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4TH EDITION

Managing and Using Information Systems A Strategic Approach

KERI E. PEARLSON KP Partners

CAROL S. SAUNDERS University of Central Florida

JOHN WILEY & SONS, INC.

To Yale & Hana

To Rusty, Russell &Kristin

VICE PRESIDENT & EXECUTIVE PUBLISHER Don Fowley EXECUTIVE EDITOR Beth Lang Golub EDITORIAL ASSISTANT Lyle Curry MARKETING MANAGER Carly DeCandia DESIGN DIRECTOR Harry Nolan SENIOR DESIGNER Kevin Murphy SENIOR PRODUCTION EDITOR Patricia McFadden SENIOR MEDIA EDITOR Lauren Sapira PRODUCTION MANAGEMENT SERVICES Pine Tree Composition

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!Preface Information technology and business are becoming inextricably interwoven. I don’t think anybody can talk meaningfully about one without the talking about the other.1

Bill Gates Microsoft

I’m not hiring MBA students for the technology you learn while in school, but for your ability to learn about, use and subsequently manage new technologies when you get out.

IT Executive Federal Express

Give me a fish and I eat for a day; teach me to fish and I eat for a lifetime. Proverb

Managers do not have the luxury of abdicating participation in information systems decisions. Managers who choose to do so risk limiting their future business options. Information systems are at the heart of virtually every business interaction, process, and decision, especially when one considers the vast penetration of the Web in the last few years. Managers who let someone else make decisions about their information systems are letting someone else make decisions about the very foundation of their business. This is a textbook about managing and using information, written for current and future managers as a way of introducing the broader implications of the impact of information systems.

The goal of this book is to assist managers in becoming knowledgeable par- ticipants in information systems decisions. Becoming a knowledgeable participant means learning the basics and feeling comfortable enough to ask questions. It does not mean having all the answers nor having a deep understanding of all the technologies out in the world today. No text will provide managers with everything they need to know to make important information systems decisions. Some texts instruct on the basic technical background of information systems. Others discuss applications and their life cycle. Some take a comprehensive view of the man- agement information systems (MIS) field and offer readers snapshots of current systems along with chapters describing how those technologies are designed, used, and integrated into business life.

This book takes a different approach. This text is intended to provide the reader with a foundation of basic concepts relevant to using and managing information. It is not intended to provide a comprehensive treatment on any one aspect of MIS,

1 http://www.woopidoo.com/business quotes/authors/bill-gates-quotes.htm.

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iv Preface

for certainly each aspect is itself a topic of many books. It is not intended to provide readers with enough technological knowledge to make them MIS experts. It is not intended to be a source of discussion of any particular technology. This textbook is written to help managers begin to form a point of view of how information systems will help, hinder, and create opportunities for their organizations.

The idea for this text grew out of discussions with colleagues in the MIS area. Many faculty use a series of case studies, trade and popular press readings, and Web sites to teach their MIS courses. Others simply rely on one of the classic texts, which include dozens of pages of diagrams, frameworks, and technologies. The initial idea for this text emerged from a core MIS course taught at the business school at the University of Texas at Austin. That course was considered an ‘‘appetizer’’ course—a brief introduction into the world of MIS for MBA students. The course had two main topics: using information and managing information. At the time, there was no text like this one, hence students had to purchase thick reading packets made up of articles and case studies to provide them with the basic concepts. The course was structured to provide the general MBA with enough knowledge of the field of MIS that they could recognize opportunities to use the rapidly changing technologies available to them. The course was an appetizer to the menu of specialty courses, each of which went much deeper into the various topics. But completion of the appetizer course meant that students were able to feel comfortable listening to, contributing to, and ultimately participating in information systems decisions.

Today many students are digital natives—people who have grown up using information technologies all of their lives. That means that students come to their courses with significantly more knowledge about things like personal com- puters, cell phones, texting, the Web, social networking, file downloading, online purchasing, and social media than their counterparts in school just a few years ago. This is a significant trend that is projected to continue; students will be increasingly knowledgeable in personally using technologies. That knowledge has begun to change the corporate environment. Today’s digital natives expect to find information systems in corporations that provide at least the functionality they have at home. At the same time, they expect to be able to work in ways that take advantage of the technologies they have grown to depend on for social interaction, collaboration, and innovation. This edition of the text has been completely edited with this new group of students in mind. We believe the basic foundation is still needed for managing and using information systems, but we understand that the assumptions and knowledge base of today’s students is significantly different.

This book includes an introduction, 12 chapters of text and minicases, and a set of case studies and supplemental readings on a Web site. The introduction makes the argument introduced in this preface that managers must be knowledgeable participants in information systems decisions. The first few chapters build a basic framework of relationships between business strategy, information systems strategy, and organizational strategy and explore the links between these strategies. Readers will also find a chapter on how information

Preface v

systems relate to business transformation. Supplemental materials, including longer cases from all over the globe, can be found on the Web. Please visit http://www.wiley.com/college/pearlson for more information.

General managers also need some foundation on how IT is managed if they are to successfully discuss their next business needs with IT professionals who can help them. Therefore, the remaining chapters describe the basics of information architecture and infrastructure, the sourcing of information systems, the organization and governance of the MIS function, the ethical issues, the funding of information systems resources, project management, and business analytics and knowledge management.

No text in the field of MIS is current. The process of writing the chapters, coupled with the publication process, makes a text somewhat out-of-date prior to delivery to its audience. With that in mind, this text is written to summarize the ‘‘timeless’’ elements of using and managing information. Although this text is complete in and of itself, learning is enhanced by coupling the chapters with the most current readings and cases. Students are encouraged to search the Web for examples and current events that further clarify the issues at hand. The format of each chapter begins with an example case and the basic language for a set of important management issues. This is followed up with a set of managerial concerns related to the topic. Each chapter then has a food for thought section on an additional, but relatively new, topic. The chapter concludes with a set of study questions, key words, and case studies.

This is the fourth edition of this text, and this version includes several significant additions and revisions. Gone is the chapter on ‘‘doing business on the Internet’’ because after all, virtually every business now uses the Internet. Instead, this edition has a new chapter on sourcing. Major changes include a new focus on Web 2.0 (Chapter 2); new framework of managerial levers (Chapter 3); new discussion on collaboration (Chapter 4); alignment and business processes (Chapter 5); SOA WOA, SaaS, enterprise architecture, and cloud computing (Chapter 6); sourcing (Chapter 7); new IT governance framework (Chapter 8); security and compliance (Chapter 9); new discussion of business cases (Chapter 10); new focus on managing business projects (Chapter 11); and on business analytics and business intelligence (Chapter 12). Many of the older cases have been replaced with newer examples throughout the text, and many of the food for thought issues are new.

Who should read this book? General managers interested in participating in information systems decisions will find this a good reference resource for the language and concepts of MIS. Managers in the information systems field will find this book a good resource for beginning to understand the general manager’s view of how information systems affect business decisions. And MIS students will be able to use the readings and concepts in this book as the beginning point in their journey to become informed and successful business people.

The information revolution is here. Where do you fit in?

Keri E. Pearlson and Carol S. Saunders

http://www.wiley.com/college/pearlson
!Acknowledgments Books of this nature are written only with the support of many individuals. We would like to personally thank several individuals who helped with this text. Although we’ve made every attempt to include everyone who helped make this book a reality, there is always the possibility of unintentionally leaving some off. We apologize in advance if that is the case here.

Philip Russell Saunders came to our rescue when we were in a pinch by researching various topics, finding cases, and verifying examples from previous editions. We really appreciate his efforts. We also appreciate the considerable efforts of Mihir Parikh at the University of Central Florida. Mihir wrote many of the new cases that appear in this fourth edition of the text. Thanks also go to Craig Tidwell who updated the teaching materials.

We also want to acknowledge and thank pbwiki.com. Without their incredible, and free, wiki, we would have been relegated to e-mailing drafts of chapters back and forth. For this edition, we wanted to use Web2.0 tools as we wrote about them.

We have been blessed with the help of our colleagues in this and in previous editions of the book. They helped us by writing cases and reviewing the text. Our thanks continue to go out to Jonathan Trower, Espen Andersen, Janis Gogan, Ashok Rho, Yvonne Lederer Antonucci, E. Jose Proenca, Bruce Rollier, Dave Oliver, Celia Romm, Ed Watson, D. Guiter, S. Vaught, Kala Saravanamuthu, Ron Murch, John Greenwod, Tom Rohleder, Sam Lubbe, Thomas Kern, Mark Dekker, Anne Rutkowski, Kathy Hurtt, Kay Nelson, and John Butler. In addition, the students of the spring 2008 Technology Management and summer 2008 Information Resource Management classes at the University of Central Florida provided comments that proved helpful in writing some cases and making revisions. Though we cannot thank them by name, we also greatly appreciate the comments of the anonymous reviewers who have made a mark on this edition.

The book would not have been started were it not for the initial suggestion of a wonderful editor at John Wiley & Sons, Inc., Beth Lang Golub. Her persistence and patience have helped shepherd this book through many months of creation, modification, evaluation, and production, and she will shepherd it through translation into other languages. Special thanks go to Maria Guarascio, who very cheerfully and very competently helped us through the revision process. We also appreciate the help of (Jennifer Snyder, Lorraina Raccuia, Gitti Lindner, and Sujin Hong) and others at Wiley, who have made this edition a reality.

From Keri: Thank you to my husband, Dr. Yale Pearlson, and my daughter, Hana Pearlson. Their patience with me while I worked on this project was incredible. They celebrated and commiserated the ups and downs that came with the process of writing this book. I love you guys!

From Carol: Rusty, thank you for being my compass (always keeping me headed in the right direction) and my release valve (patiently walking me through stressful times). I couldn’t do it without you. I love you, Russell, and Kristin very much! vi

!About the Authors Keri E. Pearlson

Dr. Keri E. Pearlson is president of KP Partners, a consultancy specializing in cre- ating leaders skilled in the strategic use of information systems and organizational design in the Web 2.0 world.

Dr. Pearlson has held various positions in academia and industry. She was a member of the information systems faculty at the Graduate School of Business at the University of Texas at Austin, where she taught management information systems courses to MBAs and executives. She was a research director at the Research Board, held positions at the Harvard Business School, CSC-Index’s Prism Group, nGenera (formerly the Concours Group), AT&T, and Hughes Aircraft Company.

She is co-author of Zero Time: Providing Instant Customer Value—Every Time, All the Time (John Wiley & Sons, 2000). Her work has been published in Sloan Management Review, Academy of Management Executive, Information Resources Management Journal, and Beyond Computing. Many of her case studies have been published by Harvard Business School Publishing and are used all over the world.

Dr. Pearlson holds a Doctorate in Business Administration (DBA) in Man- agement Information Systems from the Harvard Business School and both a Master’s Degree in Industrial Engineering Management and a Bachelor’s Degree in Applied Mathematics from Stanford University.

Carol S. Saunders

Dr. Carol S. Saunders is professor of MIS at the University of Central Florida in Orlando, Florida. She served as General Conference Chair of the International Conference on Information Systems (ICIS) in 1999 and Telecommuting in 1996. She was the chair of the ICIS Executive Committee in 2000. She was editor-in-chief of MIS Quarterly and is a Fellow of the Association of Information Systems (AIS). Her current research interests include the impact of information system on power and communication, virtual teams, virtual worlds, time, information overload, sourcing, and interorganizational linkages.

Her research is published in a number of journals including MIS Quar- terly, Information Systems Research, Journal of MIS, Communications of the ACM, Academy of Management Journal, Academy of Management Review, Communica- tions Research, and Organization Science.

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!Contents Introduction 1 The Case for Participating in Decisions about Information Systems 2 What If A Manager Doesn’t Participate? 5 What Skills Are Needed to Participate Effectively in Information

Technology Decisions? 7 Basic Assumptions 9 Food for Thought: Economics of Information Versus Economics of

Things 16 Summary 18 Key Terms 18 Discussion Questions 19 Case Study I-1: Terry Cannon, MBA 19 Case Study I-2: Anyglobal Company Inc. 21

! CHAPTER 1 The Information Systems Strategy Triangle 22

Brief Overview of Business Strategy Frameworks 25 Brief Overview of Organizational Strategies 34 Brief Overview of Information Systems Strategy 37 Food for Thought: The Halo Effect and Other Business Delusions 38 Summary 40 Key Terms 40 Discussion Questions 41 Case Study 1-1: Roche’s New Scientific Method 41 Case Study 1-2: Google 43

! CHAPTER 2 Strategic Use of Information Resources 46

Evolution of Information Resources 47 Information Resources as Strategic Tools 48 How Can Information Resources Be Used Strategically? 52 Strategic Alliances 66 Risks 68 Food for Thought: Co-creating IT and Business Strategy 69

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Summary 71 Key Terms 71 Discussion Questions 71 Case Study 2-1: Lear Won’t Take A Backseat 73 Case Study 2-2: Zipcar 74

! CHAPTER 3 Organizational Impacts of Information Systems Use 76

Information Technology and Organizational Design 77 Information Technology and Management Control Systems 85 Information Technology and Culture 89 Food for Thought: Immediately Responsive Organizations 92 Summary 93 Key Terms 94 Discussion Questions 94 Case Study 3-1: US Air and America West Merger Case 94 Case Study 3-2: The FBI 96

! CHAPTER 4 Information Technology and the Design of Work 98

Work Design Framework 101 How Information Technology Supports Communication

and Collaboration 102 How Information Technology Changes the Nature of Work 108 How Information Technology Changes Where Work Is Done and Who

Does It 115 Virtual Teams 120 Gaining Acceptance for IT-Induced Change 125 Food for Thought: Security With Remote Workers 127 Summary 129 Key Terms 130 Discussion Questions 130 Case Study 4-1: Automated Waste Disposal, Inc. 131 Case Study 4-2: Virtually There? 132

! CHAPTER 5 Information Technology and Changing Business Processes 134

Silo Perspective Versus Business Process Perspective 135 The Tools for Change 141 Shared Services 145 Enterprise Systems 147 Integrated Supply Chains 152 Food for Thought: Is ERP a Universal Solution? 155

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Summary 157 Key Terms 158 Discussion Questions 158 Case Study 5-1: Santa Cruz Bicycles 159 Case Study 5-2: Boeing 787 Dreamliner 160

! CHAPTER 6 Architecture and Infrastructure 162

From Vision to Implementation 163 The Leap from Strategy to Architecture to Infrastructure 165 Architectural Principles 171 Enterprise Architecture 171 Other Managerial Considerations 174 From Strategy to Architecture to Infrastructure: An Example 181 Food for Thought: Cloud Computing 183 Summary 186 Key Terms 187 Discussion Questions 187 Case Study 6-1: Hasbro 188 Case Study 6-2: Johnson & Johnson’s Enterprise Architecture 189

! CHAPTER 7 Information Systems Sourcing 190

Sourcing Decision Cycle Framework 192 Insourcing 193 Outsourcing 193 Outsourcing Abroad 198 Backsourcing 206 Outsourcing Models 207 Food for Thought: Outsourcing and Strategic Networks 211 Summary 212 Key Terms 212 Discussion Questions 213 Case Study 7-1: Sodexho Asia Pacific 213 Case Study 7-2: Overseas Outsourcing of Medical Transcribing 215

! CHAPTER 8 Governance of the Information Systems Organization 218

Understanding the IS Organization 219 What a Manager Can Expect from the IS Organization 224 What the IS Organization Does Not Do 230 IT Governance 231 Food for Thought: CIO Leadership Profiles 240

Contents xi

Summary 241 Key Terms 242 Discussion Questions 242 Case Study 8-1: IT Governance at UPS 242 Case Study 8-2: The Big Fix at Toyota Motor Sales (TMS) 243

! CHAPTER 9 Using Information Ethically 246

Normative Theories of Business Ethics 248 Control of Information 253 Security and Controls 259 IT Governance and Security 262 Sarbanes–Oxley Act of 2002 265 Food for Thought: Green Computing 270 Summary 272 Key Terms 272 Discussion Questions 273 Case Study 9-1: Ethical Decision Making 274 Case Study 9-2: Midwest Family Mutual Goes Green 276

! CHAPTER 10 Funding IT 278

Funding IT Resources 278 How Much Does IT Cost? 281 Building a Business Case 287 IT Portfolio Management 290 Valuing IT Investments 292 Monitoring IT Investments 296 Options Pricing 300 Food For Thought: Who Pays for the Internet? 304 Summary 305 Key Terms 306 Discussion Questions 306 Case Study 10-1: Troon Golf 306 Case Study 10-2: Valuing IT 307

! CHAPTER 11 Project Management 309

What Defines a Project? 310 What is Project Management? 312 Project Elements 314 IT Projects 319 IT Project Development Methodologies 322

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Managerial Influences 328 Managing Project Risk 330 The PMO 338 Food for Thought: Open Sourcing 339 Summary 341 Key Terms 342 Discussion Questions 342 Case Study 11-1: Sabre Holdings 343 Case Study 11-2: Dealing with Traffic Jams in London 344

! CHAPTER 12 Managing Business Knowledge 346

Knowledge Management 347 Data, Information, and Knowledge 348 From Managing Knowledge to Business Intelligence 351 Why Manage Knowledge? 352 Knowledge Management Processes 356 Competing with Business Analytics 365 Components of Business Analytics 366 Caveats for Managing Knowledge 368 Food for Thought: Business Experimentation 369 Summary 370 Key Terms 371 Discussion Questions 371 Case Study 12-1: GSD&M’s Virtual Crowd Uses Analytics 372 Case Study 12-2: The Brain Behind the Big, Bad Burger 373

Glossary 375

Index 385

!INTRODUCTION Why do managers need to understand and participate in the information decisions of their organizations? After all, most corporations maintain entire departments dedicated to the management of information systems (IS). These departments are staffed with highly skilled professionals devoted to the field of technology. Shouldn’t managers rely on experts to analyze all the aspects of IS and to make the best decisions for the organization? The answer to that question is no. Managing information is a critical skill for success in today’s business environment. All decisions made by companies involve, at some level, the management and use of IS. Managers today need to know about their organization’s capabilities and uses of information as much as they need to understand how to obtain and budget financial resources. The ubiquity of personal computers (PCs) and the Internet highlights this fact because together they form the backbone for virtually all new business models. Further, the proliferation of supply chain partnerships has extended the urgent need for business managers to be involved in technology decisions. In addition, the availability of seemingly free (or at least very inexpensive) applications and collaboration in the consumer area has changed the landscape once again, increasing the integration of IS and business processes. A manager who does not understand the basics of managing and using information cannot be successful in this business environment.

Consider the now-historic rise of companies such as Amazon.com and Google. Amazon.com began as an online bookseller and rapidly outpaced traditional brick-and-mortar businesses like Barnes and Noble, Borders, and Waterstones. Management at the traditional companies responded by having their IS support personnel build Web sites to compete. But upstart Amazon.com moved on ahead, keeping its leadership position on the Web by leveraging its new business model into other marketplaces, such as music, electronics, health and beauty products, lawn and garden products, auctions, tools and hardware, and more. It cleared the profitability hurdle in the fourth quarter of 2001 by achieving a good mix of IS and business basics: capitalizing on operational efficiencies derived from inventory software and smarter storage, cost cutting, and effectively partnering with such companies as Toys ‘‘R’’ Us Inc. and Target Corporation.1 In 2008, Amazon.com once again changed the basis of competition in another market, but this time it was the Web services business. Amazon.com Web services offers clients the extensive technology platform used for Amazon.com, but in an on-demand fashion for developing and running the client’s own applications.

1 Robert Hof, ‘‘How Amazon Cleared the Profitability Hurdle,’’ BusinessWeek Online (February 4, 2002), http://www.businessweek.com/magazine/content/02 05/b3768079.htm (accessed May 23, 2002).

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2 Introduction

Likewise, Google played an important role in revolutionizing the way infor- mation is located and used as well as revolutionizing the world of advertising and publishing. Google began in 1999 as a basic search company but quickly learned that a unique business model was a critical factor for future success. The com- pany changed the way people thought about Web content by making it available in a searchable format with an incredibly fast response time. Further, Google’s keyword-targeted advertising program revolutionized the way companies adver- tise. By 2001, Google announced its first quarter of profitability, solidifying the way the world finds information, publishes, and advertises.2 By 2008, Google had expanded into a complete suite of Web-based applications, such as calendaring, e-mail, collaboration, shopping, and maps. Further, like Amazon.com, Google also offers clients similar on-demand services.3

These and other online businesses are able to succeed where traditional companies were not, in part because their management understood the power of information, IS, and the Web. They did not succeed because their managers could build Web pages or assemble an IS network. Quite the contrary. The executives in these new businesses understood the fundamentals of managing and using information and could marry that knowledge with a sound, unique business vision to achieve domination of their intended market spaces.

The goal of this book is to provide the foundation to help the general business manager become a knowledgeable participant in IS decisions because any IS decision in which the manager does not participate can greatly affect the organization’s ability to succeed in the future. This introduction outlines the fundamental reasons for taking the initiative to participate in IS decisions. Moreover, because effective participation requires a unique set of managerial skills, this introduction identifies the most important ones. These skills will be helpful not just in making IS decisions, but all business decisions. We describe how a manager should participate in the decision-making process and outline how the remaining chapters of this book develop this point of view. Finally, the introduction presents current models for understanding the nature of a business and that of an information system to provide a framework for the discussions that follow in subsequent chapters.

! THE CASE FOR PARTICIPATING IN DECISIONS ABOUT INFORMATION SYSTEMS

Experience shows that business managers have no problem participating in most organizational decisions, even those outside their normal business expertise. For example, ask a plant manager about marketing problems, and the result will probably be a detailed opinion on both key issues and recommended solutions. Dialogue among managers routinely crosses all business functions in formal as

2 Adapted from information at www.google.com/corporate/history.html (accessed June 17, 2005). 3 For more information on the latest services by these two companies, see http://www.amazon.com and http://code.google.com/.

http://www.google.com/corporate/history.html
http://www.amazon.com
http://code.google.com/
The Case for Participating in Decisions about Information Systems 3

Reasons

IS must be managed as a critical resource. IS enable change in the way people work together. IS are part of almost every aspect of business. IS enable business opportunities and new strategies. IS can be used to combat business challenges from competitors.

FIGURE I.1 Reasons why business managers should participate in information systems decisions.

well as informal settings, with one general exception: IS. Management continues to tolerate ignorance in this area relative to other specialized business functions. Culturally, managers can claim ignorance of IS issues without losing prestige among colleagues. On the other hand, admitting a lack of knowledge regarding marketing or financial aspects of the business will earn colleagues’ contempt.