IT for Small and Medium-sized Enterprises (SMEs)

IT for Small and Medium-sized
Enterprises (SMEs)

Dr. ir Jan Devos
• ELIT-Lab & Industrial Management
Department HOWEST
• Ghent University
• Graaf Karel De Goedelaan 5
• BE-8500 KORTRIJK - BELGIUM
• T: +32 56 24 12 72
• F: +32 56 24 12 24
• e-mail: jan.devos@howest.be
• e-mail: jgdvos.devos@ugent.be
• linkedIn: www.linkedin.com/in/jangdevos
• website: http://ela.howest.be/jdevos
• Twitter: @jangdevos

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Agenda

 History of SMEs
 Definitional problems and heterogeneity
 Generic characteristics of SMEs in relation
with IT: what is the problem?
 Findings from research
 Problems & Solutions
 IS Failures (OISF)
 Lemon Markets
 Lack of models – new frameworks
 Conclusions and future

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History and rise of SMEs

SMEs largely ignored until the 1970s
• 1953 In the US: Small Business Administration
• 1959 Theory of the growth of the firm (Penrose)
• 1970s Oil shocks (turning point)
• 1971 UK and AU: Bolton & Wiltshire Committees
• 1973 Small is beautiful (Schumacher)
• 1980s Downsizing & Outsourcing trends
• 1990s Internet – “the virtual organization”
• 2005 The World is Flat (Friedman)

Two (flawed) views on SMEs:
• backbone of the economy
• second class citizen

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“The perfectly bureaucratic giant
industrial unit not only outsets the
small- or medium-sized firm and
expropriates its owners, but in the
end it also ousts the entrepreneur
and expropriates the bourgeoisie as
a class which in the process stands
to lose not only its income but also,
what is infinitely more important, its
functions.”

(Schumpeter, 1942)

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“smallness within bigness”

“for a large organization to work it
must behave like a related
group of small organizations”

(Schumacher, 1973)

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• Systems thinking approach learned that SMEs
played an important role in an economy separate
from, but complementary to a large business.

• Business landscape is changing
D.B. Audretsch: “The Entrepreneurial Economy” (vs The
Managed Economy)

• Entrepreneurial SMEs counts for new employment,
innovation and sustainability
▫ Strong economic focus by governments (Europe, US,
Singapore, Australia, Canada, ...)

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• Reduction in the average size of business firms
• High growth new firms provide the majority of new
firm jobs
• SMEs play an important role in the development of
innovation
• SMEs may be in a disadvantage in the access to
new technology
• LE provide better quality jobs but the gap LE-SME
in job quality is shrinking
• JQ = wages (higher in LE), fringe benefits (more available in LE), job tenure (+/- 4,5
years), employee morale, job satisfaction.

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Do Small Firms Compete with Large Firms?

“Despite the pervasive phenomenon of scale economies, the
majority of firms have always been small firms. The
emergence of small firms as a means of economic
development on both sides of the Atlantic has been one of the
major new topics of economic policy since the 1980s.”

“... small firms seek out markets where they are able to avoid
competition with their larger counterparts.”

“… small firms pursue a strategy of producing in distinct product
niches.”

(Audretsch et al., 1999).

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The flatteners:
Collapse of the Berlin wall,
Outsourcing, Netscape (?),
Open Source, Supply Chains,
VoIP, WIFI, Smartphones, …

(Friedman, 2005)

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Definitional problem

Bolton committee defined an SME as: (Bolton, 1971)

1) one that has a relatively small market share,

2) one that is managed by its owners or part owners in
a personalized way, not by an organized managerial
structure,

3) one that is independent with the owners/managers
having control of the activities of the business.

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U.S. Small Business Administration (Size Standard)

1) depending on the industry of the SME

2) number of employees (<500) or the average annual
receipts

3) independently owned and operated and not
dominant in its field of operation

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EUROPE

Singapore
New Zealand
Australia
Canada

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SME sector in Belgium
2009 Number of enterprises
Flanders Walloon Brussels
SMEs (<50) 513.829 238.641 98.371
LE (>50) 3.129 1.092 835
99,4% 99,5% 99,1%

Source: website Unizo (http://www.unizo.be/statistieken)

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SME sector in Europe

What usually gets lost is that more than 99% of all European
businesses are, in fact, SMEs.
They provide two out of three of the private sector jobs and contribute
to more than half of the total value-added created by businesses in the
EU. Moreover, SMEs are the true back-bone of the European economy,
being primarily responsible for wealth and economic growth, next to
their key role in innovation and R&D.

What is even more intriguing is that nine out of ten SMEs are actually
micro enterprises with less than 10 employees. Hence, the mainstays
of Europe's economy are micro firms, each providing work for two
persons, in average.

This is probably one of the EU's best kept secrets!

Source: website Europe (http://ec.europa.eu/enterprise/policies/sme)

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Heterogeneity of the SME sector

• Organizational size (head count, turnover, margins, …)
• Head count not always relevant for IT
example: manufacturing companies > 50 people
„blue collars‟ vs „white collars‟
• Micro enterprises constitute a separate group (9 out of 10 is µ)
• Innovative entrepreneurs or sub-contractors
(Pareto analysis: 1 customer / 1 supplier)
• Ownership structure: family enterprises
• Role of CEO
• Management maturity (depends on organizational size)
• Exporting – only domestic markets
• Economic activity: manufacturing, services, trading, government
and not-for-profit organizations
• Economic sector: see table

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NUMBER OF COMPANIES (< 50 people)
SECTOR FLANDERS BRUSSELS WALLOON BELGIË
Other 36.908 9.738 18.143 64.789
Automotive (trade and maintenance) 14.332 2.260 8.046 24.638
Construction & Building 65.264 9.993 30.291 105.548
Communication & IT 18.959 6.088 7.727 32.774
Retail 55.414 10.671 29.307 95.392
Financial services 15.088 3.485 6.033 24.606
Healthcare 15.516 2.419 8.840 26.775
Wholesales 29.218 5.439 8.961 43.618
Mediation & Trading 14.316 2.763 8.972 26.051
Hotel & catering 34.025 7.066 16.898 57.989
Real estate 20.102 5.856 7.179 33.137
Industry: agriculture, fishing & forestry 34.823 324 20.290 55.437
Chemical industry 2.283 323 1.184 3.790
Lumber & Furnishing 3.302 391 1.774 5.467
Electronics & IT 1.203 265 508 1.976
Manufacturing metals 5.767 340 2.769 8.876
Manufacturing paper and press 3.460 717 1.321 5.498
Textiles: leather, apparel 2.250 484 823 3.557
Alimentation Industry 5.336 554 2.492 8.382
Other industries 5.946 724 2.740 9.410
Personal services 31.762 3.855 15.102 50.719
Logistics & Transport 13.672 2.843 4.616 21.131
Business services 84.883 21.773 34.625 141.281
Total 513.829 98.371 238.641 850.841

Source: website Unizo (http://www.unizo.be/statistieken)

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Some findings from research

Organizational size
• SMEs and LEs have not equal experiences with IS success
• SMEs and LEs are not equally in using „formal‟ IT Governance
method
• Micro enterprises differ considerably from small and medium-
sized enterprises

Economical activity
• Trading-SMEs are less „IT minded‟ than in services

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Generic SME characteristics in relation with IT

• SMEs have a different economic, cultural and
managerial environment (compared to LEs)
▫ Resource poverty (financial, knowledge, internal IT
expertise, ...)
▫ Depend on external IT expertise
▫ Low IT capabilities and practices
▫ Intuitive and informal management
▫ more task-centric than process-centric
▫ Slow adopters of IT
▫ Focus (more) on trust, empathy, fairness and devotion less
on control, risk and assurance.
▫ Central role of CEO (owner)

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Generic SME characteristics - SME CEO ?

• Managerial Attention Deficit Disorder
(MADD) - the patient
• is easily distracted
• pays no attention to his/her environment
• looses the power of concentration after a few hours
• has no thoughts for details
• does not listen when he/she is addressed
• jumps to conclusions
• interrupts and disturbs the work of collaborators
• interferes abruptly into conversations

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Generic SME characteristics in relation with IT

• What is the problem ?
• - lack of good and appropriate methods for governing IT in SMEs (Cobit, ITIL, ...)
• - SMEs should adopt more IT: IT is seen as a driver for innovation and progress
• - IT is not always very positively perceived by SMEs (not a good image)

• IT and SMEs (Europe, 2004) – The Go Digital Awareness Campaign 2001-2003:
The main lessons to be learnt

• E-Business is not a top priority for most SMEs
• Networking is the most successful marketing strategy to reach SMEs
• Awareness raising needs to be based on realistic targets and expectations
• SMEs often lack appropriate information about e-business and ICT
• Most SMEs remain skeptical about ICT and e-business
• Training and managerial change are key issues
• Resources and costs matter for SMEs more than for LE
• E-business might not always be beneficial for SMEs
• Many IT solutions are still too expensive or not trusted

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IS Research in SMEs

• Lack of relevant IS research in SMEs
▫ Since 1979 (to august 2010): only 300 refereed A1-
publications (Devos, 2010; working paper)

• Starting point in 1979 (Ein-Dor & Segev)

IS projects are less likely to succeed in
SMEs than in large ones.

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IS Research in SMEs

• Cultural differences: US vs Europe (+Singapore /
New Zealand / Australia)

• No agreement on the size standard (5 – 3000)

• Absence of a consistent body of research
▫ Too much seen as a homogeneous group
▫ Inconsistent findings (e.g. strategic IT)

• Dated research (microcomputers, mini computers, …)

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IS Research in SMEs

Studies of SMEs and IT according to IS Research Topic

Class Research Topic
Software and ERP (15), Software packages & COTS (5), Applications (1), CRM (1), Expert
Applications (31) Systems (1), CAD/CAM (1), Stock Record System (1), Groupware (1), Advanced
Manufacturing Systems (1), Application Service Providing (1), DSS (1), Marketing
Information System (1), Software for innovation (1),
Internet and Related Internet (10), E-Commerce (26), E-Business (11), Supply Chain E -Business (5),
technologies (71) Websites (3), e-government (1), e-mail (1), www (3), On line connection (1),
Electronic Trading Systems (1), EDI (7), Internet Based Techn ologies (2), web
services (1)
Hardware & Microcomputers (8), IS architecture (1), Computer Network Development &
Infrastructure (12) Implementation (1), Hardware & Software (2)
Organizational IT (18) Strategic IS (9), IS Sophistication (4), EUC (3), IS Planning (1), IS Architecture (1)
Nominal view of IT 115

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IS Research in SMEs: Literature

• SME-IT Literature overview

5

IT Managerial, IT Artifact Impact
Methodological, and Satis-
Technological Capabilities System Information 6
faction 121
Use 37 1
12 Quality Quality Organiza- Individual
5 1 tional Impact Impact

3 32

8
2
IT Managerial,
Methodological, and
Technological Practices
14
Source: Benbasat & Zmud, 2003; Gable et al, 2008

Devos, J. Van Landeghem H. & Deschoolmeester D., (2009), IT and SMEs: Literature
Overview.


SMEs are often disappointed with their software packages. The
disappointment is a result of the inability of the package to adapt
to the needs of the company. For SME with less then 20
employees the packages are too difficult to use. (Heikkila et al;
Finland)
Managers were found to be more successful when they develop
their own numeric applications using spreadsheets to provide
greater analytical support for decision-making. (Raymond &
Bergeron; Canada)
Software characteristics, vendor capability and opinions from other
concerned groups are relatively important factors when making
the software selection decision. (Chau ; Hong-Kong)
SMEs that adopt the vendor-only approach have more effective IS
than SMEs that adopt the consultant-vendor approach (Thong et
al; Singapore)

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Top management support is not as important as effective external IS
expertise (Thong et al: Singapore)
The most effective IS implementation environment is one in which both top
management support and external IS experts work as a team. (Thong et
al: Singapore)
Most important area of IT dissatisfaction is the lack of training and
education. Most important factor of IT satisfaction are the owners
attributes (age: younger CEO are more satisfied, gender: female are less
likely to be dissatisfied then men). (Fuller & Southern: US)
CEO’s innovativeness and IS knowledge are positively associated with the
decision to adopt IS in SMEs. The effect of competition on IS adoption in
SMEs has no direct effect on IS adoption. (Poon & Swatman: Singapore)
In the eyes of SMEs, EDI still is not considered as something that enables
them to gain major strategic benefits or competitive advantages. (Van
Everdingen et al: Europe)

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Owners innovativeness is the strongest determinant for adopting traditional
IT – relative advantage plays most critical role for Internet related
technologies. (Chau & Hui: USA)
External expertise is the predominant key factor of IS implementation
success in SMEs. (Lesjak & Lynn)
Three strategies are revealed: 1) ERP systems need to be localized to
reflect local management features 2) ERP systems should be
customizable at a variety of levels 3) BPR should be carried out in a
incremental manner taking the dialectic of organizational learning into
account (Levy et al: UK)
Different industry sectors significantly differ in the amount spend to IT
investments. Firm size does not influence IT investment levels. Strategic
benefits vary across different industry sectors. The way employees adapt
to change as a result of IT implementations depends on the size of the
organization. (Lucchetti & Sterlacchini: Australia)
Managerial and vendor support are essential for effective IS in Canadian
SMEs. Managers should engage quality vendors to obtain IS that
contribute to the specific goals of the small business.

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IS Research in SMEs: Survey (Devos, 2008)

IT Governance
• Investigation to the relevance of
▫ Strategic IT
▫ IT Outsourcing
▫ IT Failures
IT Outsourcing SMEs IT Failures
▫ IT Governance

Strategic IT
• Survey (2008) – 12 questions
#1538 organizations (random group)
#169 response (11%)

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Organizational size

38%

22% 23%

16%

Micro (< 10) Small (10< <50) Medium-sized Large (250<)
(50< <250)
©Jan Devos

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IS Research in SMEs

Strategic IT
• Strategic Information Systems (SIS)
developed to support, change or enable Business
Processes and Business Strategies. (Porter)
• Has a profound impact on the
operational, tactical and strategic level of a
business
• Example: Enterprise Systems (ERP)
“Large scale (?), real-time, integrated application-software
packages that use the computational, data storage, and data
transmission power of modern IT to support
processes, information flows, reporting, and business
analytics within and between complex organizations”
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Owners & Managers ?

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Organizational size ?

Industry ?

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IS Research in SMEs

IT Outsourcing
• Project Management Outsourcing (Lacity & Hirschheim)
= outsourcing for a specific project or portion of IS work.

Ex. use of vendors to develop a new system, support an
existing application,…

• In these cases the vendor is responsible for managing and
completing the work

• Principal-Agent setting

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Number of conducted IT projects

Number of conducted IT
projects depends on
organizational size

Number of conducted IT
projects is least in trading

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Sourcing strategy

Less outsourcing in micro and
large organizations

Outsourcing is mainly done by
small and medium-sized
enterprises

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What are IS Failures ?

Engineering Failures?

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What are IS Failures ?

An IS Failure is an outcome of a human process
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IS Research in SMEs

IS Failures
• Best kept (public) secret worldwide ?

• A lot of research for almost 45 years
• 1967, Management misinformation systems, (Ackoff)
• 2010, Project failure en masse: a study of loose budgetary control in ISD projects
(Conboy)

• Much is known - less is done !
• 1975 / 1995, The mythical Man-Month (Brooks)

• Failure to learn ? CIOs - IS-Researchers
• 1999, Learning failure in information systems development (Lyytinen & Robey)
• MISQ, EJIS, ISR, JAIS, …

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IS Research in SMEs

IS Failures

• Expectation failures (Lyytinen & Hirschheim)
• Termination failures (Sauer)
• IS project abandonment (Ewusi-Mensah)
• IS project escalation (Keil)
• Outsourced IS Project failure (Devos et al.)

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IS Research in SMEs

IS Failures
• Expectation failures (Lyytinen & Hirschheim)
• = the inability of an IS to meet a specific
stakeholder group‟s expectations
• Stakeholders: any group of people who share a pool of values
that define what the desirable features of an IS are and how
they should be obtained

• - Correspondence Failure
• - Process Failure
• - Interaction Failure

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IS Research in SMEs

Expectation failures (Lyytinen & Hirschheim)

• Correspondence failures

• Process failures

• Interaction failures

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IS Research in SMEs

IS Failures
• Termination failures (Sauer)
when all development or operation is ceased, leaving the
stakeholders (supporters) dissatisfied

• Project Runaways (Keil)
escalation of commitment(runaways): continued commitment
in the face of negative information about prior resource
allocations coupled with uncertainty surrounding the
likelihood of goal attainment

 Project Abandonment (Ewusi-Mensah)
defined as a phenomenon that concerned with the anticipated
failure of the project prior to its full implementation

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IS Research in SMEs

IS Failures Project Runaways (Keil)

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IS Research in SMEs

Project Runaways (Keil)

Some IS projects never seem to
terminate… “rather, they become like
Moses, condemned to wander till the end
of their days without seeing the promised
land (Keider, 1974)

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IS Research in SMEs

Cover-Up Deaf, Dumb
high
Organization and Blind
Organization
Mum Effect
bad news is Healthy Ostrich
transmitted less
frequently than low Organization Organization
good news

low high
Deaf Effect
reluctance to hear bad news

Blowing the whistle on troubled software projects (Keil, 2001)


IS Failures
• Outsourcing IS Failures - OISF (Devos)
• Moral Hazard: lost of trust
• Adverse Selection: Lemon Markets

Expectation failure

Termination Failure Escalation Failure
(Runaway projects)
OISF

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IS Failures
1994 1996 1998 2000 2004
Failed projects 31% 40% 28% 23% 18%
Challenged projects 53% 33% 46% 49% 53%
Succeeded projects 16% 27% 26% 28% 29%

Source: Standish Group

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IS Failures

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IS Failures
Bad experiences depend
on organizational size

Bad experiences depend
on number of projects

Number of projects depend on
organizational size

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IS Failures and the sourcing strategy

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IT Governance
• Since late 1990s
• Lack of a clear understanding of the term
• Influences the benefits generated by IT
investments
• Link with corporate governance (Sarbanes-
Oxley)
• Link with Strategic IT
• A lot of methodologies from and for practitioners
(Cobit, ITIL, PMBOK, PRINCE2, ISOxxxx, ...)

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IT Governance

to direct IT endeavors, to ensure ITs performance meets
the following objectives:
- - for IT to be aligned with the enterprise and realize the
promised benefits
- - for IT to enable the enterprise by exploiting
opportunities and maximizing benefits
- - for IT resources to be used responsibly
- - for IT related risks to be managed appropriately

“Placing IT on the agenda of the board” (W. Van
Grembergen)

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Use of a formal method
depends on organizational size

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Use of a formal method and IS failures

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Conclusions

• Why do IT projects fail in SMEs?
• Information asymmetry
• Low IT managerial, technological and methodological capabilities
in SMEs
• How do IT projects fail in SMEs?
• Opportunistic behavior
• Deterioration of trust
• Lack of control
• How do SMEs manage there IT?
• Absence of a formal intentional IT management
• Why is there not enough IT Governance in SMEs?
• IT Governance is not an SME concept
• Lack of IT managerial, technological and methodological practices

Problems and solutions

• From a vendor perspective
▫ Niches – heterogeneous target groups
▫ Low IT capabilities - Low expenditures
▫ Lot of IS failures
▫ Lemon Markets (the bad wipe out the good !)

• From a customer perspective (the SME)
▫ Opportunistic behavior (E-tic charter)
▫ Winner‟s curse en Vendor lock-in
▫ Lemon Markets (IT has not a good reputation)

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• Winner‟s curse

• Vendor Lock-in

• Lemon Markets

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Theory of Lemon Markets

ICT

ICT

ICT

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• Nobel Prize Winner G. Akerlof, 1970
(Akerlof, G.A. (1970). „The Market for 'Lemons': Quality Uncertainty and the Market Mechanism‟.
Quarterly Journal of Economics, 84(3), 488-500.)

• a market with unbalanced information can lead to
complete disappearance or to offerings with poor quality
where bad products (lemons) wipe out the good ones

• Popular economic grant theory
• Used car market (lemons)
• E-business, E-auctions, IT security, Grid computing, IT outsourcing

• Devos J., Van Landeghem H. and Deschoolmeester D., (2010), An IS Theory:
The Lemon Market, in Information Systems Theory: Explaining and Predicting
Our Digital Society, Y.K. Dwivedi, M. Wade & S.L. Schneberger, to be published
in 2011


= €1

= €0.1

ICT

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€1

? €0.1

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€0.55 - €1 = -€45

€0.55

€0.55 - €0.1 = €0.45

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€0.55 - €0.1 = €0.45

€0.55

€0.55 - €0.1 = €0.45

€0.55 - €0.1 = €0.45

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€0.23- €0.1 = €0.13

€0.23

€0.23 - €0.1 = €0.13

€0.23 - €0.1 = €0.13

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• A market place: buyers and sellers (internally/externally;
individuals/firms): von Neumann-Morgenstein maximizers of
Expected Utility
• Information Asymmetry between transacting partners
• Overall quality of goods and services offered is
reflected to the entire group of sellers rather than on
individual sellers
• Lack of seller differentiation
• There is incentive to market low quality (igniting
condition)

• High-quality sellers flee the market because their
quality and reputation cannot be rewarded
• Complete Market Deterioration

independent
Information
Asymmetry

+ - +
Adverse
Trust Moral Hazard
Selection

- +
- - Opportunistic
Reputation
Behavior

-
Perceived
Quality

Who is serving SMEs?

• Research (Devos, 2010) – Lemon Market ?
• ICT Top 1000 → 484 ISV (Independent Software Vendors)
Screening of websites (profile, product/service offerings, working
methods)

Checkpoint score 0 score l score 2 score 3 Median
Not Minimal Moderate Strongly
present
CP1 - SME – focus 61,1% 12,7% 15,2% 11,0% 2

CP2 - Positive framing 37,8% 40,3% 12,7% 9,2% 1

CP2b - Negative framing 96,8% 2,5% 0,7% 0,0% 0

CP3 - References 22,6% 28,6% 14,5% 34,3% 1

CP4 - Methodology 41,7% 20,5% 20,1% 17,7% 1

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Who is serving SMEs?

• Research (Devos, 2010) – Lemon Market ?

• 77,4% reference selling
• 34,6% make use of case studies
• 38,9% of the ISV‟s is targeting also an SME market
• 11,0% of the ISV‟s is only targeting an SME market
• Large ISVs targeting LE (and sometimes SMEs)
• Small ISVs targeting SMEs

• SME-customers are mainly served by SME-
vendors

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Agency Theory

• Principal = customer / determines the work

• Agent = contractor: ISV (Independent Software Vendor)
or ERP Implementer / undertakes the work

• Contract =

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Agent theory: constraints
• Rational behaviour & expectations for both parties (bounded rationality)
• Self-interest of parties (goal conflict between parties)
• Outcome has effects on the Principal's profit and success

• Outcome is only partly a function of behaviours of Agent
(risk aversion / risk neutral)

• Agent has discretionary freedom due to asymmetric information
• ex ante = uncertainties for Principal (Adverse Selection)
• ex post = disadvantages for Principal (Moral Hazard)

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Agent theory: IT and SMEs?
• SME-Principal is less knowledgeable on IT than ISV-Agent

• SME-Principal is confronted with high monitoring costs

• SME-Principal is limited in his ability to monitor and judge the
contractor‟s input and output.

• Missing metrics and measures for programmers productivity and
outcome

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Some examples from real life cases: (Moral Hazard)
• hidden characteristics
Skills to develop & modify screens in an ERP package
• hidden intention
Agent want to use the custom made software for the purpose of
developing a software package
Agent is working on two parallel projects
• hidden action
Agent is correcting software errors during billable hours
Agent is playing computer games during work hours

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• 1 - Situation of complete (public) information
• When the P has information to verify A behavior, then A is more likely to
behave in the interests of the P.

• → best solution: Behavior-based contract
• reward is outcome independent !

• 2 - situation of incomplete information (information asymmetry)
• When the contract between the P and A is outcome based, then A is more
likely to behave in the interests of the principal.

• → second best solution: Outcome-based contract
• reward is outcome dependent !

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Findings (Devos, 2007)
• AT does not take trust into account, trust is important for avoiding
OISFs

• AT is not bidirectional: The Principal controls the Agent however:
both parties are exposing opportunistic behaviour

• Adverse selection is better explained by Prospect Theory &
Lemon Market Theory

• Structured controls are not sufficient to avoid OISFs

• Avoiding OISFs is cumbersome

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• Prospect Theory (Kahneman & Tversky)

• A falsification of the EUT

• - Theory of decision under risk

• Daniel Kahneman* & Amos Tversky

• “for having integrated insights from psychological research into
economic science, especially concerning human judgment and
decision-making under uncertainty”

• *Nobel Price winner 2002

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• An experiment: lung cancer
• Prospect 1 Survival Frame

• Surgery: Of 100 people have surgery 90 live through the post-operative
period, 68 are alive at the end of the first year and 34 are alive at the end
of five years.
82%

• Radiation Therapy: Of 100 people having radiation therapy all live
through the treatment, 77 are alive at the end of one year and 22 are
alive at the end of five years.
18%

© Jan Devos - 79


• An experiment: lung cancer
• Prospect 2 Mortality Frame

• Surgery: Of 100 people have surgery 10 die during surgery or the post-
operative period, 32 die by the end of the first year and 66 die by the end
of five years. 56%

• Radiation Therapy: Of 100 people having radiation therapy none die
during treatment, 23 die by the end of one year and 78 die by at the end
of five years.
44%

© Jan Devos - 80


• Propositions of the Prospect Theory
• A person is risk averse for gains and is risk seeking for losses
(reflectivity principle)

This is also known as the certainty effect

People favors risk aversion in the domain of gains and risk seeking
in the domain of losses

“Losses loom larger than gains”

© Jan Devos - 82


The value function

A person is risk averse
for gains (concave
function)

A person is risk
seeking for losses
(convex function)

© Jan Devos - 83


• Propositions of the Prospect Theory
• A decision about prospects is a two phase process consisting of:

• a editing or framing phase:
• identical information is edited out (often a simpler representation)

• a evaluation phase:
• taken the decision on the highest “value”

© Jan Devos - 84


Application of Prospect Theory in IT Outsourcing for
SMEs
- Editing phase (= tendering phase) is often an extreme positive framing of
a proposal on behalf of the ISV, to keep the SME (customer) in the
“survival” frame

• Stressing direct benefits (pseudo-tangible)
• Denying the TCO concept (selling hardware, licenses, and …consultancy)
• Simplification of ROI
• Short project time
• Fixed Price Contracts
• Absence of requirement management (package contains “all” functionalities)
• Avoid speaking about IS risks factors
• Don‟t mention the burden of change management
• Don‟t mention risk of scope creep
• …

© Jan Devos - 85


Top 10 of IS failure risks

1. Lack of top management commitment to the project
2. Failure to gain user commitment
3. Misunderstanding the requirements
4. Lack of adequate user involvement
5. Lack of required knowledge/skills in the project personnel
6. Lack of frozen requirements
7. Changing scope/objective
8. Introduction of new technology
9. Failure to manage end user expectations
10. Insufficient/appropriate staffing
Source: Schmidt, Lyytinen, Keil & Cule; Identifying Software Project Risks, 2001

A Framework for IT Governance in SMEs
• Building theory from case studies (Eisenhardt, 2007)
▫ Observations from previous literature
▫ Commons sense
▫ Experience
• Multiple case studies (#5)
▫ Theoretically chosen, not randomly !
• Software Project Risks (Schmidt et al, 2001)
▫ Potentially important constructs
• Pattern mapping

Result the OISF Framework

Derived hypotheses
Domain Nr Hypothesis (to avoid OISF)
SME 1 SME-principals should have CEOs who are personally
principal committed to IS projects

2 SME-principals should have effective project
management skills.
3 SME-principals should be convinced that an outsourced
IS project is a joined endeavour between two
collaborating partners and should to be managed towards
an equilibrated balance between control and trust
ISV Agent 4 ISV-agents should have a profound capability maturity
level on project management
5 ISV-agents should avoid all distrust mechanisms vis-à-vis
SME principals

© Jan Devos - 89

Derived hypotheses

Domain Nr Hypothesis (to avoid OISF)
Tendering 6 both parties should avoid fixed price contracts.
and
Contracting

7 both parties should make renegotiable contracts
IT artefact 8 specific IT artifacts should be made for SMEs with less
sophistication and build up from their specific business
requirements.
Use 9 SME and ISV should work together in a spirit of
collaboration and openness and keep the balance
between control and trust equilibrated.

© Jan Devos - 90

Conclusion of the Framework

• Novel, testable and empirical valid

• Unique SME perspective

• Generic and not only suitable for a particular
technology or artifact (ERP, CRM, …)

• Complete cycle of plan-do-run-check(monitor)

• Spelling out characteristics of IT Governance for
SMEs

© Jan Devos - 91

Conclusion of the Framework

• Scientific challenge:
Testing of induced hypothesizes (increase external
validity)

• Governmental challenge:
Deploying Quality and Certification programs for ISV willing
to serve an SME-market

• Managerial challenge:
Developing realistic models for IT Governance for SMEs

© Jan Devos - 92

Future

• Open Source Software (OSS) and Free/Libre/open
source Software (FLOSS)
▫ alternative for ERP
▫ avoiding vendor lock-ins
• Cloud Computing
▫ Complete outsourcing
▫ Utility computing
• Social Networks
▫ Crowd sourcing
▫ SME networks
• IT for the not-for-profit (government agencies, cities,
culture industry, NGOs, …)
• IT Governance in SMEs: expand our domain of
knowledge

© Jan Devos - 93

Conclusions

• SMEs constitute an important but separate unit of
analysis

• SMEs struggle with IT (as LEs do)

• Lack of appropriate methods for running IT in SMEs

• Lack of theoretical knowledge about IT phenomena
in SMEs (failures, adoption, use, management, …)
• Is „control‟ (always) the right way to do things ?

© Jan Devos - 96

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