on determining the optimal contract, behavior
versus outcome, between the principal and the
agent. The simple model assumes goal conflict
between principal and agent, an easily mea-
sured outcome, and an agent who is more risk
averse than the principal. (Note: The argument
behind a more risk averse agent is that agents,
who are unable to diversify their employment,
should be risk averse and principals, who are
60
capable of diversifying their investments,
should be risk neutral.) The approach of the sim-
ple model can be described in terms of cases
(e.g., Demski 8c Feitham, 1978). The first case, a
simple case of complete information, is when the
principal knows what the agent has done.
Given that the principal is buying the agent's
behavior, then a contract that is based on be-
havior is meet efficient. An outcome-based con-
tract would needlessly transfer risk to the agent,
who is assumed to be more risk averse than the
principal.
The second case is when the principal does
not know exactly what the agent has done.
Given the self-interest of the agent, the agent

14. may or may not have behaved as agreed. The
agency problem arises because (a) the principal
and the agent have different goals and (b) the
principal cannot determine if the agent has be-
haved appropriately. In the formal literature,
two aspects of the agency problem are cited.
Moral hazard refers to lack of effort on the part of
the agent. The argument here is that the agent
may simply not put forth the agreed-upon effort.
That is, the agent is shirking. For example,
moral hazard occurs when a research scientist
works on a personal research project on com-
pany time, but the research is so complex that
corporate management cannot detect what the
scientist is actually doing. Adverse selection re-
fers to the misrepresentation of ability by the
agent. The argument here is that the agent may
claim to have certain skills or abilities when he
or she is hired. Adverse selection arises because
the principal cannot completely verify these
skills or abilities either at the time of hiring or
while the agent is working. For example, ad-
verse selection occurs when a research scientist
claims to have experience in a scientific spe-
cialty and the employer cannot judge whether
this is the case.
In the case of unobservable behavior (due to
moral hazard or adverse selection), the principal
has two options. One is to discover the agent's
behavior by investing in information systems
such as budgeting systems, reporting proce-
dures, boards of directors, and additional layers
of management. Such investments reveal the
agent's behavior to the principal, and the situa-

15. tion reverts to the complete information case. In
formal terms,
Proposition 3: Information systems are posi-
tively related to behavior-based contracts and
negatively related to oufcome-based contracts.
The other option is to contract on the outcomes
of the agent's behavior. Such an outcome-based
contract motivates behavior by coalignment of
the agent's preferences with those of the princi-
pal, but at the price of transferring risk to the
agent. The issue of risk arises because outcomes
are only partly a function of behaviors. Govem-
ment policies, economic climate, competitor ac-
tions, technological change, and so on, may
cause uncontrollable variations in outcomes.
The resulting outcome uncertainty introduces
not only the inability to preplan, but also risk
that must be borne by someone. When outcome
uncertainty is low, the costs of shifting risk to the
agent are low and outcome-based contracts are
attractive. However, as uncertainty increases, it
becomes increasingly expensive to shift risk de-
spite the motivational benefits of outcome-based
contracts. In formal terms.
Proposition 4: Outcome uncertainty is positively
related to behavior-based contracts and nega-
tively related to outcome-based contracts.
This simple agency model has been described
in varying ways by many authors (e.g., Demski
& Feitham, 1978; Harris & Raviv, 1979; Holm-
strom, 1979; Shavell, 1979). However, the heart
of principal-agent theory is the trade-off be-

16. tween (a) the cost of measuring behavior and (b)
the cost of measuring outcomes and transferring
risk to the agent.
A number of extensions to this simple model
are possible. One is to relax the assumption of a
risk-averse agent (e.g., Harris & Raviv, 1979).
Research (MacCrimmon & Wehrung, 1986) indi-
cates that individuals vary widely in their risk
61
attitudes. As the agent becomes increasingly
less risk averse (e.g., a wealthy agent), it be-
comes more attractive to pass risk to the agent
using an outcome-based contract. Conversely,
as the agent becomes more risk averse, it is in-
creasingly expensive to pass risk to the agent. In
formal terms.
Proposition 5; Th& risk aversion of the agent is
positively related to behavior-based contracts
and negatively related to outcome-based con-
tracts.
Similarly, as the principal becomes more risk
averse, it is increasingly attractive to pass risk to
the agent. In formal terms.
Proposition 6: The risk aversion ot the principal
is negatively related to behavior-based con-
tracts and positiveJy related to outcome-
based contracts.

17. Another extension is to relax the assumption
of goal conflict between the principal and agent
(e.g., Demski, 1980). This might occur either in a
highly socialized or clan-oriented firm (Ouchi,
1979) or in situations in which self-interest gives
way to selfless behavior (Perrow, 1986). If there
is no goal conflict, the agent will behave as the
principal would like, regardless of whether his
or her behavior is monitored. As goal conflict
decreases, there is a decreasing motivational
imperative for outcome-based contracting, and
the issue reduces to risk-sharing considerations.
Under the assumption of a risk-averse agent,
behavior-based contracts become more attrac-
tive. In formal terms,
Proposition 7: The goal conflict between princi-
pal and agent is negatively related to behavior-
based contracts and positively related to out-
come-based contracts.
Another set of extensions relates to the task per-
formed by the agent. For example, the progam-
mability of the task is likely to influence the ease
of measuring behavior (Eisenhardt, 1985, 1988).
Programmability is defined as the degree to
which appropriate behavior by the agent can
be specified in advance. For example, the job of
a retail sales cashier is much more programmed
than that of a high-technology entrepreneur.
The argument is that the behavior of agents en-
gaged in more programmed jobs is easier to ob-
serve and evaluate. Therefore, the more pro-
grammed the task, the more attractive are be-
havior-based contracts because information

18. about the agent's behavior is more readily de-
termined. Very programmed tasks readily re-
veal agent behavior, and the situation reverts to
the complete information case. Thus, retail sales
clerks are more likely to be paid via behavior-
based contracting (e.g., hourly wages), where-
as entrepreneurs are more likely to be compen-
sated with outcome-based contracts (e.g., stock
ownership). In formal terms.
Proposition 8: TasJr programmabiiity is posi-..
tiveiy reiated to behavior-based contracts and
negatively related to outcome-based contracts.
Another task characteristic is the measurabil-
ity of the outcome (Anderson, 1985; Eisenhardt,
1985). The simple model assumes that outcomes
are easily measured. However, some tasks re-
quire a long time to complete, involve joint or
team effort, or produce soft outcomes. In these
circumstances, outcomes are either difficult to
measure or difficult to measure within a practi-
cal amount of time. When outcomes are mea-
sured with difficulty, outcome-based contracts
are less attractive. In contrast, when outcomes
are readily measured, outcome-based contracts
are more attractive. In formal terms.
Proposition 9: Outcome measurability is nega-
tively related to behavior-based contracts and
positively related to outcome-based contracts.
Finally, it seems reasonable that when prin-
cipals and agents engage in a long-term rela-
tionship, it is likely that the principal will leam
about the agent (e.g., Lambert, 1983) and so will

19. be able to assess behavior more readily. Con-
versely, in short-term agency relationships, the
information asymmetry between principal and
agent is likely to be greater, thus making out-
come-based contracts more attractive. In formal
tenns,
Proposition 10: The length of the agency rela-
tionship is positively related to behavior-based
contracts and negatively related to outcome-
based contracts.
Agency Theory and the
Organizational Literature
Despite Perrow's (1986) assertion that agency
theory is very different from organization theory,
agency theory has several links to mainstream
organization perspectives (see Table 2). At its
roots, agency theory is consistent with the clas-
sic works of Barnard (1938) on the nature of co-
operative behavior and March and Simon (1958)
on the inducements and contributions of the em-
ployment relationship. As in this earlier work,
the heart of agency theory is the goal conflict
inherent when individuals with differing prefer-
ences engage in cooperative effort, and the es-
sential metaphor is that of the contract.
Agency theory is also similar to political mod-
els of organizations. Both agency and political
perspectives assume the pursuit of self-interest
at the individual level and goal conflict at the

20. organizational level (e.g., March, 1962; Pfeffer,
1981). Also, in both perspectives, infonnation
asymmetry is linked to the power of lower order
participants (e.g., Pettigrew, 1973). The differ-
ence is that in political models goal conflicts are
resolved through bargaining, negotiation, and
coalitions—the power mechanism of political
science. In agency theory they are resolved
through the coalignment of incentives—the
price mechanism of economics.
Agency theory also is similar to the informa-
tion processing approaches to contingency the-
ory (Chandler, 1962; Galbraith, 1973; Lawrence
& Lorsch, 1967). Both perspectives are informa-
tion theories. They assume that individuals are
boundedly rational and that information is dis-
tributed asymmetrically throughout the organi-
zation. They also are efficiency theories; that is,
they use efficient processing of information as a
criterion for choosing among various organizing
forms (Galbraith, 1973). The difference between
the two is their focus: In contingency theory re-
searchers are concerned with the optimal struc-
turing of reporting relationships and decision-
making responsibilities (e.g., Galbraith, 1973;
Lawrence & Lorsch, 1967), whereas in agency
theory they are concerned with the optimal
structuring of control relationships resulting
from these reporting and decision-making pat-
terns. For example, using contingency theory,
we would be concerned with whether a firm is
organized in a divisional or matrix structure.
Table 2

21. Comparison of Agency Theory Assumptions and Organizational
Perspectives
Assumption
Seli-interest
Goal conflict
Bounded rationality
Iniormation asymmetry
Preemmence of efficiency
Risk aversion
Wormation as a commodity
PoliUcal
X
X
Contingency
X
X
X
Perspective
Organisation
Control
X
X
Transaction
Cost

22. X
X
X
X
X
Agency
X
X
X
X
X
X
X
63
Using agency theory, we would be concerned
with whether managers within the chosen struc-
ture are compensated by performance incen-
tives.
The most obvious tie is with the organizational
control literature (e.g., Dombusch Be Scott, 1974).
For example, Thompson's (1967) and later Ou-
chi's (1979) Unking of known means/ends rela-
tionships and crystallized goals to behavior ver-
sus outcome control is very similar to agency
theory's Unking task programmabiUty and mea-
surability of outcomes to contract form (Eisen-
hardt, 1985). That is, known means/ends rela-
tionships (task programmability) lead to behav-
ior control, and crystallized goals (measurable

23. outcomes) lead to outcome control. Similarly,
Ouchi's (1979) extension of Thompsons (1967)
framework to include clan control is similar to
assuming low goal conflict (Proposition 7) in
agency theory. Clan control impUes goal con-
gruence between people and, therefore, the re-
duced need to monitor behavior or outcomes.
Motivation issues disappear. The major differ-
ences between agency theory and the organi-
zational control literature are the risk implica-
tions of principal and agent risk aversion and
outcome uncertainty (Propositions A, b, 6).
Not surprisingly, agency theory has similari-
ties with the transaction cost perspective
(Williamson, 1975). As noted by Bomey and Ou-
chi (1986), the theories share assumptions of self-
interest and bounded rationality. They also
have similar dependent variables; that is, hier-
archies roughly correspond to behavior-based
contracts, and markets correspond to outcome-
based contracts. However, the two theories
arise from different traditions in economics
(Spence, 1975): In transaction cost theorizing we
are concerned with organizational boundaries,
whereas in agency theorizing the contract be-
tween cooperating parties, regardless of bound-
ary, is highlighted. However, the most impor-
tant difference is that each theory includes
unique independent variables. In transaction
cost theory these are asset specificity and small
numbers bargaining. In agency theory there
are the risk attitudes of the principal and agent,
outcome uncertainty, and information systems.
Thus, the two theories share a parentage in eco-

24. nomics, but each has its own focus and several
unique Independent variables.
Contributions of Agency Theory
Agency theory reestablishes the importance
of incentives and seif-interest in organizaUona]
thinking (Perrow, 1986). Agency theory reminds
us that much of organizational life, whether we
like it or not, is based on self-interest. Agency-
theory also emphasizes the importance of a
common problem structure across research top-
ics. As Barney and Ouchi (1986) described it,
organization research has become increasingly
topic, rather than theory, centered. Agency the-
ory reminds us that common problem structures
do exist across research domains. Therefore, re-
sults from one research area (e.g., vertical inte-
gration) may be germane to others with a com-
mon problem structure (e.g., compensation).
Agency theory also makes two specific contri-
butions to organizational thinking. The first is the
treatment of information. In agency theory, in-
formation is regarded as a commodity: It has a
cost, and it can be purchased. This gives an
important role to formal information systems,
such as budgeting, MBO, and boards of direc-
tors, and informal ones, such as managerial
supervision, which is unique in organizational
research. The implication is that organizations
can invest in information systems in order to
control agent opportunism.
An illustration of this is executive compensa-
tion. A number of authois in this literature have

25. expressed surprise at the lack of performance-
based executive compensation (e.g., Pearce,
Stevenson, & Perry, 1985; Ungson & Steers,
1984). However, from an agency perspective, il
is not surprising since such compensation
should be contingent upon a variety of factors
including information systems. Specifically,
64
richer infonnation systems control managerial
opportunism and, therefore, lead to less perfor-
mance-contingent pay.
One particularly relevant information system
for monitoring executive behaviors is the board
of directors. From an agency perspective, boards
can be used as monitoring devices for share-
holder interests (Fama & Jensen, 1983). When
boards provide richer information, compensa-
tion is less likely to be based on firm perfor-
mance. Rather, because the behaviors of top ex-
ecutives are better known, compensation based
on knowledge of executive behaviors is more
likely. Executives would then be rewarded for
taking well-conceived actions (e.g., high
risk/high potential R&D) whose outcomes may
be unsuccessful. Also, when boards provide
richer information, top executives are more
likely to engage in behaviors that are consistent
with stockholders' interests. For example, from
an agency viewpoint, behaviors such as using
greenmail and golden parachutes, which tend
to benefit the manager more than the stockhold-

26. ers, are less likely when boards are better mon-
itors of stockholders' interests. Operationally,
the richness of board information can be mea-
sured in terms of characteristics such as fre-
quency of board meetings, number of board
subcommittees, number of board members with
long tenure, number of board members with
managerial and industry experience, and num-
ber of board members representing specific
ownership groups.
A second contribution of agency theory is its
risk implications. Organizations are assumed to
have uncertain futures. The future may bring
prosperity, bankruptcy, or some intermediate
outcome, and that future is only partly controlled
by organization members. Environmental ef-
fects such as government regulation, emer-
gence of new competitors, and technical Inno-
vation can affect outcomes. Agency theory ex-
tends organizational thinking by pushing the
ramifications of outcome uncertainty to their
implications for creating risk. Uncertainty is
viewed in terms of risk/reward trade-offs, not just
in terms of inability to preplan. The implication
is that outcome uncertainty coupled with differ-
ences in willingness to accept risk should influ-
ence contracts between principal and agent.
Vertical integration provides an illustration.
For example. Walker and Weber (1984) found
that technological and demand uncertainty did
not affect the "make or buy" decision for compo-
nents in a large automobile manufacturer (prin-
cipal in this case). The authors were unable to

27. explain their results using a transaction cost
framework. However, their results are consistent
with agency thinking if the managers of the au-
tomobile firm are risk neutral (a reasonable as-
sumption given the size of the automobile firm
relative to the importance of any single compo-
nent). According to agency theory, we would
predict that such a risk-neutral principal is rela-
tively uninfluenced by outcome uncertainty,
which was Walker and Weber's result.
Conversely, according to agency theory, the
reverse prediction is true for a new venture. In
this case, the firm is small and new, and it has
limited resources available to it for weathering
uncertainty: The likelihood of failure looms
large. In this case, the managers of the venture
may be risk-averse principals. If so, according to
agency theory we would predict that such man-
agers will be very sensitive to outcome uncer-
tainty. In pariicuiar, the managers would be
more likely to choose the "buy" option, thereby
transferring risk to the supplying firm. Overall,
agency theory predicts that risk-neutral manag-
ers are likely to choose the "make" option (be-
havior-based contract), whereas risk-averse ex-
ecutives are likely to choose "buy" (outcome-
based contract).
Empirical Results
Researchers in several disciplines have un-
dertaken empirical studies of agency theory.
These studies, mirroring the two streams of theo-
retical agency research, are in Table 3.

28. 65
66
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Is
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o 5
3 5
0 3
I - CO
II
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2 ta
i2 „, " ffi g
S -S ° « c
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29. I
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a
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67
Results of the Positivist Stream
In the positivisf stream, the common approach
is to Identify a policy or behavior in which stock-
holder and management interests diverge and
then to demonstrate that information systems or
outcome-based incentives solve the agency
problem. That is, these mechanisms coaUgn
managerial behaviors with owner preferences.
Consistent with the positivist tradition, most of
these studies concern the separation of owner-
ship from management in large corporations,
and they use secondary source data that are
cxvailable ior large firms.
One of the earliest studies of this type was
conducted by Amihud and Lev (1981). These re-
searchers explored why firms engage in con-
glomerate mergers. In general, conglomerate
mergers are not in the interests of the stockhold-
ers because, typically, stockholders can diver-
sify directly through their stock portfolio. In con-
trast, conglomerate mergers may be attractive

30. to manageTS who have fewer avenues available
to diversify their own risk. Hence, conglomerate
mergers are an arena in which owner and man-
ager interests diverge. Specifically, these au-
thors linked merger and diversification behav-
iors to whether the firm was owner controlled (i.e.,
had a major stockholder) or manager controlled
(i.e., had no major stockholder). Consistent with
agency theory arguments (Jensen & Meckling,
1976), manager-controlled firms engaged in sig-
nificantly more conglomerate (but not more re-
lated) acquisitions and were more diversified.
Along the same lines. Walking and Long
(1984) studied managers' resistance to takeover
bids. Their sample included 105 large U.S. cor-
porations that were targets of takeover attempts
between 1972 and 1977. In general, resistance to
takeover bids is not in the stockholders' interests,
but it may be in the interests of managers be-
cause they can lose their jobs during a takeover.
Consistent with agency theory Qensen & Meck-
Ung, 1976), the authors found that managere
who have substantial equity positions within
their firms (outcome-based contracts) were less
likely to resist takeover bids.
The effects of market discipline on agency re-
lationships were examined in Wolfson's (1985)
study of the relationship between the limited
(principals) and general (agent) partners in oil
and gas tax shelter programs. In this study, both
tax and agency effects were combined in order
to assess why the limited partnership gover-
nance form survived in this setting despite ex-

31. tensive information advantages and divergent
incentives for the limited partner. Consistent
with agency arguments (Fama, 1980), Wolfson
found that long-run reputation effects of the mar-
ket coallgned the short-run behaviors of the gen-
eral partner with the limited partners' welfare.
Kosnik (1987) examined another information
mechanism for managerial opportunism, the
board of directors. Kosnik studied 110 large U.S.
corporations that were greenmail targets be-
tween 1979 and 1983. Using both hegemony and
agency theories, she related board characteris-
tics to whether greenmail was actually paid
(paying greenmail is considered not in the stock-
holders' interests). As predicted by agency the-
ory (Fama & Jensen, 1983), boards of companies
that resisted greenmail had a higher proportion
of outside directors and a higher proportion of
outside director executives.
In a similar vein, Argawal and Mandelker
(1987) examined whether executive holdings of
firm securities reduced agency problems be-
tween stockholders and management. Specifi-
cally, they studied the relationship between
stock and stock option holdings of executives
and whether acquisition and financing deci-
sions were made consistent with the interests of
stockholders. In general, managers prefer lower
risk acquisitions and lower debt financing (see
Argawal & Mandelker, 1987, for a review). Their
sample included 209 firms that participated in
acquisitions and divestitures between 1974 and
1982. Consistent with agency ideas (e.g., Jensen
& Meckling, 1976), executive security holdings

32. (outcome-based contract) were related to acqm-
sition and financing decisiorxs that were
consistent with stockholder interest. That is, ex-
ecutive stock holdings appeared to coalign
managerial preferences with those of stockhold-
ers.
Singh and Harianto (in press) studied golden
parachutes in a matched sample of 84 Fortune
500 firms. Their study included variables from
both agency and managerialist perspectives.
Consistent with agency theory Gensen & Meck-
ling, 1976; Fama & Jensen, 1983), the authors
found that golden parachutes are used to coaUgn
executive interests with those of stockholders in
takeover situations, and they are seen as an al-
temative outcome-based contract to executive
stock ownership. Specifically, the authors found
that golden parachutes were positively associ-
ated with a higher probability of a takeover at-
tempt and negatively associated with executive
stock holdings.
Finally, Barney (1988) explored whether em-
ployee stock ownership reduces a firm's cost of
equity capital. Consistent with agency theory
Gensen & Meckling, 1976), Barney argued that
employee stock ownership (outcome-based con-
tract) would coaUgn the interests of employees
with stockholders. Using efficient capital market
assumptions, he further argued that this coaUgn-
ment would be reflected in the market through a
lower cost of equity. Although Barney did not

33. directly test the agency argument, the results
are consistent with an agency view.
In summary, there is support for the existence
of agency problems between shareholders and
top executives across situations in which their
interests diverge—that is, takeover attempts,
debt versus equity financing, acquisitions, and
divestitures, and for the mitigation of agency
problems (a) through outcome-based contracts
such as golden parachutes (Singh & Harianto,
m press) and executive stock holdings (Argawal
& Mandelker, 1987; Walking & Long, 1984) and
(b) through information systems such as boards
(Kosnik, 1987) and efficient markets (Barney,
1988; Wolfson, 1985). OveraU, these studies sup-
port the positivist propositions described earlier.
Similarly, laboratory studies by Dejong and col-
leagues (1985), which are not reviewed here,
are also supportive.
Results of the Principal-Agent Stream
The principal-agent stream is more directly fo-
cused on the contract between the principal and
the agent. Whereas the positivist stream lays the
foundation (that is, that agency problems exist
and that various contract alternatives are avail-
able), the principal-agent stream indicates the
most efficient contract altemative in a given sit-
uation. The common approach in these studies
is to use a subset of agency variables such as
task programmability, information systems, and
outcome unceriainty to predict whether the con-
tract is behavior- or outcome-based. The under-

34. lying assumption is that principals and agents
will choose the most efficient contract, although
efficiency is not directly tested.
In one study, Anderson (1985) probed vertical
integration using a transaction cost perspective
with agency variables. Specifically, she exam-
ined the choice between a manufacturer's rep-
resentative (outcome-based) and a corporate
sales force (behavior-based) among a sample of
electronics firms. The most powerful explana-
tory variable was from agency theory: the diffi-
culty of measuring outcomes (measured by
amount of nonselling tasks and joint team sales).
Consistent with agency predictions, this vari-
able was positively related to using a corporate
sales force (behavior-based contract).
In other studies, Eisenhardt (1985, 1988) exam-
ined the choice between commission (outcome-
based) and salary (behavior-based) compensa-
tion of salespeople in retaiUng. The original
study (1985) included only agency variables,
while a later study (1988} added additional
agency variables and institutional theory pre-
dictions. The results supported agency theory
predictions that task programmability, informa-
tion systems (measured by the span of control),
and outcome uncertainty variables (measured
69
by number of competitors and failure rates) sig-
nificantly predict the salary versus commission

35. choice. Institutional variables were significant
as well.
Conlon and Parks (1988) repUcated and ex-
tended Eisenhardt's work in a laboratory set-
ting. They used a multiperiod design to test both
agency and institutional predictions. Consistent
with agency theory (Harris & Raviv, 1978), they
found that information systems (manipulated by
whether or not the principal could monitor the
agent's behavior) were negatively related to
performance-contingent (outcome-based) pay.
They also found support for the institutional pre-
dictions.
Finally, Eccles (1985) used agency theory to
develop a framework for understanding transfer
pricing. Using interviews with 150 executives in
13 large corporations, he developed a frame-
work based on notions of agency and faimess to
prescribe the conditions under which various
sourclng and transfer pricing altematives are
both efficient and equitable. Prominent in his
framework is the link between decentralization
(arguably a measure of task programmability)
and the choice between cost (behavior-based
contract) and market (outcome-based contract)
transfer pricing mechanisms.
In summary, there is support for the principal-
agent hypotheses linking contract form with (a)
information systems (Conlon & Parks, 1988; Ec-
cles, 1985; Eisenhardt, 1985), (b) outcome uncer-
tainty (Eisenhardt, 1985), (c) outcome measur-
ability (Anderson, 1985; Eisenhardt, 1985), (d)
time (Conlon & Parks, 1988), and (e) task pro-

36. grammability (Eccles, 1985; Eisenhardt, 1985).
Moreover, this support rests on research using a
variety of methods including questionnaires,
secondary sources, laboratory experiments,
and interviews.
Recommendations for Agency
Theory Research
As argued above, agency theory makes con-
tributions to organization theory, is testable, and
has empirical support. Overall, it seems reason-
able to urge the adoption of an agency theory
perspective when investigating the many prob-
lems that have a principal-agent structure. Five
specific recommendations are outUned below
for using agency theory in organizational re-
search.
Focus on Information Systems, Outcome
Uncertainty, and Risk
McGrath, Martin, and Kukla (1981) argued
that research is a knowledge accrual process.
Using this accrual criterion, next steps for
agency theory research are clear: Researchers
should focus on information systems, outcome
uncertainty, and risk. These agency variables
make the most unique contribution to organiza-
tional research, yet they have received little em-
pirical attention (Table 3). It is important that re-
searchers place emphasis on these variables in
order to advance agency theory and to provide
new concepts in the study of familiar topics such
as impression management, innovation, verti-

37. cal integration, compensation, strategic alli-
ances, and board relationships.
Studying risk and outcome uncertainty is par-
ticularly opportune because of recent advances
in measuring risk preferences. By relying on the
works of Kahneman and Tversky (1979), Mac-
Crimmon and Wehrung (1986), and March and
Shapira (1987), the organizational researcher
can measure risk preference more easily and
realistically. These techniques include direct
measures of risk preference such as lotteries and
indirect measures using demographic charac-
teristics such as age and wealth and payoff
characteristics such as gain versus loss. (See
March and Shapira, 1987, for a review.)
Key on Theory-Relevant Contexts
Organizational theory usually is explored in
settings in which the theory appears to have
greatest relevance. For example, institutional
and resource dependence theories were devel-
oped primarily in large, public bureaucracies in
which efficiency may not have been a pressing
70
concem. The recommendation here is to take
the same approach with agency theory: Key on
theory-relevant contexts.
Agency theory is most relevant in situations in
which contracting problems are difficult. These

38. include situations in which there is (a) substan-
tial goal conflict between principals and agents,
such that agent opporiunism is likely (e.g., own-
ers and managers, managers and profession-
als, suppliers and buyers); (b) sufficient outcome
uncertainty to trigger the risk implications of the
theory (e.g., new product innovation, young
and small firms, recently deregulated indus-
tries); and (c) unprogrammed or team-oriented
jobs in which evaluation of behaviors is difficult.
By emphasizing these contexts, researchers can
use agency theory where it can provide the most
leverage and where it can be most rigorously
tested. Topics such as innovation and settings
such as technology-based firms are pariicularly
attractive because they combine goal conflict
between professionals and managers, risk, and
jobs in which performance evaluation Is diffi-
cult.
Expand to Richer Contexts
Perrow (1986) and others have criticized agency
theory for being excessively narrow and having
few testable implications. Although these criti-
cisms may be extreme, they do suggest that re-
search should be undertaken in new areas.
Thus, the recommendation is io expand to a
richer and more complex range of contexts.
Two areas are particularly appropriate. One
is to apply the agency structure to organiza-
tional behavior topics that relate to information
asymmetry (or deception) in cooperative situa-
tions. Examples of such topics are impression
management (Gardner & Martinko, 1988), lying

39. and other forms of secrecy (Sitkin, 1987), and
blame (Leatherwood & Conlon, 1987). Agency
theory might contribute an overall framework in
which to place these various forms of self-
interest, leading to a better understanding of
[when such behaviors will be likely and when
Pthey will be effective.
The second area is expansion beyond the
pure forms of behavior and outcome contracts as
described in this article to a broader range of con-
tract altematives. Most research (e.g., Anderson,
1985; Eisenhardt, 1985, 1988) treats contracts as a
dichotomy: behavior versus outcome. However,
contracts can vary on a continuum between be-
havior and outcome contracts, Also, current re-
search focuses on a single reward, neglecting
many situations In which there are multiple re-
wards, differing by time frame and contract ba-
sis. For example, upper level managers usually
are compensated through multiple rewards
such as promotions, stock options, and salary.
Both multiple and mixed rewards (behavior and
outcome) present empirical difficulties, but they
also mirror real life. The richness and complex-
ity of agency theory would be enhanced if re-
searchers would consider this broader spectrum
of possible contracts.
Use Multiple Theories
A recent article by Hirsch et al. (1987) elo-
quently compared economics with sociology.
They argued that economics is dominated by a
single paradigm, price theory, and a single

40. view of human nature, self-interest. In contrast,
the authors maintained that a strength of orga-
nizational research is its polyglot of theories that
yields a more realistic view of organizations.
Consistent with the Hirsch et al. arguments,
the recommendation here is fo use agency the-
ory with complementary theories. Agency the-
ory presents a partial view of the world that,
although it is valid, also ignores a good bit of the
complexity of organizations. Additional per-
spectives can help to capture the greater com-
plexity.
This point is demonstrated by many of the em-
pirical studies reviewed above. For example,
the Singh and Harianto (in press) and Kosnik
(1987) studies support agency theory hypothe-
ses, but they also use the complementary per-
spectives of hegemony and managerialism.
These perspectives emphasize the power and po-
litical aspects of golden parachutes and green-
71
mail, respectively. Similarly, the studies by
Eisenhardt (1988) and Conlon and Parks (1988)
combine institutional and agency theories. The
institutional emphasis on tradition complements
the efficiency emphasis of agency theory, and
the result is a better understanding of compen-
sation. Other examples include Anderson (1985),
who coupled agency and transaction cost, and
Eccles (1985), who combined agency with equity

41. theory.
Look Beyond Economics
The final recommendation is that organiza-
tional researchers should look beyond the eco-
nomics literature. The advantages of economics
are careful development of assumptions and
logical propositions (Hirsch et al., 1987). How-
ever, much of this careful theoretical develop-
ment has already been accomplished for agency
theory. For organizational researchers, the pay-
off now is in empirical research, where organi-
zational researchers have comparative advan-
tage (Hirsch et al., 1987). To rely too heavily on
economics with its restrictive assumptions such
as efficient markets and its single-perspective
style is to risk doing second-rate economics with-
out contributing first-rate organizational re-
search. Therefore, although it is appropriate to
monitor developments in economics, it is more
useful to treat economics as an adjunct to more
mainstream empirical work by organizational
scholars.
Conclusion
This paper began with two extreme positions
on agency theory—one arguing that agency
theory is revolutionary and a powerful founda-
tion (Jensen, 1983) and the other arguing that the
theory addresses no clear problem, is narrow,
lacks testable implications, and is dangerous
(Perrow, 1986). A more vaUd perspective lies in
the middle. Agency theory provides a unique,

42. reaUstic, and empirically testable perspective
on problems of cooperative effort. The intent oi
this paper is to clarify some of the confusion sur-
rounding agency theory and to lead organiza-
tional scholars to use agency theory in their
study of the broad range of principal-agent is-
sues facing firms.
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74

50. Chapter 5: Sustainability, Technology, and Economic
Pragmatism—A View into the Future
Jonathan Hujsak
SUSTAINABILITY
Once it was familiar only in the lexicon of bioscience
professionals, but now CIOs have increasingly come to
understand, embrace, and employ the principles inherent in this
word—sustainability—to realize strategically renewable IT
systems capable of operational diversity and healthy
productivity over the long term. Sustainability is defined as:
1. The ability to sustain something.
2. (ecology) a means of configuring communities, systems, and
human activity so that cultures, their members, and their
economies are able to meet their needs and reach their greatest
potential in the present, while preserving resources, biodiversity
and natural ecosystems, planning and acting for the ability to
maintain these ideals for future generations.
Sustainability is one of the most misunderstood topics in today's
media, often considered to be anti-business and anti-technology,
and frequently associated with phrases like "green anarchism,"
"social ecology," and "eco-socialism." It's widely believed that
sustainability negatively impacts the bottom line, lowers
standard of living, reduces enterprise agility, and strangles
innovation. Nothing could be farther from the truth.
Sustainability in practice is not much different from familiar
cost reduction and efficiency moves, and has much in common
with Business Process Reengineering (BPR). Sustainability
improvements are grounded in economic pragmatism and often
turn cost centers into profit centers by reusing resources and
consolidating business processes. These improvements apply
not only to businesses of all shapes and sizes, but to society in
general, regardless of culture, industrialization, or geography.
We all live in a closed system (the Earth) and therefore we all
share a finite set of resources for which there are no
replacements.

51. Unless the world becomes more sustainable, the forces of
globalization will eventually exhaust all known resources and
industrialized society as we know it with its globally distributed
supply chains will simply grind to a halt. Millennia of human
progress will be suddenly reversed in a chaotic, violent process
of deglobalization. If we can reach a state of sustainable
equilibrium, however, we can ensure that resources, natural or
man-made, are carefully managed to preserve the delicate
balance within our sealed biosphere. We can ensure that future
generations will inherit a world even richer than before, make
room for additional population growth, support the advancement
of both undeveloped and developing nations, increase our
standard of living, and literally, "have our cake and eat it too."
Information technology has long been a historical driver of
globalization, and in the future it must play a pivotal role in
achieving the global sustainability now needed, because the
reach of human influence and our species' ability to radically
alter our planetary ecosystem demands immediate agency and
foresighted stewardship. By the same token, the role of the CIO
will become ever more important in the global enterprises that
survive and thrive in this highly integrated, globalized,
sustainable world of the future.
Information technology (IT) organizations are the distributed
neural network of the global, enterprise organism that now
reaches the most remote regions of the world, providing these
areas with unprecedented connectivity to sophisticated
information, trading, and financial systems. The scope and scale
of global enterprise IT operations are growing at an exponential
rate, as Ray Kurzweil's monumental work, The Singularity is
Near, illustrates with its exhaustive collection of technology
trend lines.[1] As these trends indicate, information technology
will be one of the most pivotal elements in the global
enterprise, not just for the sustainability improvements it can
provide, but for the transformative influence it will have on the
rest of enterprise operations. Those who lead these
organizations, CIOs and CTOs, will play an increasingly

52. important role that will soon overshadow many other high-level
executive functions.GLOBALIZATION,
DECENTRALIZATION, AND SUSTAINABILITY
Globalization is increasing at a quickening pace, transforming
the most remote corners of the world with a flood of
technology, finance, information, and cultural memes. The rate
at which new products are developed, tested, manufactured, and
marketed into this environment is now increasing at an
exponential rate, as revealed by Kurzweil's The Singularity is
Near. In this chaotic, accelerating global market, segments such
as mobile computing and communications are experiencing
product obsolescence that even overtakes product release. Cell
phones are prime examples of this trend and today have product
lifecycles of less than a year. Much of this product churn is
driven by the wide availability of powerful electronic design
and automation (EDA) tools that automate the design of
increasingly miniaturized electronics, simulating the final
functionality and performance of the product before a prototype
is ever built. The end result is a lowering of technology barriers
that reduces time to market, drives "feature explosion," and
fuels consumer expectations. More and more technologies are
becoming commoditized almost instantly under the intense
pressure of lowered trade and financial barriers, highly efficient
supply chains, improved communications, and a growing
number of global competitors. A highly visible example of this
effect is the emergence of multiple competitors to the
revolutionary Apple iPhone within months of its release.
The Shifting Landscape of IT
Concurrent with the rapid pace of globalization is the explosive
growth in offshoring of manufacturing and business processes.
The global business process offshoring (BPO) market is
currently worth $30 billion, with an upside potential of more
than $250 billion. It includes a complex mix of finance,
accounting, customer interaction and support, credit card
processing and billing, telecomm billing, legal process, and a

53. variety of emerging knowledge services.[2] Information
technology offshoring (ITO), which preceded BPO, is moving at
an even faster pace (more than 30 percent growth per year) and
is currently estimated to be worth over $50 billion
worldwide.[3] India now leads the BPO market with an
estimated 37 percent market share. Canada follows closely at 27
percent, and then the Philippines at 15 percent. A number of
other countries are rapidly gearing up to follow them into the
market, including Ireland, Mexico, Central and Eastern
European countries, South Africa, and China. Both the ITO and
BPO markets are driven by large transnational customers such
as Thomson Reuters, Dell, HSBC, American Express, and
Citigroup that are reaping substantial benefits including lower
costs, increased flexibility, and access to a growing global pool
of talent. Keeping up with these rapidly shifting global
opportunities will require unprecedented agility from future
global IT organizations.
Sustainability, Theory, and Practice
To understand the profound impact that information technology
will have in the future and the pivotal role that IT leadership
will play, the CIO must first understand sustainability
principles, sustainability frameworks, and how all of this fits
into enterprise strategic planning. From the literal definition at
the beginning of this chapter, dozens of sustainability initiatives
have sprung up over the last 20 years or so, providing well-
grounded theories, principles, and standards for the enterprise
to follow. Several of the most widely known frameworks
introduced in this chapter include Carbon Footprint, Ecological
Footprint, and The Natural Step. Many references are readily
available for the large number of lesser known frameworks not
mentioned here. This section provides the essential information
that a CIO needs to guide the C-Suite toward a forward-
thinking, factually-researched menu of applied enterprise
sustainability models and an introduction to the terminology
that a best practice CIO requires to understand emerging

54. sustainability research as a basis for ecologically and
financially sustainable IT practices that enable enterprise
strategy.Carbon Footprint
One of the best known metrics of sustainability is the Carbon
Footprint, a measure of the direct and indirect greenhouse gas
(GHG) emissions caused by the enterprise, its services, and its
products. Six primary GHG types are defined by the UN
Framework Convention on Climate Change Kyoto Protocol that
set emission standards for 37 industrialized countries and the
European Union. GHGs interfere with the radiation of heat into
space as part of the Earth's natural temperature regulation
process, contributing to global warming. The atmospheric
heating potential of GHGs is measured using the relative Global
Warming Potential (GWP) scale, which assigns carbon dioxide
the reference value of one.[4] A GHG with a larger value of
GWP has a greater impact on global warming. The six
greenhouse gases identified by the Kyoto Protocol are:
1. Carbon dioxide (CO2) is a trace gas in the atmosphere (0.038
percent) that is used by plants in the process of photosynthesis
to make sugars used in plant respiration and growth. Estimates
of the natural lifetime of CO2 in the atmosphere vary, but
generally range up to 100 years.
2. Methane (CH4) is the principal component of natural gas and
is eventually oxidized in the atmosphere to produce carbon
dioxide and water. It's a very potent GHG with a GWP value of
72. Methane has an estimated atmospheric lifetime of about 12
years.
3. Nitrous oxide (NO2) is a colorless gas with a lightly sweet
odor that is a strong oxidizer, with effects not unlike molecular
oxygen. It has a GWP of 298 and has long been linked to ozone
layer depletion. NO2 has an estimated atmospheric lifetime of
114 years.
4. Hydrofluorocarbons (HFCs) are common compounds used as
refrigerants in commercial, industrial, and consumer
applications. GWPs for these compounds range from 140 (HFC-
152a) to an amazing 11,700 (HFC-23).[5] HFC lifetimes in the

55. atmosphere range up to 260 years.
5. Perfluorocarbons (PFCs) have extremely stable chemical
structures and are not broken down in the atmosphere like other
GHGs, remaining in the atmosphere for several thousand years.
Two of the most important PFCs, tetrafluoromethane (CF4) and
hexafluoromethane (C2F6), are byproducts of aluminum
production and semiconductor manufacturing and have
atmospheric lifetimes of 50,000 and 10,000 years, respectively.
They have respective estimated GWPs of 6,500 and 9,200.
6. Sulfur hexafluoride (SF6) is a colorless, odorless gas widely
used in the power industry as a high-voltage dielectric insulator
for electrical equipment such as circuit breakers and switchgear.
It has an estimated lifetime in the atmosphere of 3,200 years
and GWP of 23,900.
Carbon Footprint is a location specific metric that takes into
consideration how "clean" the energy sources are in a specific
region (i.e., GHG production). The energy portion of the
footprint is typically calculated by summing the total direct and
indirect fuel consumption of the enterprise facility or activity in
the region including fixed assets, transportation, heating and
cooling, and other sources and multiplying the total by a
regional emissions factor which converts the value to the
equivalent mass of CO2. One gallon of gasoline, for example, is
equivalent to 8.7 kg of emitted CO2. A diesel-powered delivery
truck that gets 10 miles per gallon and drives 50,000 miles per
year will result in:
which converts to 54.83 short tons per year. To put this in
perspective, a fleet of 100 such trucks would emit 5,483 short
tons of CO2 per year.
Corrections for non–energy related GHG emissions such as
HFCs must be made to this value to get an accurate aggregate
value for enterprise Carbon Footprint. According to the
Greenhouse Gas Protocol Initiative (www.ghgprotocol.org)
Scope 3 Accounting and Reporting Standard, all GHG emissions
data must be accounted for and converted to equivalent CO2

56. tonnage.[6]
There are three distinct scopes that must be addressed in
calculating Carbon Footprint:
· Scope 1: Direct emissions from the enterprise facility
including electrical generators (emergency and cogeneration
systems), boilers, water heaters, gas-powered ovens, kilns, or
dryers, or similar equipment, vehicles, and refrigeration
systems.
· Scope 2: Electrical energy purchased from an external utility
or source.
· Scope 3: Indirect emissions resulting from your supply chain
including purchased materials, delivery vehicles and freight
services, employee commuting, employee travel (car rentals,
train, airlines), outsourced services, and offshoring.Ecological
Footprint
Carbon Footprint is just one component of the more
comprehensive Ecological Footprint, a metric first defined by
William Rees at the University of British Columbia in 1992,[7]
and codified as a set of standards that apply to national and
subnational population groups by the Global Footprint Network
Standards Committee.[8] The Ecological Footprint is an
estimate of the areal extent of biologically productive land and
sea necessary to offset resource consumption and to assimilate
any resulting waste. The original nation-level, population-
centric approach has been adapted to calculate footprints for a
variety of enterprise systems and products. Calculating the
footprint for manufactured goods, however, can be explosive
and complicated in combination by lack of information about
proprietary materials and processes, as demonstrated by Sibylle
Frey's analysis of a typical mobile phone.[9]
Closely related to Ecological Footprint is biocapacity, an
aggregate measure of the production of ecosystems in a specific
area, which may include arable land, pasture, forest, ocean,
river, or lake. Land or water area is normalized to world
average biocapacity equivalents in global hectares, using yield
factors (global hectares/hectares [gha/ha]) that take into account

57. the degree to which the local productivity is greater or less than
the world average for that usage type. Biocapacity increases
with the amount of biologically productive area and with
increasing productivity per unit area. The total biocapacity of
the world is currently estimated to be in the range of 11.5 to
12.5 billion gha. When the Ecological Footprint of civilization
exceeds this value, the world is no longer sustainable. It's
estimated that humanity's Ecological Footprint exceeded this
value in 1997 by over 30 percent.
One of the standard methods for calculating Ecological
Footprint uses a matrix technique not unlike the input-output
multiplier method widely used to make economic projections.
The highly similar Consumption Land Use Matrix (CLUM)
translates row inputs that represent standard categories of
consumption to column outputs that represent Ecological
Footprint land use types such as crop land, grazing land, or
forest. CLUM matrices are generated in several different ways.
Process-based CLUMS are created by gathering data that
associates land use type to consumption categories, such as the
amount of forest land required to produce the wood for
manufacturing printer paper used in a billing process. Input-
output–based CLUMs are constructed by extending existing
physical or monetary input-output tables with Ecological
Footprint data. The monetary input-output table, for example,
maps an activity to its direct and indirect economic impact on
other business sectors of the community. The resulting
economic impacts can then be mapped to their respective
Ecological Footprints based on land use types.The Natural Step
One of the most well known and widely applied sustainability
frameworks is The Natural Step (TNS), founded by Karl-Henrik
Robèrt in Sweden in 1989. TNS is an internationally recognized
organization with offices located in Australia, Brazil, Canada,
Israel, Japan, New Zealand, South Africa, Sweden, United
Kingdom, and the United States. It's been successfully applied
across a wide variety of industries, including real estate, metals,
appliances, utilities, food, retail, apparel, fast food, healthcare,

58. paints, chemicals, furniture, and more. TNS has been adopted
and successfully used by over 100 major companies including
Bank of America, McDonald's, Nike, Interface, Starbucks,
Home Depot, and Ikea.
TNS represents a systems approach to sustainability analysis
and is based on four fundamental Principles of
Sustainability.[10]
1. "Prevent the progressive buildup of substances extracted from
the Earth's crust." For example, mining, extracting, and refining
of the naturally occurring and highly toxic element mercury
from cinnabar ore and preventing its subsequent accumulation
in our environment through sustainable, lossless reuse.
2. "Prevent the progressive buildup of chemicals and
compounds produced by society." For example, avoiding the
buildup of highly toxic man-made compounds in the
environment such as dioxins, PCBs and DDT, by using non-
toxic, sustainable alternatives.
3. "Prevent progressive physical degradation and destruction of
nature and natural processes." Examples include sustainable
harvesting and replanting of forest regions, avoiding depletion
of soil nutrients by using sustainable agriculture practices, and
preserving fisheries and diversity of species through sustainable
commercial fishing practices.
4. "Promote conditions that empower people's capacity to meet
their basic human needs (for example, safe working conditions
and sufficient pay to live on)." Other examples include
offshoring and outsourcing operations that promote safe
working conditions and standard wage levels, which combat the
causes of social unrest, violence, and political instability.
The TNS Framework employs a practice of "backcasting," or
working backwards, from a desired future state, one of ideal
sustainability. In backcasting, you start with a vision of the
future, and iteratively plan actions that take you ever closer
your future ideal. This is similar to traditional strategic
planning methodologies, such as SWOT (Strengths,
Weaknesses, Opportunities, and Threats) and SCAN (Strategic

59. Creative Analysis) that begin with a desired end state or
objective, identify internal and external factors that are
favorable or unfavorable to achieving success, and then plan
incremental steps to reach the desired objective. There are now
many successful case studies of this process to draw from.
Ashforth Pacific, Inc., is a typical, successful example of the
TNS framework that produced a wealth of tangible and
intangible benefits. Ashforth Pacific has a total of 55 employees
and provides third-party property management, construction,
and parking management services to markets throughout the
Western United States. The company currently manages over 15
million square feet of office space. By applying the four TNS
Principles, Ashforth developed a variety of sustainability
programs that focused on energy, water, waste, and toxic
materials. Over a five-year period, Ashforth saved a total of
$654,000 by reducing energy consumption through adjustments
to lighting, heating, and cooling systems throughout its building
inventory. They saved over $43,000 annually through several
water conservation projects that included sustainable
improvements to their landscape irrigation systems. They also
instituted a variety of waste reduction programs, including
increased emphasis on electronic communication, double-sided
copying, use of recycled paper ($15,000 annual savings),
recycling of construction materials, and centralization of trash
collection.
At the other end of the spectrum is Nike, Inc., with annual
revenues of over $18 billion and nearly 800,000 workers in
contract factories spread across the world. Nike senior
management, led by CEO Phil Knight, began adopting the
principles of TNS in 1997. Nike has continued to infuse TNS
principles into their product lifecycle, strategic decision
process, and employee culture for over ten years. By 2003, Nike
manufacturing operations reduced their solvent use by 95
percent by instituting the use of alternative water-based
cements, cleaners, and similar materials. The reduction in the
use of hazardous chemicals not only improved worker safety, it

60. significantly reduced the environmental impact of Nike
manufacturing operations. The resulting annual cost savings on
materials alone amounted to nearly $4.5 million in 2003. In
another example, Nike introduced improved machine technology
for manufacturing its shoeboxes (which were already using
recycled materials) in 2008 and realized not only a material
savings of 4,000 tons per year, but an additional annual cost
savings of $1.6 million. Over the years Nike has increasingly
woven the principles of sustainability into its product line and
design philosophy, and earned rewards in the form of tangible
cost savings and intangible social capital, market positioning,
and competitive advantage.
These are just a few examples drawn from a much larger
collection of case studies that span the entire spectrum of
industries worldwide. They consistently demonstrate not only
tangible cost benefits but a broad range of intangible benefits
resulting from increased sustainability. The next section
narrows this focus to a particular aspect of the enterprise,
IT.FUTURE OPPORTUNITIES FOR IMPROVING GLOBAL IT
SUSTAINABILITY
Information technology holds the promise of revolutionary
improvements in global enterprise sustainability that will
dramatically enhance enterprise agility, increase operational
efficiency, and even turn cost centers into profit centers. Until
recently, this potential was largely unexplored while basic
improvements in material recycling and facility energy
efficiency were the primary focus. In the last several years,
however, IT's growing impact on the sustainability of a broad
spectrum of industries and institutions in commercial,
government, and academic sectors has been felt. These
improvements have a far-reaching global effect and are driven
by advances in data center consolidation, server, storage,
desktop, and network virtualization, cloud computing,
workforce mobility, ubiquitous computing, energy and
environmental management, disaster recovery, information
assurance, and physical security. They physically manifest as

61. deferred construction, downsized buildings, reduced floor
space, lower energy consumption, savings in heating/cooling,
reduced peak electrical usage, co-generation, employee well-
being, customer satisfaction, and many other tangible and
intangible benefits. IT is now a key enabler of global enterprise
sustainability, and its direct and indirect influence will be
increasingly felt in all facets of global enterprise operations.
IT server and data center operations account for a significant
portion of worldwide energy consumption, and every key sector
of the world economy now depends on them. According to the
U.S. Environmental Protection Agency, in 2006 over 1.5 percent
of the total U.S. energy consumption, shown in Exhibit 5.1, was
attributable to data center operations, or over 120 billion
kilowatt-hours (kWh) projected for 2011 (see Exhibit 5.2). This
amounts to over 61 million kWh of energy consumed with an
aggregate value exceeding $4.5 billion. A single enterprise-
grade data center consumes enough energy to power 25,000
households.[11] These numbers are projected to double by the
year 2011[12] and reflect a doubling of energy consumption
since the year 2000. Of the total energy consumption, about 50
percent is currently attributable to power and cooling
infrastructure alone. Data center Carbon Footprint, if
unchecked, will increase by a factor of four by the year 2020.
Fortunately, we have the means available to prevent this.
Exhibit 5.1: Total U.S. Energy Consumption by Segment
Source: EIA.
Exhibit 5.2: Annual U.S. Data Center Electricity Usage
On the commercial side, data center growth is being driven by a
number of factors including the growth of global electronic
financial transactions, expansion of the Internet, rise of

62. electronic healthcare systems (e.g., a single high-quality digital
chest X-ray can consume 20 megabytes or more; a CT scan of a
heart can consume 200 megabytes or more), increase in global
commerce and services, and the impact of satellite navigation
and commercial package tracking services.[13] On the
government side, similar expansion is being driven by digital
records retention, Internet publishing of government
information, growing defense and national security systems,
disaster recovery preparations, information security initiatives,
and the impact of digital health and safety requirements.
Overall, data centers now account for as much as 25 percent of
corporate IT budgets, and operational costs are rising by as
much as 20 percent per year. In a recent Sun Microsystems poll,
68 percent of IT managers reported that they were not even
responsible for their data center power bills. These numbers
will rapidly spiral out of control unless these systems become
more sustainable, ultimately resulting in widespread service
interruptions due to energy or infrastructure shortages. The
solution, however, lies not in curtailing growth, but in
embracing an entirely new paradigm of high performance,
energy-conserving, and sustainability-enhancing enterprise IT
technologies.
Virtualization and Cloud Computing
This section extends the best practices discussion of Cloud
Computing in Chapter 3 to include essential elements of
sustainability best practices for this rapidly emerging
information technology, with a focus on storage and
virtualization practices.Data Center Consolidation and
Virtualization
Data center consolidation and virtualization efforts are closely
related and have a major impact on enterprise Ecological
Footprint. Deferred construction of a single large-scale data
center, for example, can offset tens of thousands of gha of
Ecological Footprint. When a hundred or more global data
centers are consolidated down to just a few, the reduction in

63. footprint can be substantial. New innovations in high-density,
modular data centers significantly increase the capacity and
utilization of these assets, while considerably reducing
operating costs. Relocation of data centers near sources of
renewable energy and cooling such as hydroelectric dams
further reduces cost and enhances Carbon and Ecological
Footprints. Virtualization amplifies this effect by significantly
increasing asset utilization levels and reducing overall power
consumption and cooling load.
The total Ecological Footprint of a data center is calculated by
first enumerating the fixed and recurring resources needed to
construct, equip, commission, and operate the facility. Each
component and process used in the project must be traced back
to the original source. The calculation must account for the
amount of biocapacity, or amount of biologically productive
land or sea (measured in gha) dedicated to the production of the
item and for consumption of any wastes resulting from the use
of that item. A cell phone, for example, has an Ecological
Footprint of about 32 global square meters. An average PC has a
footprint of about 764 global square meters. (CFOs love this
stuff).
Most of the waste and inefficiency associated with commercial
products results from the basic material processes, energy, and
emissions used in their production, not their disposal. For
example, every metric ton of gold used to make electrical
contacts in a rack server requires 350,000 tons of ore to be
mined. One metric ton of platinum requires 950,000 tons of ore.
Obviously, recycling materials without loss of value has a huge
impact on sustainability when the effects of the entire supply
chain are considered. Every pound of aluminum that is recycled,
for example, saves 8 pounds of bauxite, 4 pounds of chemical
products, and 14 kW of energy. Exhibit 5.3 illustrates the
explosive problem of tracing sources of Ecological Footprint
from a complex system such as a data center back to their
origins. Consequently, few detailed studies have looked at
systems more complex than a single cell phone,[14] and even

64. those studies were limited by materials and processes
considered proprietary by the manufacturer. Even the most basic
first order analysis shows that the footprint of a large, multi-
building, enterprise class data center complex can amount to
tens of thousands of global acres (>10,000 gha). This value, to
make matters worse, does not include the additional impact of
powering and cooling the data center, or the impact of staffing
the data center to operate it. Obviously every time construction
of a data center is avoided, or an existing data center is
decommissioned, there is a tremendous reduction in enterprise
Ecological and Carbon Footprint, and an equivalent increase in
enterprise sustainability, graphically illustrating the impact of
IT on overall enterprise sustainability.
Exhibit 5.3: The Recursive Nature of Calculating Ecological
Footprint
The best practice CIO can be certain of one thing. More and
more C-Suite teams are actively managing these issues because
shareholder activists have all this information at their
fingertips. Robert Stephens warned in Chapter 1 that it is only a
matter of time until each and every corporation has its pants
pulled down on the Internet. The real blow to enterprise
profitability comes when this kind of information is exposed by
shareholders to an ignorant executive management team.
Conventional data centers consume about 150 to 300 Watts per
square foot power density.[15] These are now starting to be
replaced by a new generation of sustainable, modular data
centers packaged in integrated "containerized" units that can be
installed outdoors with minimal shelter. A single Sun Modular
Data Center (MDS), for example, contains 200 kW of IT server
capacity in 160 square feet, or 8 times the density of
conventional data centers. The integrated closed loop water
cooling system used in the MDS is 40 percent more efficient
than conventional data center HVAC systems.[16] Power

65. conditioning systems are removed from the MDS container and
packaged as external transformer units with power busses
extending into the container, further reducing cooling
requirements. The similar Hewlett-Packard (HP) POD
(Performance Optimized Data Center) is packaged in a 40 foot
container and replaces 4,000 square feet of conventional data
center space. The POD is 50 percent more power efficient than
conventional data center build-outs according to HP and can
support loads of 1,800 Watts per square foot, or 27 kW for each
of its twenty-two 50U racks. This equates to a Power Usage
Effectiveness (PUE) of 1.25 compared to 1.7–2.0 for a
conventional facility. A 40-foot POD can house as many as
3,520 computer nodes and is equipped to accept chilled water
for cooling. Containerized data centers such as the MDS and
POD can be more easily relocated to cooler, higher latitudes,
allowing the external atmosphere or adjacent rivers to be used
to augment server cooling, saving 10 percent or more in cooling
costs, while simultaneously reducing Carbon and Ecological
Footprint (i.e., sustainability and economic pragmatism go
hand-in-hand).
There are many ongoing examples of major data center
consolidation to point to at the time of this writing. HP
Corporation is currently in the process of consolidating 85
worldwide data centers into just 6 by converting to a virtualized
blade server-based infrastructure. This consolidation move will
save HP an estimated $1 billion annually and will be phased in
over three to four years. Three of the six data centers will be
dedicated to disaster recovery. The consolidation effort will be
used as a showcase for HP technologies, reaping not only
tangible savings from reduced footprint, but a variety of
intangible benefits in the form of market positioning,
competitive advantage, social capital, and technical
discriminators.
Emerson Network Power recently consolidated over 100 data
centers worldwide into just four, while reducing high-cost peak
energy demand at its main corporate data center by using a 550-

66. panel, 100-kW rooftop solar photovoltaic array.[17] Although
powering an entire data center with photovoltaic panels would
be quite expensive, a hybrid approach can produce substantial
savings through "peak shaving" during times when utilities are
forced to buy energy in the expensive spot markets (and pass
these costs on to the enterprise). Alternative renewable energy
sources can also be employed, in some cases, by utilizing waste
from nearby operations as feedstock for anaerobic digesters or
gasification systems. The CAPEX associated with a 2.5-MW
digester-based generation system today is about $2.5 million, or
$2.50 per Watt, about half the installed cost of an equivalent
solar PV system.
Other "greenfield" data center projects are being driven as much
by enterprise growth as by needed improvements in
sustainability. Amazon, for example, is building a new $100
million, 116,700 square foot data center complex near the
Columbia River in Oregon. The location, scheduled for
completion in the third quarter 2010, provides a sustainable
answer to the sizeable problem of cooling hundreds of
thousands of servers. River water is piped directly into the site
after being processed through a water treatment system. Power
from the Columbia River hydroelectric sources provides a large-
scale renewable energy source to offset its Carbon
Footprint.[18] Google recently built a similar 30-acre complex
in The Dalles, Oregon, also along the Columbia River.[19] One
of the major attractions of this small-town location is the nearby
Dalles Dam hydroelectric complex. With an overall length of
8,875 feet and height of 260 feet, the dam hydroelectric
complex includes a powerhouse with a total capacity of 1,779
megawatts, ample renewable capacity for the local Google
operations. Also making this an ideal location is the local fiber
optic hub tied to the coastal PC-1 landing of the 640 Gbps fiber
optic network, linking the United States with Japan and Asia.
Similar river-cooled data centers have sprung up 130 miles to
the north built by Yahoo and others. In yet another twist on
sustainability, Microsoft's new $550 million, 477,000-square

67. foot data center in San Antonio, Texas, uses 602,000 gallons a
day of recycled municipal wastewater to cool the facility during
peak cooling months. Water cooling, however, is not the only
approach to improve data center sustainability. Microsoft's
Dublin data center uses the year round cool ambient air found at
the higher latitude to eliminate the need for chillers entirely.
Waste heat generated from large data center operations can also
be used for a variety of sustainable applications, including
space heating of buildings, facility hot water pre-heating,
industrial heating of local commercial greenhouse operations,
and heat for sustainable wastewater treatment (anaerobic
digestion).Server Virtualization
Virtualization (see Exhibit 5.4) typically goes hand-in-hand
with data center consolidation, and contributes significantly to
enterprise sustainability by increasing asset utilization,
reducing energy consumption, and decreasing Ecological
Footprint. Server utilization in conventional data centers can be
as low as 6 percent, and the same servers can use as much as 74
percent of peak power when idle.[20] By running multiple
virtual machines on a single hardware platform, physical server
energy consumption can drop as much as 80 percent, while
server utilization can increase to as much as 60 to 80 percent.
This means that as much as a 15:1 reduction in the number of
physical servers is possible with an associated drop in
Ecological Footprint (i.e., more than 700 square global meters
per server). Blade servers, in particular, can reduce overall
energy usage by as much as 35 percent over conventional
servers. For each physical server that is virtualized, 4 metric
tons per year of CO2 emission are eliminated, an amount
equivalent to a gas-guzzling SUV getting 15 mpg being taken
off the road.
Exhibit 5.4: Consolidation of Server Functions through
Virtualization