GebauerJudithUCS06

 Information System Flexibility and the Cost Efficiency of Business Processes*Judith GebauerMay 18, 2006* with Franz Schober;Journal of the AIS 7 (March 2006), 122-147: 

Information System Flexibility and the Cost Efficiency of Business Processes* Judith Gebauer May 18, 2006 * with Franz Schober; Journal of the AIS 7 (March 2006), 122-147

Research Objective: 

Research Objective Based on the assumptions, that Too little flexibility as well as too much flexibility can limit the effectiveness of an information system (IS), and that IS flexibility causes cost, We focus on the economics of IS flexibility, seeking to determine the optimal level and type of IS flexibility for the cost-efficient support of a given business process.

Model Structure: 

Uncertainty (p) Time-criticality (r) Variability (v) Total IS investment and process operating costs during IS lifetime (TCOST) IS Flex-to-use (w1) IS Flex-to-change (w2) No usage of IS (w3) Independent Variables Business process characteristics Decision Variables Strategies of IS flexibility Objective Variable Business process cost efficiency Model Structure

Decision Variables: Strategies of IS- Flexibility: 

Decision Variables: Strategies of IS- Flexibility IS-flexibility-to-use (scope of application) (w1) System functionality Scope of database User interface Processing capacity IS-flexibility-to-change (upgradability; conceptually similar IS infrastructure and real options) (w2) Personnel Integration of data and functionality Modularity of system components No usage of IS (manual operations, outsourcing etc.) (w3)

Independent Variables: Business Process Characteristics: 

Independent Variables: Business Process Characteristics Uncertainty (p) Environmental uncertainty of exogenous Variables Structural uncertainty (non-routineness) Determines the predictability of process requirements Variability (v) Distribution of different process requirements during the IS-lifetime (Lorenz-curve for graphical representation) Time-Criticality (r) Extent to which the performance of a business process is time-critical

Lorenz Curve: 

Lorenz Curve

Lorenz Curve as a Measure of Process Variability: 

Lorenz Curve as a Measure of Process Variability

Lorenz Curves for Different Levels of Variability v (Ortega et al. 1991): 

Lorenz Curves for Different Levels of Variability v (Ortega et al. 1991) 0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1 v = 0 v = 0.2 v = 0.4 v = 0.6 v = 0.8 v = 0.9 Share of actual process tasks x, cumulative Share of potential process tasks L(x), cumulative v = 1

Optimization Model – Preliminary Propositions: 

Uncertainty (p) Time-criticality (r) Variability (v) Total IS investment and process operating costs during IS lifetime (TCOST) IS flex-to-use (w1) IS flex-to-change (w2) No usage of IS (w3) Optimization Model – Preliminary Propositions - + + + - 0 - + - Independent Variables Business process characteristics Decision Variables Strategies of IS flexibility Objective Variable Business process cost efficiency

Optimization Model – Preliminary Propositions: 

Uncertainty (p) Time-criticality (r) Variability (v) Total IS investment and process operating costs during IS lifetime (TCOST) IS flex-to-use (w1) IS flex-to-change (w2) No usage of IS (w3) Optimization Model – Preliminary Propositions - + + - 0 - + - + Independent Variables Business process characteristics Decision Variables Strategies of IS flexibility Objective Variable Business process cost efficiency

Preliminary Propositions (1): 

Preliminary Propositions (1) Proposition A (Uncertainty effect, p) A business process characterized by low uncertainty (high value of p) can be supported cost efficiently based on IS flexibility-to-use. ... by high uncertainty ... based on flexibility-to-change. Proposition B (Variability effect, v) ... by low variability can generally be supported cost efficiently with an IS. ... by high variability may not warrant the inclusion of all different process tasks into the IS, making it efficient to perform some process tasks outside of the system.

Preliminary Propositions (2): 

Preliminary Propositions (2) Proposition C (Time-criticality effect, r) A business process characterized by high time-criticality can be performed cost efficiently with an IS, ... by low time-criticality, the IS investment may not outweigh the cost premium to be paid for tasks that are performed outside of the system.

Two-Step Decision Process: 

Two-Step Decision Process t = 0 (IS Design) Budget Allocation IS flexibility-to-use ICOST Process activities t = 1 (IS Use) IS flexibility-to-change FCOST (y = 1, if provided) Anticipated in t = 0 (prob = p) Not anticipated in t = 0 (prob = 1-p) Performed with IS (share = x1 ) Performed manually (share = 1-x1 ) Performed manually (share = 1-x2 ) Performed with IS (share = x2 ) System Upgrade UCOST System operating cost OCOST System operating costs OCOST Manual operating costs MCOST

Decision Variabiles: 

Decision Variabiles x1: Share of process tasks anticipated in t = 0 and using flexibility-to-use in t = 1 x2: Share of process tasks not anticipated in t = 0 and using flexibility-to-change in t = 1 Strategy-mix determined by uncertainty factor p: w1 = px1 w2 = (1-p) x2 w3 = p (1-x1) + (1-p) (1-x2) = 1 – w1 – w2

Cost Factors (1): 

Cost Factors (1) Investment in IS flexibility-to-use (t = 0) ICOST = a + b L(x1) Investment in IS flexibility-to-change (t = 0) FCOST = c*y System operating costs (t = 1) OCOST = d [w1 + w2] System upgrade costs (t = 1) UCOST = e L(x2) Manual processing costs (t = 1) MCOST = f (1 + r g) w3

Cost Factors (2): 

Cost Factors (2) Lorenz curve to measure process variability L(x) = xv [1 – (1 – x)1-v] Total costs, to be minimized TCOST = ICOST + FCOST + OCOST + UCOST + MCOST with 0 ≤ x1, x2 ≤ 1 and y  {0,1}

Model Analysis (1): Low Uncertainty, Variable Variability, No Time-Criticality: 

Model Analysis (1): Low Uncertainty, Variable Variability, No Time-Criticality

Model analysis (2): Medium Uncertainty, Variable Variability, No Time-Criticality: 

Model analysis (2): Medium Uncertainty, Variable Variability, No Time-Criticality

Model Analysis (3): High Uncertainty Variable Variability, No Time-Criticality: 

Model Analysis (3): High Uncertainty Variable Variability, No Time-Criticality

Propositions (1): 

Propositions (1) Proposition 1a: A business process characterized by low uncertainty and high variability can be supported cost efficiently with an IS that is based predominantly on flexibility-to-use and that is complemented by manual operations. Proposition 1b: A business process characterized by low uncertainty and low variability can be supported cost efficiently with an IS that is based predominantly on flexibility-to-use and that is complemented by IS flexibility-to-change.

Propositions (2): 

Propositions (2) Proposition 2a: A business process characterized by medium uncertainty and high variability can be supported cost efficiently with an IS that is based equally on flexibility-to-use and on flexibility-to-change and that is complemented by manual operations. Proposition 2b: A business process characterized by medium uncertainty and low variability can be supported cost efficiently with an IS that is based equally on flexibility-to-use and on flexibility-to-change strategies with a negligible share of manual operations.

Propositions (3): 

Propositions (3) Proposition 3a: A business process characterized by high uncertainty and high variability can be supported cost efficiently with an IS that is based predominantly on flexibility-to-change and that is complemented by manual operations. Proposition 3b: A business process characterized by high uncertainty and low variability can be supported cost efficiently with an IS that is based predominantly on flexibility-to-change and that is complemented by flexibility-to-use.

Model Analysis (4): Low Uncertainty, Variable Variability, High Time-Criticality: 

Model Analysis (4): Low Uncertainty, Variable Variability, High Time-Criticality

Model analysis (5): Medium Uncertainty, Variable Variability, High Time-Criticality: 

Model analysis (5): Medium Uncertainty, Variable Variability, High Time-Criticality

Model analysis (6): High Uncertainty, Variable Variability, High Time-Criticality: 

Model analysis (6): High Uncertainty, Variable Variability, High Time-Criticality

Propositions (4): 

Propositions (4) Proposition 4: A business process characterized by high time-criticality and low uncertainty can be supported cost efficiently with an IS according to Propositions 1a and 1b, yet with a reduced but still sizable share of manual operations in the case of high variability. Proposition 5: A business process characterized by high time-criticality and medium uncertainty can be supported cost efficiently with an equal mix of flexibility-to-use and flexibility-to-change with a negligible share of manual operations, independent of the level of process variability.

Propositions (5): 

Propositions (5) Proposition 6: A business process characterized by high time-criticality and high uncertainty can be supported cost efficiently with an IS according to Propositions 3a and 3b, yet with a reduced but still sizable share of manual operations in the case of high variability.

Model Results: 

Model Results Process uncertainty Process Variability Process Time-Criticality +++ for w > 0.67 (dominant IS flexibility strategy) ++ for 0.33 < w < 0.67 + for 0.10 < w < 0.33 0 for w < 0.10 Low Low Low Low Low Low Low Low Low Low Medium High High High High High High High High High High + + 0 0 0 + 0 0 + + 0 0 +++ +++ +++ +++ ++ ++ ++ ++ 0 0 + + 0 0 + + ++ ++ ++ ++ +++ +++ +++ +++

Sensitivity Analysis: Variation of System Operating Costs d: 

Sensitivity Analysis: Variation of System Operating Costs d Cost assumptions: a = 100, b = 300, c = 50, d = variable, e = 300, f = 1,500, g = 0.7 Low uncertainty (p = 0.8), medium variability (v = 0.6), high time-criticality (r = 0.5) = w1 = w2 = w3 0 0.2 0.4 0.6 0.8 1 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 d d=1,049 d=2,024

Summary: 

Summary Objective: Develop a theory to determine the impact of IS flexibility on the cost efficiency of business processes Main results: High uncertainty corresponds with IS flexibility-to-change Low uncertainty corresponds with IS flexibility-to-use High variability can limit the efficiency of the IS in general High time-criticality can strenthen the efficiency contribution of the IS in general In general: IS-flexibility can help explain IS success

Applicability: 

Applicability Establish the general relevance of IS flexibility for IS management and the benefits of longterm IS investment strategies. Contribution to operationalization of flexibility-related process characteristics (e.g., uncertainty, variability, time-criticality) that have been included in IS investment decisions already, albeit often implicitly. Contribution to service- und release-management in software industry; allows to better balance features included in the SW, and uprading possibilities. Evaluation of IS-innovations (web-services, outsourcing-arrangements) regarding flexibility aspects.

Next Steps: 

Next Steps Empirical Evaluation of variables and constructs (interface of theory and research) Concrete operationalization of risk parameter: flexibility-to-change as a real option Concrete consideration of dynamic aspects, including IS life time Relaxation of various model assumptions (e.g., cost disadvantage of processing activities outside of the IS) Development of practically applicable design and management guidelines, e.g., by operationalizing the weights of various IS flexibility components

Slide33: 

Thank you very much for your attention – Questions?