DYNAMIC INVESTMENT STRATEGIES FOR INFORMATION SYSTEMS DEVELOPMENT

This paper presents an analytical model for choosing optimal investment schedules for the development of new systems under various types of risk. Two modes of risk reduction are considered. In the first mode, risk is reduced by gathering information through prototype building or sequential development, where risky parameters are assumed to have unknown but fixed values. The second mode involves an increase in systems development and usage skills through experience and learning, which may reduce the development cost and increase the acceptance of the system among the potential users. The second mode of risk reduction changes the true values of the parameters. Starting with a conceptual multi-dimensional framework for analyzing systems risk, a dynamic decisiontheoretic model for guiding the investment process is developed. The model specifies the level of investment in development activities at any stage, depending on the information gathered from prototypes or parts of the actual system developed to that point. Some properties of global and myopic investment policies are derived. The sensitivity of the level of investment to the accuracy of information is characterized. Experience and learning effects are considered in a simple two-period setting, where familiarity with the development process in the first period reduces the cost of developing the remaining part of the system in the second period. Extensions, testing, and implementation of the model are discussed

To Commit or Not: Reputation and Preemption Strategies in Competing Technology Networks

When an incumbent technology network faces a new entrant with superior capabilities, it may choose to announce a technology improvement as a preemption strategy to avoid forfeiting users. While the incumbent faces the dilemma of how much improvement it should commit to, users face the challenge of deciding how to divide resources (e.g., time spent) between the two networks. Using a two-period decision theoretic model, where users can be loyalists (who always prefer the incumbent) or switchers (ready to switch to the new entrant and back under suitable conditions), we show that in the presence of high switching costs, a low or high reputation leads the incumbent to a pure strategy of committing to a given level of improvement in technological capability. However, an incumbent with moderate reputation may not commit to any particular level of improvement. Consumer welfare may be adversely affected as a result of chosen strategies

The Incumbency Protection Power of Network Effects: Hype or Reality?

Many IT enabled networks have attained a large user base induced by strong network effects, which are thought to create an economic moat by increasing switching costs, thus offering protection against new entrants. The underlying assumption behind this result is that users completely adopt one network at any given time. Is the incumbency protection power of the moat as strong in multi-homing when users co-exist on multiple networks and can incrementally adopt a new entrant? We develop a multi-period analytical model of endogenous adoption decisions in a setting where a new network arrives with a superior capability, and where users have a resource constraint and derive value from technological capability as well as network effects. We demonstrate that the moat created by network effects for the case of incremental adoption is weaker than that in the case of complete adoption. Thus the protection power of network effects and the resulting competitive intensity may be overrated and underplayed respectively in many modern technology settings

Of Governance and the BPO Paradox: The Impact of Information Capabilities on Service Satisfaction

The fundamental value premise of business process outsourcing (BPO) is greater process efficiency at reduced costs of ownership. However, recent studies suggest that BPO may add cost and friction, and require more management attention than originally envisioned to realize the benefits of outsourcing. Service dissatisfaction ensues, giving rise to a BPO paradox. This study focuses on the role of governance choice in resolving this emerging paradox. We build on the information processing view of the firm and theories of interfirm coordination to argue that the alignment between information requirements (IR) of the BPO relationship and information capabilities (IC) of the governance solution is central to service satisfaction. We use this conceptual model of fit to identify two aligned configurations of BPO governance, which reflect the end points of a continuum in decreasing order of IR and IC. These configurations are used to test hypotheses predicting alternative governance choices and the impact of these choices on service satisfaction. Our empirical analysis of survey data on 137 BPO relationships suggests that aligned BPO configurations are marked by higher levels of satisfaction than nonaligned relationships, and that underinvestment in IC has a marked negative impact on satisfaction relative to overinvestment. The findings enhance managerial understanding of governance choice in BPO, and underscore the normative implications of the alignment between IR of the BPO relationship and IC of the governance solution on service satisfaction and the BPO paradox

The Impact of Firm Learning on Financial Value in Strategic Outsourcing Relationships

We investigate whether managers in outsourcing firms, through their prior experience in managing similar strategic alliances and prior association with the provider, learn to create value in their outsourcing relationships. Value creation is estimated in terms of long-term abnormal stock returns to the outsourcing firm relative to an industry, size and book-to-market matched sample of control firms following the implementation of the outsourcing contract, announcement period returns, and allied wealth effects. We find that prior experience and prior association have a significant impact on long-term abnormal stock returns, suggesting that financial markets are slow to price learning effects in outsourcing. Further, while relational learning alone influences value creation in simpler fixed price contracts, both procedural learning through prior experience and relational learning through prior association with the provider have an impact on value creation in variable price contracts. This is because of greater ambiguity in cooperation and coordination between firms that characterizes variable price contracts. The results have implications for management of outsourcing engagements and their performance and valuation

Electronic Publishing Versus Publishing Electronically: The Case of EC World C A Forum for the 21st Century

Electronic journals today typically serve as on-line counterparts of their paper based versions, providing abstracts, manuscript tracking, and announcements of forthcoming issues (see Denning 1995; Jog 1995). Some e-journals and magazines also provide “live” materials such as audio/video clips, basic World Wide Web interactivity, or even customization of content and presentation. However, a majority of these ventures seek to use the Internet and the Web as an efficient medium of content distribution and presentation. It thus appears that the broadcast model of television (O’Reilly 1996) has been most widely adopted by the creators of e-journals (Chellappa, Barua and Whinston 1996a). However, the global scope of the Internet and the open nature of its applications enable us to rethink the publishing process itself and to redesign the way content is created (i.e., authored, reviewed, validated, and published). In other words, publishing electronically (making content available on-line without changing processes that support content creation) is not the same as electronic publishing, which seeks to redesign the processes themselves. True electronic publishing can lead not only to improved knowledge dissemination, but can also help create new knowledge through successive refinement and longitudinal argument-based interactions between authors, readers, and other experts

MIS AND INFORMATION ECONOMICS: AUGMENTING RICH DESCRIPTIONS WITH ANALYTICAL RIGOR IN INFORMATION SYSTEMS DESIGN

Assessing the economic impacts of alternative Information System (IS) designs and selecting IS design parameter values for a given decision setting are two important research issues in the domain of Information Systems. Evaluation studies based on information economics provide rigorous but restricted models, while traditional MIS studies suggest richer but less formal evaluation frameworks. \u27 In this paper, we attempt to combine the analytical rigor and descriptive richness into a unified and consistent basis for evaluating IS designs and making design modifications (improvements) to existing IS. Expanding on the concepts of information economics, a multi-dimensional mathematical model of information quality is developed. Several properties of the quality model with implications for system design are derived in the form of propositions. The impacts of information quality differential upon the effectiveness of an operational level decision setting are investigated through a decision-theoretic approach. Next, a hierarchical model is suggested for relating system design variables to the quality of information generated by the IS. Based on the quality differential impact analysis and the hierarchical model, a structured methodology for making design changes to existing IS is outlined

ON THE ECONOMICS OF THE-SOFTWARE REPLACEMENT PROBLEM

Software maintenance constitutes a significant fraction of the software budget. The cost of maintaining old applications has been escalating and this trend is likely to continue in the foreseeable future. The study of software maintenance strategies has become important to both researchers and practitioners in Information Systems. While there is a rich literature on the technical aspects of software maintenance, research on the economics of maintenance is in its infancy. In particular, the tradeoffs between maintaining and rewriting old software have not been investigated from a theoretical standpoint. In this paper, we present an economic model of the software replacement problem. Based on available empirical evidence, we hypothesize that, with frequent modifications and enhancements, the complexity of software increases rapidly. This deterioration of the code leads to a sharp increase in the maintenance cost. Thus, there may exist a time when it is optimal (in an economic sense) to rewrite the system, which reduces the system complexity and the subsequent maintenance cost. The proposed model allows us to compare the economics of various rewriting strategies and to determine the optimal rewriting point(s). Some interesting results with implications for the systems manager are obtained from the analysis. These include the impacts of system size, structuredness of the underlying technology, and the availability of superior technologies upon the rewriting point(s) and life cycle costs. A numerical example is provided to demonstrate the applicability of the model