Electronic Business Networking 9781845446130, 9780861767052

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Business Process Management Journal

ISSN 1463-7154 Volume 8 Number 3 2002

Electronic business networking Editor Majed Al-Mashari Paper format Business Process Management Journal includes five issues in traditional paper format. The contents of this issue are detailed below.

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CONTENTS

Editorial advisory and review board ________________ 188 Abstracts and keywords ___________________________ 189 Editorial __________________________________________ 192 The efficiency of accounting service provision Peter Barrar, Douglas Wood, Julian Jones and Marco Vedovato__________

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Ubiquitous organization: organizational design for e-CRM Radoslav P. Kotorov _____________________________________________

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A framework for best practices in electronic commerce awareness creation Anastasia Papazafeiropoulou, Athanasia Pouloudi and Georgios Doukidis __

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B2B-enhanced supply chain process: toward building virtual enterprises Mike Serve, Dave C. Yen, Jyun-Cheng Wang and Binshan Lin ___________

245 In association with

Unleashing the integration potential of ERP systems: the role of process-based performance measurement systems Sergio Beretta __________________________________________________

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The European Centre for Total Quality Management

CONTENTS continued

The development of e-commerce in Singapore: the impact of government initiatives Busli Chan and Suliman Al-Hawamdeh _____________________________

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The knowledge of coordination for supply chain integration Togar M. Simatupang, Alan C. Wright and Ramaswami Sridharan ______

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Business Process Management Journal online

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EDITORIAL ADVISORY AND REVIEW BOARD Dr Asamir Abuznaid Hebron University, Palestinian Authority Professor Mustafa Alshawi Faculty of Business and Informatics, University of Salford, UK

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Professor David Bennett Aston Business School, Birmingham, UK Dr Khaled A. Bushait Manager, Economic & Industrial Research, King Fahd University of Petroleum & Minerals, Dhahran, Saudi Arabia Professor Barrie Dale United Utilities Professor of Quality Management, Manchester School of Management, UMIST, Manchester, UK

Paul Leonard Senior Consultant, Rank Xerox Business Solutions, Loughborough, UK Professor Binshan Lin Department of Management & Marketing, Louisiana State University in Shreveport, USA Dr-Ing Kai Mertins Institute of Production Systems and Design Technology, Berlin, Germany Dr John Peters Emerald, 60/62 Toller Lane, Bradford, UK

Dr Tom Fisher University of Technology, Sydney, New South Wales, Australia

Dr A. Rigby Qualtone Consultants, Thornton Cleveleys, Lancashire, UK

Professor Varun Grover William S. Lee Distinguished Professor of Information Systems, Clemson University, USA

Dr Zien Y. Rushami Universiti Utara Malaysia, Kedah, Malaysia

Professor A. Gunasekaran University of Massachusetts, USA Philip Hanson IBM UK Ltd, Warwick, UK Dr H. James Harrington Principal, Ernst & Young, California, USA Professor Gopal Kanji Dept of Applied Statistics & Operational Research, Sheffield Hallam University, Sheffield, UK Professor Noriaki Kano Science University of Tokyo, Tokyo, Japan Professor Andres Kiitam Quality Engineering Chair, Tallin Technical University, Tallin, Estonia

Business Process Management Journal, Vol. 8 No. 3, 2002, p. 188. # MCB University Press, 1463-7154

Chan Meng Khoong Managing Director, SCS Foresight Pte Ltd, Singapore

Dr Shane J. Schvaneveldt Associate Professor, Weber State University, Utah, USA Professor Dr H.D. Seghezzi Institute of Technology Management, University of St Gallen, St Gallen, Switzerland R.K. Talwar London, UK Professor N. Venkatraman David J. McGrath Jr Professor of Management, Boston University, USA

The efficiency of accounting service provision Peter Barrar, Douglas Wood, Julian Jones and Marco Vedovato Keywords Outsourcing, Benchmarking, Small- to medium-sized enterprises, Accounting, Data envelopment analysis The paper uses a procedure called data envelopment analysis (DEA) to compare internal against external (outsource) efficiency in the delivery of finance function activities. The approach allows a direct comparison between the in-house efficiency of UK small, medium and large companies in managing their accounting activities both with UK outsource contractors and also against the rather larger and more numerous contractors observed in Italy. The paper finds that, through comparative advantages, outsourcing presents a more efficient solution for the management of very small firm accounting than internal provision. Furthermore, there is evidence that substantial scale benefits continue to be available to outsource contractors, while inefficiency on internal provision is mainly technical. The paper concludes that outsourcing provision is likely to offer worthwhile savings to small firms, allowing them to shed competitive weaknesses and operate at efficient or best practice levels. At the same time, by converting an internal fixed cost, fixed capacity activity into a flexible, variable cost activity, SMEs have the potential to transform a previously unmanageable activity into an efficient or best practice activity that can grow or contract with the business. Ubiquitous organization: organizational design for e-CRM Radoslav P. Kotorov Keywords Information systems, Transaction costs, Organizational design, Teams, E-commerce In 1998 J.P. Morgan’s analysts forecast that the market for e-CRM (customer relationship management) solutions would grow rapidly. Since then more than 700 e-CRM firms emerged. The convergence of information

technologies caused enterprise information systems providers to add e-CRM functionality to their systems, thus further increasing the number of e-CRM suppliers. The proliferation of e-CRM concepts, models and technologies causes significant confusion and uncertainty. Corporate executives question the economic benefits of investing in multimillion dollar e-CRM projects, ponder about the right business and organizational models for e-CRM, and are uncertain which e-CRM models and technologies will prove both profitable and sustainable over time. With so many failed e-CRM initiatives some executives wonder whether e-CRM is not simply a hype. In the present paper, what e-CRM is, from where the economic benefits from investing in e-CRM derive, and the evolution of alternative e-CRM models are elaborated. It is also argued that successful e-CRM projects are not narrowly departmental, but instead organization-wide initiatives. The paper presents a conceptual framework for e-CRM organizational architecture. The findings in the paper are based on e-CRM industry analysis, evaluation and work experience with over 50 e-CRM vendors, and on consulting experience with numerous corporations. A framework for best practices in electronic commerce awareness creation Anastasia Papazafeiropoulou, Athanasia Pouloudi and Georgios Doukidis Keywords E-commerce, Innovation, Small- to medium-sized enterprises The rapid growth of electronic commerce technologies and practices has created a tremendous need for awareness creation for organisations such as small and medium-sized enterprises which seem to lack the necessary information about technology, business practices, investment cost and human capital. Often, the professional organisers of awareness activities are also uncertain about best practice in electronic commerce awareness creation. Thus, although a number of initiatives have taken place in Europe, they have failed to produce the expected results. This paper describes how a project funded by

Abstracts and keywords

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the European Commission (WeCAN) defined and evaluated a number of awareness models in electronic commerce in order to support organisations involved in awareness creation such as chambers of commerce, consulting companies and higher educational institution. B2B-enhanced supply chain process: toward building virtual enterprises Mike Serve, Dave C. Yen, Jyun-Cheng Wang and Binshan Lin Keywords Supply-chain management, Internet, Business-to-business marketing, E-commerce Successful supply chain management requires a change from managing individual functions to integrating activities into the key supply chain process. The advantages far outweigh the effort involved in accessing the final product; a seamless supply chain that operates fluidly and benefits the entire chain. In this paper, the merit of supply chain and B2B is discussed, and the impacts on each other identified. With the groundwork built, the concept of B2B marketplaces as the participating units in a supply chain process in order to enhance the business process is employed. Virtual enterprises can use this extended form of supply chain as its buildingblocks. Unleashing the integration potential of ERP systems: the role of process-based performance measurement systems Sergio Beretta Keywords Resource management, Process control, Performance measurement Despite the large investments recently made in ERP systems, many companies are beginning to admit that the real impact of ERPs on management styles and practices is actually well below expectations, especially on the front of organizational integration. It is argued that ERP systems possess integrating capabilities only at a potential stage: their simple physical implementation is not enough to activate their inner potentialities. ERP systems can enact substantial organizational integration, only if they rely on a sound business process architecture. When the

process dimension is absent from the implementation, the integration potential of ERP systems is frozen. It is argued that this situation can be unfrozen by making processes visible: the introduction of a process-based performance measurement system can help to unleash the power of integration, by making the processes visible to people.

The development of e-commerce in Singapore: the impact of government initiatives Busli Chan and Suliman Al-Hawamdeh Keywords E-commerce, Central government, Knowledge management, Information technology, Infrastructure, Singapore With the advent of Internet technology and its rapid growth during the last few years, electronic commerce has become an increasing reality. While e-commerce still constitutes a small part of many countries’ economies, it is seen by many as an opportunity to reduce cost and improve productivity. This is true, as many economies are transferring themselves into knowledge-based economies, where information and innovation are the competitive instruments. Singapore as a small country with limited natural resources realized the importance of the new economy and the need to position itself as an information and knowledge hub in Asia. The government has taken an active role in the establishment of an e-commerce infrastructure. The government’s vision is to build a premier service hub in the region with global orientation, and focusing on new high growth hub services. This paper reviews the development of e-commerce in Singapore and studies its impact on the development of the information society in Singapore.

The knowledge of coordination for supply chain integration Togar M. Simatupang, Alan C. Wright and Ramaswami Sridharan Keywords Coordination, Supply-chain management, Logistics, Information exchange

Increasing competition due to market globalisation, product diversity and technological breakthroughs stimulates independent firms to collaborate in a supply chain that allows them to gain mutual benefits. This requires the collective knowhow of the coordination mode, including the ability to synchronise interdependent processes, to integrate information systems and to cope with distributed learning. However, research into coordination has paid little attention to acknowledging different modes of coordination. This study

promotes the notion of mutuality and the focus of coordination in order to establish a comprehensive taxonomy of coordination modes. Four different modes of coordination have been identified: logistics synchronisation, information sharing, incentive alignment, and collective learning. The knowledge of coordination is then proposed as an explicit understanding about key drivers of coordination modes that have positive impacts on supply chain performance. This paper also presents a research agenda.

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Business Process Management Journal, Vol. 8 No. 3, 2002, pp. 192-194. # MCB UP Limited, 1463-7154

Editorial Electronic business networking A major feature of BPM can be seen in its growing capacity to fulfil the future requirements of innovative organizations. New management techniques tend to focus on integrating a diversity of basic management concepts from all business functions. They also emphasize the role of electronic technologies in enabling that integration. This is electronic business networking in action; a customer-oriented, process-based approach that relies heavily on electronic information technologies to facilitate the integration of various business functions through advanced socio-technical management techniques such as application service provider (ASP), customer relationship management (CRM), electronic commerce (EC), knowledge management (KM), enterprise resource planning (ERP) and supply chain management (SCM). This special issue attempts to highlight the key concepts, techniques and tools which together enable the development and continuous improvement of electronically-based networked organizations. In their article, Barrar et al. adopt a procedure called data envelopment analysis to compare internal against external (outsource) efficiency in the delivery of finance function activities. The approach allows a direct comparison between the in-house efficiency of UK small, medium and large companies in managing their accounting activities both with UK outsource contractors and also against the rather larger and more numerous contractors observed in Italy. Their paper finds that, through comparative advantages, outsourcing presents a more efficient solution for the management of very small firm accounting than internal provision. It is also evident that substantial scale benefits continue to be available to outsource contractors, while inefficiency on internal provision is mainly technical. The paper concludes that outsourcing provision is likely to offer worthwhile savings to small firms, allowing them to shed competitive weaknesses and operate at efficient or best practice levels. At the same time, by converting an internal fixed cost, fixed capacity activity into a flexible, variable cost activity, SMEs have the potential to transform a previously unmanageable activity into an efficient or best practice activity that can grow or contract with the business. Kotorov’s article reviews e-CRM concepts, models and technologies. The author notes that corporate executives question the economic benefits of investing in a multimillion dollar e-CRM project, ponder about the right business and organizational models for e-CRM, and are uncertain which e-CRM models and technologies will prove both profitable and sustainable over time. With so many failed e-CRM initiatives, some executives wonder whether e-CRM is not simply a hype. Kotorov’s article elaborates on what e-CRM is, on from where the economic benefits investing in e-CRM derive, and on the evolution of alternative e-CRM models. It also argues that successful e-CRM projects are not narrowly departmental, but instead organization-wide

initiatives. The article presents a conceptual framework for e-CRM organizational architecture. The findings in the paper are based on e-CRM industry analysis, evaluation and work experience with over 50 e-CRM vendors, and on consulting experience with numerous corporations. In their article, Papazafeiropoulou et al. argue that the rapid growth of electronic commerce technologies and practices has created a tremendous need for awareness creation for organisations such as small and medium-sized enterprises which seem to lack the necessary information about technology, business practices, investment cost and human capital. Often, the professional organisers of awareness activities are also uncertain about best practice in electronic commerce awareness creation. Thus, although a number of initiatives have taken place in Europe, they have failed to produce the expected results. Papazafeiropoulou et al.’s article describes how a project funded by the European Commission (WeCAN) defined and evaluated a number of awareness models in electronic commerce in order to support organisations involved in awareness creation, such as chambers of commerce, consulting companies and higher educational institutions. Serve et al. argue that successful supply chain management (SCM) requires a change from managing individual functions to integrating activities into key supply chain process. They also assert that the advantages far outweigh the effort involved in accessing the final product; a seamless supply chain that operates fluidly and benefits the entire chain. In their article, the authors discuss the merit of supply chain and business-to-business (B2B) relationships, and identify the impacts on each other. They then use the concept of B2B marketplaces as the participating units in a supply chain process in order to enhance the business process. It is expected that this extended form of supply chain will be useful for virtual enterprises and serves as its building-blocks. In his article, Beretta claims that, despite the large investments recently made in ERP systems, many companies are beginning to admit that the real impact of ERPs on management styles and practices is actually well below expectations, especially on the front of organizational integration. He argues that ERP systems possess integrating capabilities only at a potential stage: their simple physical implementation is not enough to activate their inner potentialities. ERP systems can enact substantial organizational integration, only if they rely on a sound business process architecture. When the process dimension is absent from the implementation, the integration potential of ERP systems is frozen. It is argued that this situation can be unfrozen by making processes visible: the introduction of a process-based performance measurement system can help to unleash the power of integration by making the processes visible to people. Chan and Al-Hawamdeh maintain that, while e-commerce still constitutes a small part of many countries’ economies, it is seen by many as an opportunity to reduce cost and improve productivity. This is true, as many economies are transferring themselves into knowledge-based economies, where information and innovation are the competitive instruments. Singapore as a small country

Editorial

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with limited natural resources realized the importance of the new economy and the need to position itself as an information and knowledge hub in Asia. The government has taken an active role in the establishment of e-commerce infrastructure. The government’s vision is to build a premier service hub in the region with global orientation, and focusing on new high growth hub services. Chan and Al-Hawamdeh’s article reviews the development of e-commerce in Singapore and studies its impact on the development of the information society in Singapore. Finally, Simatupang et al. point out that increasing competition due to market globalisation, product diversity and technological breakthroughs stimulates independent firms to collaborate in a supply chain that allows them to gain mutual benefits. This requires the collective know-how of the coordination mode, including the ability to synchronise interdependent processes, to integrate information systems and to cope with distributed learning. However, research into coordination has paid little attention to acknowledging different modes of coordination. Simatupang et al.’s study promotes the notion of mutuality and the focus of coordination in order to establish a comprehensive taxonomy of coordination modes. Four different modes of coordination have been identified: logistics synchronisation, information sharing, incentive alignment, and collective learning. The knowledge of coordination is then proposed as an explicit understanding about key drivers of coordination modes that have positive impacts on supply chain performance. Majed Al-Mashari King Saud University

The research register for this journal is available at http://www.emeraldinsight.com/researchregisters

The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/1463-7154.htm

The efficiency of accounting service provision

The efficiency of accounting service provision

Peter Barrar and Douglas Wood Manchester Business School, The University of Manchester, Manchester, UK

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Julian Jones School of Accounting and Finance, University of Manchester, Manchester, UK, and

Marco Vedovato Universita´ Ca’Foscari di Venezia, Dipartimento di Economia e Direzione Aziendale, Venice, Italy Keywords Outsourcing, Benchmarking, Small- to medium-sized enterprises, Accounting, Data envelopment analysis Abstract The paper uses a procedure called data envelopment analysis (DEA) to compare internal against external (outsource) efficiency in the delivery of finance function activities. The approach allows a direct comparison between the in-house efficiency of UK small, medium and large companies in managing their accounting activities both with UK outsource contractors and also against the rather larger and more numerous contractors observed in Italy. The paper finds that, through comparative advantages, outsourcing presents a more efficient solution for the management of very small firm accounting than internal provision. Furthermore, there is evidence that substantial scale benefits continue to be available to outsource contractors, while inefficiency on internal provision is mainly technical. The paper concludes that outsourcing provision is likely to offer worthwhile savings to small firms, allowing them to shed competitive weaknesses and operate at efficient or best practice levels. At the same time, by converting an internal fixed cost, fixed capacity activity into a flexible, variable cost activity, SMEs have the potential to transform a previously unmanageable activity into an efficient or best practice activity that can grow or contract with the business.

Introduction Outsourcing, as a credible alternative to in-house provision is, defined as the provision of services to an organisation by an unconnected outside supplier (Earl, 1991; Huff, 1992; Friedberg and Yarberry, 1991). The delegation of discretion in the day-to-day management of the outsourced activity differentiates it from classical sub-contracting, where a complete (fully specified) contract exists. This paper positions outsourcing between classical market transacting and traditional sub-contracting. Outsourcing incorporates the managerial The authors are grateful to the Institute of Chartered Accountants in England and Wales (ICAEW) for their financial support and to their members for providing invaluable data. In addition, the European Social Fund (ESF) for their transnational financial support. Thanks go to Professors Luciano Olivotto and Massimo Warglien for their invaluable comments and insights and to the two anonymous reviewers for their guidance through the review process.

Business Process Management Journal, Vol. 8 No. 3, 2002, pp. 195-217. # MCB UP Limited, 1463-7154 DOI 10.1108/14637150210428925

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delegation aspects of the former and the long-term nature of the latter. Further, to account for firms which never had internal provision and rely from the beginning on service providers, outsourcing is considered as the provision of an activity that is normally (but not always) realised using in-house resources. In this way, the reduction of management control found in classical market transactions is considered along with the long-term nature of subcontracting. Recent improvements in cost and effectiveness of communications, together with digitisation and imaging technologies, have increasingly extended the option of transferring in-house activities to outsourcing contractors down to smaller firms. This has been reflected in the growth of shared service centres, which offer cost and processing efficiencies through scale beyond those available to an inhouse operation. Low communication costs mean that service centres also offer a means to exploit large differences in international costs, since location of service activity becomes immaterial. Financial telecommunications and software companies have themselves been prominent in this process of international transfer, with telecommunications companies outsourcing their international communication management to cheaper locations (McClelland, 1992). At the same time many service suppliers have re-engineered their business to become partners to multinational companies (Booker, 1991). Technology development and exchange of digitised information presents opportunities for the small firm to access scale-based and otherwise unattainable best practice efficiencies offered by outsource providers (Quinn and Hilmer, 1994; McFarlan and Nolan, 1995). In spite of these, evidence suggests that small firms continue to suffer scale-based disadvantages evident in higher failure probability (Gill, 1985), worse access to financial support (Keasey and Warton, 1993; Burns and Dewhurst, 1996) and poor managerial skills. High environmental volatility and low separation of responsibilities in small businesses result in interactive and highly integrated and informal management structures that make outsourcing more complex in SMEs. In this paper we attempt to estimate the nature of this problem and whether the growing availability of smaller-scale service providers is amenable to small companies. Despite the slow uptake of external contracting by SMEs, the total outsourcing sector is still estimated at £2.3bn (Accountancy Age, 1992) in the UK, with Europe’s (Computer Weekly, 1997) estimated as a whole to be worth about £9bn, consisting primarily of IT and networked contracts. Other service support activities (often recognised as non-core), such as finance administration, payroll and pensions management, are estimated to be worth only £100m annually (Accountancy Age, 1996). One potential reason for the slow uptake by SMEs is the thinness of the alternatives to in-house provision. Large companies are well served by major international service providers, while shared service centres appropriate to SMEs are relatively less common. Another is that identifying non-value-adding

activities and arranging an outsource transfer involve benchmarking skills The efficiency typically not present in the smaller firm. of accounting This is particularly the case with possibly the most common business service provision process – accounting. Measuring accounting activity is complex, since the quantity and quality of service output are more difficult to quantify than for operational activities with dedicated inputs and (more) tangible outputs. The 197 multiple common resources used in accounting to provide a variety of accounting output(s) make the capture of complex interactions and outputs difficult enough to inhibit outsourcing. This paper uses a procedure called data envelopment analysis (DEA) to capture resource utilisation in relation to volume and complexity characteristics of the finance department. It extends the analysis to comparison with outsourcing performance to facilitate comparisons of internal versus external performance. The sample also incorporates an international perspective, using evidence of accounting outsourcing through Italian collaborative service centres. In doing so, the paper aims to identify the most efficient platform for SME accounting and the contributing factors underlying performance differentials, so as to reduce the information disadvantage of the smaller firm in the make or buy process. The remainder of the paper is structured as follows. Part I discusses outsourcing and the underlying rationale for finance function outsourcing together with the motives, as they apply to SMEs, together with a description of the role and difficulties in measuring the performance of accounting activities. Part II outlines the hypotheses drawn for the research, while part III reports on the properties of a linear programming technique called data envelopment analysis (DEA) and its methodological properties that render it an appropriate tool in the context of small firm make or buy decisions. Part IV discusses the rationale for the selection of accounting input and output activity drivers, while part V outlines the data used to capture performance differentials. Results are provided in part VI with concluding comments on SME outsourcing potential discussed in part VII. Outsourcing and interfirm efficiency Outsourcing is approached in three stages: (1) evaluation; (2) negotiations; and (3) control. During the evaluation stage, companies attempt to identify current performance and reasons for performance differentials to identify the possible opportunity advantage from outsourcing. During negotiations risks are identified and appropriate mitigation strategies employed and, at the control stage, the emphasis is on managing the relationship with the service provider rather than the activity itself.

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Much of the outsourcing literature has focused on the negotiations stage, taking the form of descriptive surveys (Loh and Vankatraman, 1992), with some formal event studies (Loh, 1992; Peak, 1994) and a number of case studies (Lacity, 1992; Lacity and Hirschheim, 1993; Huber, 1993) covering managerial issues, customer/provider relations and the contracting side of outsourcing. Transaction cost economists (Coase, 1937; Williamson, 1981, 1985a; Robins, 1987) have also made significant headway in explaining the management of outsourcing risks: uncompetitive supply markets, information imbalance, limited decision-making capacity, and potential to ‘‘shirk’’ from obligations are four such risks that may exceed the transaction costs of maintaining the activity directly under management’s in-house control. Transaction cost economics has also been useful in controlling the agreement, where the focus is on monitoring to avoid ‘‘hold-ups’’ (Klein, 1996), ensuring that the implicit terms of the contract are adhered to (Axelrod, 1984), and promoting collaborative, mutually beneficial exchanges (Sriram et al., 1992). Although essential for outsourcing, the emphasis on negotiations has resulted in little empirical work on the connection between performance measurement as a means of positioning internal versus external possibilities and on the means through which these are formulated. The absence of such information increases the risk of outsourcing the wrong activity on the wrong basis (Klepper and Jones, 1993). Even in the IT domain where outsourcing is most developed, the focus remains on outsourcing typologies and motives for externalising transactions. Lacity et al. (1996), for example, recommend that companies separate functions into portfolios, benchmark in-house against external provision and evaluate the competitiveness (or otherwise) of outsourcing markets. In doing so, companies identify: . areas where outsourcing may be easy (outputs clear-cut, quality monitoring straightforward and competitive outsource markets); . areas where collateral effects on other activities will be low (the outsourced function connects with low frequency/intensity with core activities); and . areas where the scope for competitive advantage through outsourcing is low (Prahalad and Hamel, 1990). Outsourcing activity can generally take two forms: tactical and strategic (Antonucci and Tucker, 1998). Tactical outsourcing occurs where there will be no presumption that the relationship will be permanent, and so outsourcing may simply be an enhanced form of subcontracting. On the other hand, if outsourcing is used as a strategic tool, it will generally be linked with reengineering, alliance and core competence strategies (Quinn and Hilmer, 1994). Tactical outsourcing is motivated by cost reduction, the availability of capital funds or to eliminate a difficult to manage function (Antonucci and Tucker, 1998, p. 18). On the other hand, strategically outsourcing activities for

which the firm has neither a critical strategic need nor special capabilities The efficiency (Quinn, 1992) and focusing on areas where the firm has a pre-eminence (Quinn of accounting et al., 1990) allow companies to access resource capabilities well beyond those service provision available in tactical outsourcing. Some at least of these include a high return on in-house resources, access to superior capabilities, improved responsiveness to customer needs and the possibility of erecting barriers against present and 199 future competitors (see Quinn and Hilmer (1994) for a full discussion). A particularly appealing feature of strategic outsourcing in SMEs is that it potentially provides a vehicle for buying into contractors who have themselves achieved competence in a core activity (North, 1991; Kogut and Singh, 1998). Economies of scale and scope are also of major importance in make or buy considerations, since efficiency differentials between small and large firms (and potential service suppliers) may reflect scale, scope or technical (competitive) advantages[1] that may not be available for in-house provision in small firms. These issues are particularly relevant in smaller firm make or buy, since the overall business may operate in a niche, and core processes operate at adequate scale, but the accounting performed in-house may incur scale and/or technical diseconomies. Decision frameworks, though, are of little value, if performance cannot be quantified, since satisfaction will always be a function of expectation. Furthermore, the identification of core commodity (Prahalad and Hamel, 1990) is far from straightforward. Business support activities such as accounting (the focus of this paper) have an integrating role with the core function and involve multiple inputs and multiple outcomes or ‘‘outputs’’. Some of these may be quantifiable (employee inputs, IT expenditure, asset utilisation and process cycle time), but others (including accuracy and inbound error rates) are poorly recorded in most businesses. Productivity measures in service activities can therefore at best be described as ‘‘fuzzy’’ (Bell and Morey, 1994). The relative novelty of outsourcing has outpaced the development of application frameworks to structure such decisions. Despite the useful fit between the data envelopment analysis methodology (see Charnes et al., 1978; Charnes and Cooper, 1980) adopted in this paper to control, check and challenge (Neely, 1988) accounting provision, its influence on organisational analysis has spawned very little work on the connection, not least where the research concerns business support activities. If competencies can be identified and isolated, and a gap between current performance and best practice quantified, a basis then exists to review the provision of an activity, as shown in Figure 1. Where an inefficient activity does not relate to a core competence, outsourcing could be justified, if scale factors explain underperformance, since accounting is a derived demand and cannot grow/contract simply to achieve an efficient outcome. Similarly, if technical inefficiency is observed in an activity in which the firm does not have a pre-eminence, outsourcing is still justified. If, however, the activity interacts so tightly with the core nucleus of the firm that it is inseparable, a second approach consists of process redesign. A third approach consists of insourcing

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Figure 1. The efficiency matrix

additional work, particularly where inefficiency is the penalty associated with sub-scale. The upper, right-hand quadrant then describes situations where proprietary information in a core activity restricts outsourcing, and attention focuses on alternative service attributes including cost and quality. The strategic information content of performance measurement then provided an additional decision variable in make or buy. As Stainer and Stainer (1998, p. 4) contend, ‘‘those who have never effectively measured their performance cannot seriously claim to know how their business might progress’’. Hypothesis testing The aim of this paper is to understand whether or not outsourcing offers a more efficient solution for the management of SME accounting; the paper compares finance function performance of a basket of UK companies, representing all size categories against that of outsource provision. Specifically, the following hypothesis is formulated: H0. Outsourcing vendors operate at higher efficiency levels than SMEs in servicing finance/accounting activities. If the hypothesis holds, we could conclude that outsourcing offers a more efficient solution for the management of SME finance/accounting activities. Scope economies are not sought in this paper, since almost all outsourcing arrangements are between a smaller and larger entity, and any resulting increase in service offerings (scope) follows from the larger and more specialist resources a provider bears. A case in point is Shell and the accountancy firm Ernst & Young, who formulated an ambitious joint venture service company, ‘‘Tasco’’, to provide Shell’s accounting needs and to extend services to multinational companies. By transferring its accounting work, Shell is able to provide the new company with critical mass in processing at the start-up stage

to capture the benefits from any continuing scale and cost savings. Tasco could The efficiency then extend service offerings to the Shell group of companies (scope), and of accounting exploit the reputational benefits created by Shell to pursue third-party work. service provision Since any resultant scope advantages accrue post-outsourcing, the paper focuses on the impact of scale and technical inefficiency on underlying performance. This leads to a further two hypotheses: H1. Scale inefficiencies are significant determinants of overall inefficiency in the operation of SME finance/accounting activities. H2. Technical inefficiencies are significant determinants of overall inefficiency in the operation of SME finance/accounting activities. Accounting performance methodology A non-parametric linear programming methodology called DEA was used in the examination of the multi input-output conversions occurring in the in-house finance function and external outsource provision. Since the technique does not require any assumption about the relevant production function, the technique makes it possible for the ‘‘efficient’’ solution from the particular group and range of inputs and outputs investigated to emerge (see Appendix). DEA is attributed to Charnes et al. (1978) and Charnes and Copper (1980) and is particularly attractive in the context of make or buy, since it provides a straightforward methodology for investigating the performance of decisionmaking units (DMUs) in converting multiple inputs and multiple outputs[2] into a singular efficiency measure that is not based on a population average, but on actually achieved or ‘‘revealed best practice’’. As originally developed, DEA compares specific productive units with a similar set to determine whether any in the set are relatively more efficient, and therefore lying on the efficiency frontier relative to less efficient DMUs located below the frontier. This concept of ‘‘relative efficiency’’ measurement and efficiency frontiers was originated by Farrell (1957) and is implemented in DEA by comparing the resources (inputs) and outcomes (outputs) of each DMU with what could be obtained from linear combinations of the inputs and outputs of all other reference DMUs. The relative measure of efficiency makes it suitable in cases where there is no theoretical or scientific basis for classifying any absolute optimum (Charnes et al., 1978), where the production function governing inputs and outputs is poorly understood and where studies need to discriminate between technical inefficiency and non-exploited economies of scale. Since the publication of Charnes et al. (1978), where DEA was used to investigate the efficiency of ‘‘follow-through’’ programmes in schools, DEA has been used in a wide variety of situations by researchers, with total referenced studies exceeding 1,100 (Emrouznejad and Thanassoulis, 1996a, b). Although no study has utilised DEA in the context of outsourcing, parallels can be drawn from Brown and Gardener (1995) in examining the impact of scale inefficiency on the strategy of 25 European banks. Also, in Glass et al. (1997), when

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Figure 2. Graphical explanation of DEA

examining productivity change in university departments between 1989-1996 and the impact of scale and technical factors in explaining productivity change. DEA model formulation By capturing the efficiency of multiple inputs and outputs in a single efficiency measure, the technique provides a means of comparing the ‘‘relative efficiency’’ of companies performing accounting internally against outsourcing providers performing comparable activity. Although this paper uses a multi-dimensional input/output model, run under both constant (CRS) and increasing returns to scale (VRS), Figure 2 represents DEA in its simplest form, using a one input/output, input minimising constant returns to scale model (Charnes et al., 1978). Extending this to multiple inputs and outputs, the model can be interpreted as calculating the maximum reduction in inputs for DMUi (represented by the lowest possible value of the efficiency of DMUi ,
i ) that would be concurrent with a maintained level of output, if best practice identified within the sample was used. The projected point for DMUi (that can be seen as a ‘‘virtual’’ DMU providing the output of DMUi but at the efficiency level of the best practice) is obtained by using combinations of inputs of other DMUs capable of providing the same output as DMUi. These combinations are represented by the vector  of n elements. X and Y represent this optimal (theoretical/virtual) combination of inputs (X) and outputs (Y), which provide a ‘‘projected point’’ for DMUi. The first

constraint shows that the ‘‘virtual DMU’’ for DMUi deploys an amount of input The efficiency equal to the current use in DMUI, reduced by the factor
1i [3]. The second of accounting constraint shows the optimally weighted combination of DMUs, which consists service provision of the current output of DMUi plus a residual shortfall. It should be noted that these computations are repeated for each DMU in the analysis. If there are n DMUs in the model, this requires the solution of n linear 203 programmes, each one giving a relative efficiency measure for each DMU in terms of its own defined set of ‘‘best practice’’ comparisons. Piecemental linear combinations of efficient DMUs are used to construct a general efficiency frontier. Since we are interested in the identification of scale inefficiencies, the variable returns to scale (VRS) DEA feature, which restricts the values of  to 1, was also adopted in this paper (Banker et al., 1984). Accounting variable selection Internal firm performance To consider internal accounting efficiency, a database of mainly smaller UK companies was available from ongoing ICAEW research, commissioned to benchmark internal accounting performance[4]. The research attracted a total of 964 responses, of which 786 were usable from UK-based, public and private sector organisations[5]. This provided the necessary data to measure internal firm efficiency. Outsourcing provider performance: UK and Italy UK outsourcing provision is currently focused on ‘‘big 5’’ outsourcing providers offering services to companies employing above 250 employees. Recently, though, a growing number of smaller outsourcing providers have been beginning to take on board the non-core SME activity. These providers, albeit limited in presence, have made the transition from being the firm’s external accountant to offer outsource services incorporating many or all of the firms’ internal accounting. From a transaction cost perspective (Williamson, 1979), the presence of a small numbers problem leads to limited competition (Thorelli, 1986), allowing external suppliers to pre-empt a disproportionate share of the benefits of outsourcing. Any bottle-necks in UK outsourcing provision for SMEs, though, are eased by the continuing emergence of new providers and their co-operation makes the kinds of make or buy comparisons intended in this paper possible[6]. In stark contrast, in Italy, the small firm outsourcing market is served by a municipal, not-for-profit organisation called the ‘‘Confartigianato’’. Originally established in 1946 to provide political representation to manufacturing SMEs, today the Confartigianato is an important participant with 84 per cent of its revenue generated from the provision of services to 520,000 SMEs through a network of 119 local associations. The Confartigianato’s menu of services includes assistance for financing and export, bookkeeping and accounting, tax returns and advice, payroll management, assistance with health and safety regulations, insurance, credit information and recovery, and assistance with start-up procedures. While these

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activities constitute a comprehensive service, a limited number of providers extend beyond this to include management and financial accounting, in addition to a full purchase and sales activity[7]. The popularity of the Italian organisational model is evident through the growth in the number of members and the services taken. Its services are tailored at SMEs employing between zero and 19 employees, which constitute 98 per cent of all Italian companies, and around 50 per cent of all employment in the Italian economy. Although UK SMEs make up the same proportion of total enterprises, the emphasis of outsourcing provision is on large firms (Table I). Performance dimensions Finance department efficiency can be represented across two dimensions: efficiency and effectiveness. Under each lie four performance criteria: cost and productivity that relate to the efficiency dimension, and profit and quality that relate to the effectiveness dimension (Anthony and Herzlinger, 1975) (see Figure 3). For each performance criterion there lies a series of potential processbased performance metrics. In accounting, these could include ROI, ROCE as Size (number of employees)

Table I. The distribution of companies by size

Figure 3. Performance dimensions

0-9 10-19 20-49 50-249 250+ Enterprises Source: Eurostat (1996)

UK

Italy

3,526,924 111,626 53,502 25,731 6,640 3,724

3,338,711 115,022 48,737 16,645 2,639 3,522

potential profit metrics, error reporting or audit comments as quality metrics. The efficiency The cost approach involves setting metrics for process cost, while productivity of accounting criteria involve setting specific objectives that finance personnel are expected service provision to outperform (e.g. volumes of invoices p/week). Tomkins and Green (1988) stress an important limitation of DEA in that it does not evaluate output quality. Indeed it is not inconceivable that the 205 effectiveness of accounting provision might even be negatively correlated with efficiency scores. By examining the efficient or best practice DMEs making up the reference set for any particular less efficient DMU and following through with a qualitative quality assessment, it would be possible to determine whether quality is so high in the less efficient DMU that it warrants using so many more resources than efficient DMUs. In this paper, though, we are concerned with the efficiency platform of accounting delivery, recognising comparability restrictions in process metrics, the requirement to compare in-house against outsource delivery, and the complexity in obtaining reliable and objective measures for quality (effectiveness) for accounting input/output conversions. Furthermore, the Italian equivalent outsource structure does not provide management reporting services that have a high degree of strategic resource input (Barney and Ouchi, 1986) and are therefore measured in terms of quality. DEA variable selection Since no previous study has utilised DEA in service activity make or buy, the approach used by Wood and Kodwanni (1998) was followed for the selection of variables in the model. According to this criterion, variables should: .

incorporate differences in operating environments, which recognises a firm’s non-discretionary exogenous variables as input and output variables;

.

not be highly correlated; and

.

be logically relevant for the production of expected outputs.

Accounting productivity is governed by ‘‘complexity’’ and ‘‘volume’’ dimensions (Beretta and Dossi, 1998) and the input and output variables chosen must adequately reflect this and be comparable between and across each form of provision. Beretta and Dossi (1998), in their process-based benchmarking study of the accounts receivable and payable system of the 50 largest Italian companies, chose the number of purchase invoices and the average number of lines per invoice as ‘‘volume’’ dimensions, while the variety of transactions was chosen as a ‘‘complexity’’ indicator, limiting the analysis to similar size categories for comparability.

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Input selection Since labour cost is the main driver in service activities in general and in accounting service in particular[8], the number of qualified employees (those holding or studying for a recognised accounting professional qualification) and support, or clerical employees deployed in the accounting department provided two input measures for in-house accounting. Similarly for outsourcing providers, the number of qualified and support personnel deployed in its accounting ‘‘factory’’ to service client accounting provided two input measures comparable with internal accounting. Output selection This study departed from the output variables proposed by Beretta and Dossi (1998), for two reasons. First, although the UK and Italian accounting systems are comparable, international business practices and customs differ markedly, so process metrics including invoice volumes would yield comparability problems that would be difficult to resolve. Second, the paper sought a more generic/macro output measure for accounting efficiency that would not directly be biased by companies performing accounting internally, of providers with dedicated accounting software and of Italian outsource providers with different processes, customs and software. Accounting volume dimension The volume of accounting work is likely to be driven by the turnover serviced within the firm. Annual turnover is used to provide the volume output measure for internal accounting. Such a measure would also describe the output of activities of UK external providers on behalf of their clients. Since the Italian external accounting outsourcers provide a more limited range of service, the turnover of clients served is scaled down to adjust for the average resource requirements of UK outsourcers in tackling services not provided by Italian outsource contractors. The aggregate annual turnover of Italian ‘‘Confartigianato’’ members was therefore factored down to reflect this. The deflation of the Italian providers was calculated by reference to the UK database. Evaluating the allocation split of accounting resources across accounting activities, we could calculate the proportional loads associated with given financial activities. For example, management accounting absorbed 32 per cent of all professional staff accounting resources in the UK database. The Confartigianato did not provide management accounting, so serviced turnover by professional staff was cut by 32 per cent in respect of this activity. The calculation led to a conclusion that the service mix provided by the Confartigianato would require only 55 per cent of the professional staff time of the full measure and 67 per cent of non-professional staff time. The turnover of the Italian outsourcing providers was factored down by these proportions.

Accounting complexity dimension The efficiency Basing input efficiency against turnover per head, though, disregards the of accounting complexity associated with the creation of turnover. Turnover serviced by the service provision accounting department may be composed of a small number of high value transactions, or a large number of small and therefore more complex transactions. The development of a ‘‘complexity’’ output variable is therefore 207 desirable in accounting productivity measurement (Beretta and Dossi, 1998). Beretta and Dossi (1998) used a ‘‘variety of transactions’’ output indicator comprising the number of customer and supplier accounts managed by the finance department. This paper followed this principle, but standardised the number of customer and supplier accounts serviced by turnover to obtain a second output measure of ‘‘accounts serviced per Euro of turnover’’ for firms with an in-house accounting operation. For outsourcing providers, the number of client accounts serviced per Euro ensured comparability. Data UK companies were categorised by turnover into different size groups: .

micro companies (first decile turnover);

.

small and medium companies (first quartile);

.

large companies (last quartile); and

.

very large companies (last decile).

In addition, a proxy for the average of the sample was included. The raw input and output data for UK companies performing accounting internally are reported in Table II. Eight associations belonging to the Confartigianato (the Italian outsourcing equivalent) provided data on the requisite input and output conversions (It). Two service providers, Casson Beckman and Accountex, also participated from the UK (see Table III).

Firm size Micro Small and medium Average Large Very large

Non-professional Annual turnover Professional staff staff es (Input 1) (Input 2) (Output 1)

Serviced accounts (complexity metric)a (Output 2)

1.3

4.4

3,933,818

5.68

2.8 8.5 16 17

9.7 25.7 56 73

18,500,000 138,206,647 383,608,500 621,521,250

8.54 1.77 0.49 0.29

Notes: Figures in Euros (£1 = e1.5); a This surrogate measure of complexity is derived from the numbers of customer and supplier accounts, combined and normalised against the ‘‘provider’’ complexity measure to produce a single metric

Table II. UK companies performing accounting internally

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Table III. International outsourcing provision

Outsourcing provider Cremona (It) Mantova (It) Brescia (It) Udine (It) Pordenone (It) Trieste (It) Gorizia (It) Monfalcone (It) Accountex (UK) Casson Beckman (UK)

Aggregate client Aggregate turnover client serviced by Accounts turnover serviced per nonserviced by e Aggregate professional professional Non(Complexity staff staff client Professional professional metric) es es turnover staff staff (Output 1a) (Output 1b) (Output 2) es (Input 2) (Input 1) 1.2 5.2 4.2 5.3 1.9 0.8 1.1 0.4 0.9

10.8 46.8 37.8 47.3 17.5 7.7 10.4 4.0 8.1

0.4

3.6

44,282,047 29,355,125 206,582,760 113,620,518 351,190,691 193,154,880 254,613,251 140,037,288 96,729,278 53,201,102 29,210,802 16,065,941 33,833,608 18,608,484 4,431,200 2,437,160 42,000,000 42,000,000 16,500,000

16,500,000

29,668,971 138,410,449 235,297,763 170,590,878 64,808,616 19,571,237 22,668,517 2,968,904 42,000,000

6.57 3.64 2.24 4.75 4.50 7.78 5.55 21.23 0.19

16,500,000

0.56

Notes: Figures in Euros (£1 = e1.5)

In all, 15 DMUs were included in the DEA models to derive productivity comparisons of the internal accounting function against outsourcing provision, utilising resource usage (inputs 1 and 2) in relation to volume (output 1a, b) and complexity outcomes (output 2). In this way, traditional uni-dimensional, internal firm comparisons are expanded to multi-dimensional ones, representing the structural performance drivers influencing the amount of resources (and cost) devoted by alternative delivery channels to service accounting. Results Internal versus outsourcing performance The resulting efficiency frontier for professional staff (model I) servicing internal accounting versus outsourcing providers, drawn first, under the assumption of constant returns (CRS), shows three performance clusters (Figure 4). The first represents the two ‘‘best practice’’ performers (Monfalcone and Accountex), defining the shape of the frontier with
equal to 100 per cent. Also contained within cluster one is Brescia (99 per cent), very large firms (89 per cent) and Casson Beckman (90 per cent). To capture the essence of these results, consider the two providers defining the shape and location of the frontier. While Monfalcone is the most complex amongst the reference group, since it manages the highest number of accounts per Euro ratio, it manages the lowest volume of turnover. In contrast, Accountex manages high volume but low complexity transactions, but both define the shape of the efficiency frontier. The second cluster consists of the

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Figure 4. Professional staff efficiency frontier

remaining Italian providers (Trieste, Gorizia, Cremona, Mantova, Pordenone and Udine); together with large UK firms. Overall scores for the 15 DMUs in the model demonstrate a 64 per cent gap to best practice. There is then a very large gap to the UK small firm sector, with very low
scores of 19 per cent for small firms and 14 per cent for micro companies. These scores equate to average gaps to best practice of 83 per cent in the small firm sector. On the basis of these performance differentials, the data confirm H0 in that external providers of accounting services operate at higher efficiency levels than very small and small firms managing the activity on an in-house basis. Figure 5 presents results for model II, based on the use of non-professional staff. Cluster one again comprised the best practice Italian outsourcing provider (Monfalcone) and, in this model, also by the performance of very large UK firms. Similar to model I, the dispersion around best practice for the remaining Italian outsourcing providers in cluster two is between 30 per cent and 62 per cent, although the performance of the two UK providers falls to around 50 per cent. While the performance of outsourcing provision is still below large and very large firms, it is still substantially above small and very small firms (their potential customer base). Small and very small UK firms are still in the third performance cluster, although the gap to best practice in non-professional staff activities is lower (averaging 67 per cent) than in the professional staff model. The results of both models therefore support H0 and the competitive advantage of outsourcing providers in conducting SME accounting activities

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Figure 5. Non-professional staff efficiency frontier

relative to potential customers. Furthermore, splitting finance employees by status, we observe the generally superior performance of very large and large UK companies in both categories of activities over small and very small firms. Although both UK providers and the Italian providers were operating at significantly higher efficiency levels than small firms, they were not operating close to the maximum efficiency as defined by the best practice frontier in cluster one. One source of difference for the UK providers is that the number of clients serviced per employee is among the lowest in the sample. A number of potential explanations for this exist including the need for these newly established providers to invest more heavily in client recruitment and servicing, in addition to a higher R&D and training spend per professional and non-professional compared with the larger, established Italian collaborative groups. Another is that they may be operating below desirable scale for service of the activities they offer. This necessitates further analysis of the presence of scale or technical factors in observed efficiency differentials. Technical vs scale inefficiency The two DEA models have thus far identified a performance gap but not whether that gap comprises technical or scale inefficiency. The measure of

technical efficiency, which is obtained by running the appropriate linear The efficiency programme under the constraints of constant returns to scale, assumes that all of accounting the efficiency is attributable to ‘‘pure technical efficiency’’, i.e. wasted resources service provision (Drake and Howcroft, 1993) in as much as too many inputs are utilised relative to given level of output. In reality, however, some of this technical inefficiency may be attributable to ‘‘scale effects’’ that occur when operating at non-constant 211 returns to scale. For make or buy decisions, the presence of technical inefficiency would point towards re-engineering potential. If scale factors were significant, a stronger case would then be made for outsourcing[9] or insourcing, since any attempt at internal re-organisation is limited by the scale diseconomies facing smaller businesses, which cannot grow their activities simply to achieve an efficient dedicated accounting function. To partition between these sources of inefficiency, the DEA models were run again, this time under the constraints of variable returns (VRS), obtaining an efficiency measure which is always
the efficiency score under constant returns. The performance gap in this case would be entirely attributed to technical inefficiency. Taking very small UK firms as an example, overall efficiency,
, in model 1 (CRS) was 14 per cent, implying an overall inefficiency gap of 86 per cent for professional staff. Running the model now under VRS,
equals 31 per cent and, by implication, technical inefficiency equals 69 per cent. By deducting technical inefficiency (VRS) from overall inefficiency (CRS), we can arrive at an estimate of disadvantage equivalent to 17 per cent of resources employed (see Figure 6). Replicating this for each DMU in the model, it is apparent that inefficiency in non-professional activities are primarily scale-driven (52 per cent) rather than technical (17 per cent) (Figures 7 and 8) and, although the root cause of performance gaps differs, small firms are unable to remedy scale inefficiency for two reasons. First, if the demand for accounting grew within the firm, the very small firm would still be technically inefficient and, second, the demand for accounting is a derived demand depending on the level of core activities.

Figure 6. The decomposition of DEA efficiency results

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Figure 7. Decomposition of efficiency for professional staff

Figure 8. Decomposition of efficiency for non-professional staff

Performance gaps for the Italian outsourcing associations, however, indicate The efficiency a strong technical issue that points towards a significant re-engineering of accounting potential for these large established accounting providers. In contrast, the service provision performance gaps for Accountex and Casson Beckman, the two UK providers, are primarily scale-driven, demonstrating the growth potential to expand to remedy scale inefficiency through growth and client acquisition.

213

Conclusions The paper was motivated by the need to reduce the information disadvantage small firms face in their make or buy decisions. A procedure called data envelopment analysis (DEA) was employed on a dataset of UK companies performing accounting internally and on domestic and international outsourcing providers to represent the multi-dimensional performance drivers that influence the amount of resources (and cost) devoted by alternative delivery channels to service accounting. Utilising this procedure, we have been able to pin-point the most efficient delivery platform for accounting and to understand the reasons for deviations from the ‘‘ideal’’ performance frontier. Three performance clusters were evident. The first was limited to a small number of Italian outsourcing providers and very large firms operating on the relative efficiency frontier. The remaining Italian outsource providers and the two UK providers participating, together with large UK firms, defined the second cluster. The third encompassed small and micro UK firms, all performing accounting in-house. On this basis, the paper confirmed that all eight Italian providers, together with the two ‘‘new breed’’ of smaller SME financial outsourcing providers, all offer a more efficient platform for small firm accounting than in-house provision. This service advantage, though, is less significant relative to larger firms. Taking this finding a stage further, the paper also tested for the presence of scale and/or technical factors in explaining observed deviations from the frontier. Since observed inefficiency was primarily technical in the small firm sector, the implication is that, should the business grow, the firms’ accounting function would still be limited by technical inefficiencies that would not be supportive of the firms’ core competence. Furthermore, since accounting is a derived demand, the small-scale inefficiency element in this sector limits the potential for remedying underperformance through internal re-engineering alone. In contrast, UK outsource providers could absorb the growth, since scale factors were significant in explaining the differential between current performance and the frontier. Like the few SMEs in the UK which currently operate their financial activities on an outsourced basis, the outsourcers catchment area is small firms to operate in uncharted waters, since the potential from outsourcing has been ignored in this sector, and few parameters currently exist to simultaneously position and challenge the provision of accounting services. The scale

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inefficiency, though, in the small firm sector identified in this paper and the clear example of the Italian outsource structure in mitigating problems of establishing trust in outsourcing relations provide high incremental gain, if outsourcing gains momentum. In the absence of such a coherent, collaborative structure in the UK, SMEs will continue to operate many of their non-core business support activities at a significant competitive disadvantage compared with their large counterparts. Notes 1. Economies of scale arise when activities conducted on a large scale enjoy lower average costs than small-scale operations. Economies of scope arise where conducting two (or more) activities together offers economies relative to conducting them separately. Technical inefficiency reflects a failure to use best practice compared with other operations using the same resource. 2. Since the publication of Charnes et al. (1978), DEA has proved to be a useful tool in a wide variety of research, with total refereed studies exceeding 1,100 (Emrouznejad and Thanassoulis, 1996a, b). The major appeal of DEA is its ability to take account of all the important variables that affect a unit’s performance. 3. Less the residual slack not taken into account by
i . 4. A benchmarking database was constructed from the response to a postal benchmarking survey, distributed to 4,000 small, medium and large companies. In all, the survey resulted in 400 usable responses (or a 10 per cent response rate) from all-sized companies. 5. The sample comprised 26 per cent small, 10 per cent medium and 64 per cent large. 6. While this development will encourage more businesses to consider comprehensive financial outsourcing in order to concentrate on their core activities, the sheer lack of provision promotes agency problems and information asymmetries 7. This difference is taken into account in the consideration of resource inputs used to service accounting in the differing outsourcing institutions. 8. Accounting for 43 per cent total cost, where financing costs represent 18 per cent, depreciation costs 9 per cent, other costs 30 per cent, (ICAEW, 2000). 9. Non-constant returns consist of either increasing returns (meaning that an increase in inputs would result in a proportionately greater increase in outputs); or decreasing returns (where an increase in inputs would result in a proportionately smaller increase in outputs). References Accountancy Age (1992), 4 June p. 6. Accountancy Age (1996), 8 August p. 6. Anthony, R. and Herzlinger, R.E. (1975), Management Control in Non-profit Organisations, Irwin, Homewood, IL. Antonucci, Y.L. and Tucker, J.J. (1998), ‘‘IT outsourcing, current trends, benefits and risks’’, Information Strategy: Executive’s Journal, Vol. 14 No. 2, pp. 16-26. Axelrod, R. (1984), The Evolution of Corporations, Basic Books, New York, NY. Banker, R.D., Charnes, A. and Cooper, W.W. (1984), ‘‘Some models for estimating technical and scale inefficiencies in data envelopment analysis’’, Management Science, Vol. 30 No. 9, pp. 1078-92. Barney, J. and Ouchi, W. (Eds) (1986), Organisational Economics, Jossey-Bass, San Francisco, CA.

Bell, R.A. and Morey, R.C. (1994), ‘‘Increasing the efficiency of corporate travel management through macro benchmarking’’, working report, Cornell Hotel School Hospitality Research Centre. Beretta, S. and Dossi, A. (1998), ‘‘Methodological strategies for benchmarking accounting processes’’, Benchmarking for Quality Management & Technology, Vol. 5 No. 3, pp. 165-83. Booker, E.I. (1991), ‘‘BT targets multinational outsourcing’’, Computer World, September, Vol. 25 No. 36, p. 95. Brown, Z.M. and Gardener, E.P.M. (1995), ‘‘Bancassurance and European banking strategies: an exploratory analysis using DEA of the concept and treatment of relative efficiency’’, University of Wales, Bangor, paper presented at the 1994 Annual Conference of the European Association of University Teachers, Italy, September, pp. 1-27. Burns, P. and Dewhurst, J. (1996), Small Business and Entrepreneurship, Macmillan Business, London. Charnes, A. and Cooper, W.W. (1980), ‘‘Auditing and accounting for programme efficiency and management efficiency in not-for-profit entities’’, Organisations and Society, Vol. 5 No. 1, pp. 87-107. Charnes, A., Cooper, W.W. and Rhodes, E. (1978), ‘‘Measuring the efficiency of decision-making units’’, European Journal of Operations Research, July, pp. 429-44. Coase, R.H. (1937), ‘‘The nature of the firm’’, Economica, November, pp. 386-405. Computer Weekly (1997), 2 October p. 40. Drake, L. and Howcroft, B. (1993), ‘‘Relative efficiency in the branch network of a UK bank: an empirical study’’, working paper, Loughborough University of Technology, Loughborough, p. 3. Earl, M,J. (1991), ‘‘Outsourcing information services’’, Public Money and Management, Autumn, pp. 17-21. Emrouznejad, A. and Thanassoulis, E. (1996a), ‘‘An extensive bibliography of data envelopment analysis (DEA)’’, Vol. 1, working papers, Business School, Warwick University. Emrouznejad, A. and Thanassoulis, E. (1996b), ‘‘An extensive bibliography of data envelopment analysis (DEA)’’, Vol. 2, working papers, Business School, Warwick University. Eurostat (1996), Enterprises in Europe, 4th ed., Eurostat, Pulloxhill. Farrell, M.J. (1957), ‘‘The measurement of productive efficiency’’, Journal of Royal Statistical Society, Series A, Vol. 120 No. 3, pp. 253-81. Friedberg, A.H. and Yarberry, W.A. Jr (1991), ‘‘Audit rights in an outsource environment’’, Internal Auditor, August, pp. 53-9. Gill, J. (1985), Factors Affecting the Survival and Growth of the Smaller Company, Gower, Aldershot. Glass, J., McKillop, D.G. and O’Rourke, G. (1997), ‘‘Productivity growth in UK accountancy departments 1989-96’’, Financial Accountability & Management, Vol. 13 No. 4, November, pp. 313-30. Huber, R.L. (1993), ‘‘How continental bank outsourced its ‘crown jewels’’’, Harvard Business Review, January-February, pp. 121-9. Huff, S. (1992), ‘‘You and the computer – outsourcing of information services’’, Business Quarterly, Spring, pp. 62-5. ICAEW (2000), Benchmarking Finance Function Activities: A Comprehensive Guide, research monograph, Institute of Chartered Accountants in England and Wales.

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Keasey, K. and Warton, R. (1993), The Management of Small Firms, Ownership, Finance and Performance, Blackwell, Oxford. Klein, B. (1996), ‘‘Why hold-ups occur: the self-enforcing nature of contractual relations’’, Economic Inquiry, Vol. XXXIV, pp. 444-63. Klepper, R. and Jones, W. (1993), Outsourcing Information Technology Systems and Services, Prentice-Hall, PTR, Upper Saddle River, NJ.

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Kogut, B. and Singh, H. (1998), ‘‘The effect of national culture on choice of entry mode’’, Journal of International Business Studies, Fall, pp. 411-32. Lacity, M.C. (1992), ‘‘An interpretive investigation of the information systems outsourcing phenomenon’’, doctoral dissertation, University of Houston, Houston, TX. Lacity, M.C. and Hirschheim, R. (1993), ‘‘The information systems outsourcing bandwagon’’, Sloan Management Review, Fall, pp. 73-86. Lacity, M.C., Willcocks, I.P. and Fenny, D.F. (1996), ‘‘The value of selective IT sourcing’’, Sloan Management Review, Spring, pp. 13-25. Loh, L. (1992), ‘‘The economics and organization of information technology governance’’, Doctoral thesis, Sloan School of Management, MIT. Loh, L. and Venkatraman, N. (1992), ‘‘Diffusion of information technology outsourcing: influence sources and the Kodak effect’’, Information System Research, Vol. 3 No. 4, pp. 334-58. McCelland, S. (1992), ‘‘Outsourcing the trend continues’’, Telecommunications, August, Vol. 26 No. 8, pp. 31-3. McFarlan, F. and Nolan, R.L. (1995), ‘‘How to manage an IT outsourcing alliance’’, Sloan Management Review, Winter. pp. 9-23. Neely, A. (1988), ‘‘Three modes of measurement: theory and practice’’, International Journal of Business Performance Management, Vol. 1 No. 1. North, D.C. (1991), Institutions, Institutional Change and Economic Performance, University Press, Cambridge, MA. Peak, D.A. (1994), ‘‘The risk and benefits of outsourcing on the information systems function and the firm’’, doctoral dissertation, University of North Texas, Denton, TX. Prahalad, C.K. and Hamel, G. (1990), ‘‘The core competence of the corporation’’, Harvard Business Review, May-June, Vol. 68 No. 3, pp. 79-91. Quinn, J.B. (1992), ‘‘Leveraging knowledge- and service-based strategies through outsourcing’’, Intelligent Enterprise, Free Press, New York, NY, pp. 71-97. Quinn, J.B. and Hilmer, F.G. (1994), ‘‘Strategic outsourcing’’, Sloan Management Review, Vol. 35 No. 4, Summer. Quinn, J.B., Doorley, T.L. and Paquette, L. (1990), ‘‘Technology in services: rethinking strategic focus’’, Sloan Management Review, Winter, pp. 79-87. Robins, J. (1987), ‘‘Organisational economics: notes on the use of transaction cost theory in the study of organisations’’, Administrative Science Quarterly, Vol. 32, pp. 68-86. Sriram, V., Krapfel, R. and Spekman, R. (1992), ‘‘Antecedents to buyer-supplier collaboration: an analysis from the buyer’s perspective’’, Journal of Business Research, Vol. 25 No. 4, December, pp. 303-20. Stainer, A. and Stainer, L. (1998), ‘‘Business performance – a stakeholder approach’’, International Journal of Performance Management, Vol. 1 No. 1, pp. 2-12. Thorelli, H.B. (1986), ‘‘Networks: between markets and hierarchies’’, Strategic Management Journal, Vol. 7, pp. 37-51.

Tomkins, C. and Green, R. (1988), ‘‘An experiment in the use of data envelopment analysis for evaluating the efficiency of UK University Departments of Accounting’’, Financial Accountability and Management, Vol. 4 No. 2, Summer, pp. 147-65. Williamson, O.E. (1979), ‘‘Transaction cost economics: the governance of contractual relations’’, Journal of Law and Economics, pp. 233-61. Williamson, O.E. (1981), ‘‘The modern corporation: origin, evolution, attributes’’, Journal of Economic Literature, Vol. XIX, pp. 1537-68. Williamson, O. (1985a), Markets and Hierarchies, Free Press, New York, NY. Williamson, O.E. (1985b), The Economic Institutions of Capitalism, The Free Press, New York, NY. Wood, D. and Kodwani, D. (1998), ‘‘The regulation of the electricity industry: an event study of price-capping measures’’, Journal of Regulatory Economics, Vol. 13, pp. 207-25. Appendix. DEA model CCR Dual-input-oriented model Zi ¼
 ":u0 s  ":v0 e min
;;s;e subject to: X ¼
Xi  ei Y  ¼ Yi þ sr

Constraint 1 Constraint 2

; s; e
¼ 0 i = 1, . . ., m; r = 1, . . ., s Y and X ¼ are the output and input matrices of the n DMUs in the model Xi and Yi ¼ input and output vectors for the DMUi being evaluated
¼ scalar factor that, applied to all inputs of DMUi ; brings resource consumption down to levels on the frontier and hence is the measure of efficiency (can be seen as efficiency of DMUi expressed as a per cent of the best practice).  ¼ vector of weight applied to efficient DMUs to obtain the ‘‘projected point’’ on the frontier of DMUi being evaluated " ¼ a non-Archimedean infinitesimal constant, a very small but strictly positive number u0 s and v0 e ¼ vectors of the slacks in outputs and inputs respectively n ¼ number of DMUs m ¼ number of inputs used s ¼ number of outputs produced

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Radoslav P. Kotorov M.F. Smith & Associates, Inc., Morristown, New Jersey, USA Keywords Information systems, Transaction costs, Organizational design, Teams, E-commerce Abstract In 1998 J.P. Morgan’s analysts forecast that the market for e-CRM (customer relationship management) solutions would grow rapidly. Since then more than 700 e-CRM firms have emerged. The convergence of information technologies caused enterprise information systems providers to add e-CRM functionality to their systems, thus further increasing the number of e-CRM suppliers. The proliferation of e-CRM concepts, models and technologies causes significant confusion and uncertainty. Corporate executives question the economic benefits of investing in multimillion dollar e-CRM projects, ponder about the right business and organizational models for e-CRM, and are uncertain which e-CRM models and technologies will prove both profitable and sustainable over time. With so many failed e-CRM initiatives some executives wonder whether e-CRM is not simply a hype. In the present paper what e-CRM is, from where the economic benefits from investing in e-CRM derive, and the evolution of alternative e-CRM models are elaborated. It is also argued that successful e-CRM projects are not narrowly departmental, but instead organization-wide initiatives. The paper presents a conceptual framework for e-CRM organizational architecture. The findings in the paper are based on e-CRM industry analysis, evaluation and work experience with over 50 e-CRM vendors, and on consulting experience with numerous corporations.

Business Process Management Journal, Vol. 8 No. 3, 2002, pp. 218-232. # MCB UP Limited, 1463-7154 DOI 10.1108/14637150210428934

Introduction What is the best business organization from a customer point of view? This is the question that executives should ask themselves when embarking on customer relationship management (CRM) projects. Yet, it is rarely asked, because CRM is considered a matter of service rather than of organizational design. The managerial conception of business organization derives from the dichotomy between centralized and decentralized organizations (Coase, 1988; Chandler and Daems, 1980). It reflects the degree to which decision making is distributed among the members or employees of an organization. The distribution of decision making implies the existence of organizational layers in hierarchical organizations and of independent functional units in decentralized organizations. From an economic perspective, this segmentation of the firm facilitates specialization in function, known also as division of labor (Smith, 1963), which increases productivity. From a management point of view, it facilitates coordination (Casson, 1987) and delineates employees’ responsibilities and contributions in the production process (Alchian and Demsetz, 1972). However, the economic and management perspectives do not consider the involvement of the customer, who through customer service enters into direct interaction with the business organization. As the interaction moves beyond the traditional physical points of contact and into the virtual space, the internal

segmentation, which can also create bureaucracies and organizational silos, Organizational only frustrate the customers’ efforts to obtain service. A simple but unusual design for e-CRM inquiry, for example, whether it is cheaper to transfer foreign funds electronically or to deposit a foreign check, is sufficient to initiate a journey through the organizational silos. An automated call center is unlikely to provide an answer. A customer service specialist will re-query the call center’s 219 database and then will transfer the call to the electronic fund transfers department, which will answer half of the question and then will transfer the customer back to the call center for an answer to the other half. As the customer cycles through organizational silos and looping touch-tone telephone menus, he or she becomes increasingly and needlessly aware of the internal structure and functioning of the firm, but also feels disoriented in the technologically architected organization, similarly to Kafka’s (1956) main character in the novel The Trial, for whom the search for justice is a matter of endless opening of one door after another. Naturally, a confused and frustrated customer is more likely to seek a solution from a competitor or even abandon using the service altogether. Given that organizational segmentation increases customers’ difficulties in obtaining service, one may ask what is the ideal organizational structure from the perspective of the customer? Paradoxically, the answer is none. On the one hand, customers are not interested in knowing how firms operate internally; they only want their problems solved quickly either through an efficient self-service process or by individuals who have both the expertise and the decision power. On the other hand, customer needs are becoming quite complex and can be satisfied efficiently only by equally complex divisionalized organizations that mobilize experts with complementary skills. The solution of this apparent dilemma requires redesigning the corporation for e-CRM and making the demand chain ubiquitous to the customer. Since the emergence of IT technologies corporations have been continuously reengineered to make the supply chain transparent to management. Transparency provides immediate access to information regarding each node in the supply chain, but it also requires knowledge of the organizational blueprint, which managers possess by virtue of their positions. By contrast ubiquity provides access to services instantaneously, but does not require knowledge of the organizational blueprint. The emerging ubiquitous organization has two properties: location and time independence; and immediacy. First, location- and time-independent access to services is offered through multiple channels and devices and, second, immediacy is ensured through the design of self-service processes and real-time exceptional request brokerage. The former obscures the organizational physical infrastructure, for a corporation may be reached regardless of its physical location, while the latter masks the operational structure, providing immediate access to its services and specialists. The evolution of business organization towards ubiquity is a logical process. Technologies, such as the electric motor and the chip, have evolved to become ubiquitous. Their development was driven by the desire to make their services

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as unobtrusive as possible, which, in turn, led to continuous miniaturization. As a result, the motor and the chip spread everywhere, from aircraft and cars to kitchen and personal appliances and, very importantly, in medical implants. Similarly, the development of Internet protocol (IP) created a ubiquitous communications transport mechanism, for it enabled the encapsulation of voice into data packets that can be transmitted anywhere over different types of networks simultaneously with other types of data (Kelly, 2000). Parallel with the evolution of the IP-based transport mechanism there emerged many ubiquitous access devices, such as PDA, mobile phones, e-mail pagers, etc. Given the existing ubiquitous technologies, there is little doubt that time/ location independence and immediacy can be provided. The challenge is to overcome the old organizational design paradigm and to redesign the corporation to serve more efficiently the mobile customer. What is e-CRM? Like all emerging technologies, CRM-related technologies, such as customer relationship portals, data-mining, intelligent call centers, etc., promise profound changes. Profound changes occur when there is a change in the paradigm, i.e. in the way we do things. There are many definitions of CRM that add to the confusion about how exactly CRM will change what we do (Ernst & Young 1999). But the change is not conceptual (Peppard, 2000). The concept of customer service and relationship management is as old as the concept of the market. Customers have been the patrons of the producers and merchants ever since the emergence of competitive markets, and their goodwill rests on the quality, timeliness and convenience of the service that they receive. Even the first book on double entry accounting – Pacioli’s (1963) treatise written in the thirteenth century, which may be considered the foundation of modern enterprise management, for it establishes rigorous standards of accountability, emphasizes the importance of keeping accurate individual customer accounts for maintaining long-lasting relationships with customers (Geijsbeek, 1974). Customer retention is cheaper and more profitable than customer attraction. As Inc. magazine reports, the customer acquisition cost per single transaction for online retailers ranges from $100 for Amazon.com, to $245 for fashion retailers such as Bluefly.com, to $500 for Furniture.com (Inc.Tech 2001, 2001). Furthermore, retention contributes to the creation of reputation, which also lowers customer acquisition costs. Reputation is an intangible asset, which modern corporations explicitly manifest in the form of brand advertising. While the objectives of CRM remain the same, the development of information and communication technology allows for a significant increase in the scale and scope of customer service. Thus, e-CRM is defined as the application of information and communication technology to increase the scale and scope of customer service. Managers are very well aware of the benefits from the scale and scope increase of industrial operations (Chandler, 1990). Small increases improve profit margins, but large increases can revolutionize both the industry and

consumer behavior. Ford did not invent the assembly line. He only applied this Organizational method to the production of cars, which allowed him to increase dramatically design for e-CRM the scale of operations. The reduction in costs boosted the demand for cars but, no less importantly, the centralized manufacturing method changed the car industry. Unlike Ford, GM had a decentralized manufacturing that involved many independent suppliers. Yet, to increase the scale to match the production 221 of Ford required significant investment in the operations of the independent suppliers (Stinchcombe, 1990). However, the investment bankers saw such an investment as too risky and too difficult to manage compared with the investment in a single centralized enterprise, which left GM management no other option but to integrate vertically its suppliers. Prior to the emergence of information and communication technologies scale and scope economies were realized by optimizing the production process, which involved both development of production technologies and aligning them with adequate organizational structure. With the advent of information and communication technologies scale and scope economies can be realized in the relationship with customers, due to reduction in transaction costs, i.e. the costs to reach, communicate, negotiate and enforce the contract, and provide a post-acquisition service for a particular product or service (Williamson, 1985). The impact of information and communication technology on the transaction costs in the banking industry is shown in Table I. The savings in transaction costs translate directly either in customer savings or in increased transaction capabilities. Of the two, the latter is the more important factor in explaining the impact of CRM. The reduction in cost from using a bank teller at $1.80 per transaction to using Internet banking at $0.015 per transaction means that the bank fees for the customer will be reduced by 120 percent, if he/she decides to use Internet banking solely. Conversely, if the customer does not collect the savings, his or her transaction capabilities have increased 120 percent, which implies the existence of new business opportunities. Scale and scope effects of e-CRM Things that cannot be measured cannot be managed. However, what can be measured is not always what should be managed. Following the old paradigm of organizational design, transaction costs savings were first realized in the Delivery channel

Transaction costs ($)

In-branch teller ATM Telephone PC banking Internet banking

1.80 0.60 0.45 0.30 0.015

Source: Datamonitor (1999)

Table I. Transaction cost per delivery channel

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supply chain, for they could be easily measured and managed. The issue was important, yet the expectations were false. The transaction costs savings in the supply chain are modest; as we now know, they amount to 7-10 per cent of cost (Mandel and Hof, 2001). Even though the cost of an e-mail invoice is one-third of the cost of a mailed invoice (deJong, 2001), the cost of invoicing is only a small fraction of the total costs. Thus, while there are certainly cost savings and efficiency gains, revolutionary scale and scope effects cannot be realized in the supply chain, but in the demand chain. Prior to the emergence of Web banking, a bank customer could transact with his or her bank only during working hours, i.e. between 9 a.m. and 5 p.m. With the advent of Web banking technologies, the service hours extended from eight hours to 24 hours a day, which, in fact, represents a threefold increase in scale. If this change were to be realized in the physical world rather than on the Web, it would have required the opening of three additional shifts and a threefold increase in the number of employees. The cost of such service would have been prohibitive, which is why customers traditionally have been willing to accept a trade-off between convenience and cost, which is not needed any more. Even though the scale effect is sufficient, it does not necessarily lead to increased revenues or increased number of transactions, as shown in Figure 1. The scale effect on the demand side is merely increased transaction flexibility, analogous to the convenience of having multiple retail locations in a given geographic region. A customer may schedule a transaction at his or her convenience and the marginal cost of this convenience is decreasing in the virtual space, as opposed to the physical space, where it would have increased. Thus, many Web banking customers may simply take advantage only of the extended transaction flexibility. The increase in scale, however, opens new transaction space for firms, similar to the addition of new shelf space, presenting new display opportunities to the retailer. Thus, firms may broaden the scope of their services, as shown in

2

Increased Transactional Flexibility

1

Figure 1. Scale effect: increased transactional flexibility

1

2

3

Scale

Scope

Figure 2. Banks may offer brokerage accounts in addition to the regular Organizational account and payment services. Kinko’s offers not only the printing of business design for e-CRM materials, but also their delivery to any place in the USA. Once the business materials are uploaded on Kinko’s servers, the customer can request that they be printed and delivered to any location. The increase in scope was made possible by Kinko’s technological capability of fulfilling locally remote 223 customer requests. Scope can further be increased through the realization of transactional complementarities. Transactional complementarities occur when different services, previously offered by different companies, are arranged in a logical chain. For example, British Airways offers loans to help its customers finance their vacations, even though financing is not a core activity for the airline. Noncore services are often only processed by companies for the convenience of the customer, but are actually fulfilled by other companies, whose processes are integrated in the ubiquitous demand chain. An alternative to the logical chain of services is theme marketing. In this case the set of services offered to the customer is grouped by their relevance to a particular type of preferences, such as outdoor activities, for instance. Woolrich (UK) and Capital Bank offer cars for sale that meet the lifestyle preferences of their customers (Ernst & Young 1999). As Figure 3 shows, when the scope increases faster than the scale, the relevance of transactional flexibility decreases compared with the willingness of the consumer to redirect his/her business transactions through this channel or firm’s demand chain. From a customer perspective the longer and the more ubiquitous the demand chain, the better it is. Since transactional

3 New Transactional Capabilities

2

1

Increased Transactional Flexibility

Total effect

1

2

3

Scale

Figure 2. Scope effect: increased transactional capabilities

Scope

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Transactional Complementarities

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Figure 3. Transactional complementarities

1

2

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Scale

complementarities are the product of information flow and process design, each increase in the transaction flow creates possibilities for even further scale and scope expansion. For example, American Express’s core business is to process card payments, but in doing so it also accumulates enormous information about companies, their products, services, and in many cases even processes. The organization of this information into a ubiquitous demand chain allows customers to use American Express almost as a directory service. If a customer is looking for an insurance, AMEX can broker in real time the request to the right specialists in affiliated companies and process the transaction through its demand channel. AMEX derives three benefits from such an optimized chain: first, revenues from card payment fees, second, shared revenues from referrals, and, last but not least, extreme brand awareness. The card with the 1-800 number becomes the ubiquitous access to many services, of which even the customer does not have to be aware. If Nordstrom build a reputation for impeccable service by accepting once the return of four automobile tires, which

it never even sold, AMEX is building a sustainable competitive advantage from Organizational handling all contingencies. design for e-CRM The evolution of e-CRM So far CRM has evolved around the idea of service design, rather than around the idea of organizational redesign. The reason for this evolutionary path is the common belief that CRM is about a person-to-person relationship between the customer and the customer-service employee. In reality, however, it is just the contrary – CRM is about a person-to-organization relationship. The customer prefers to use collective agents, i.e. firms, as opposed to individual agents, i.e. independent market suppliers, because products and services are complex and require the input of many specialists. The organization of production into firms saves the customer coordination cost, monitoring costs, and other transaction and administrative costs, if he or she were to organize the supply chain of complex goods from individual suppliers. Moreover, firms provide an important form of assurance to the customer by guaranteeing service through the entire timeline of the relationship. Implicit in this assurance is the fact that the organization can recruit the needed specialists, if some of its employees leave it. From this perspective, we distinguish three stages in the evolution of CRM. The first two stages are influenced by the person-to-person view of CRM, while the third stage, which we call the ubiquitous organization, is based on the notion of a person-to-organization relationship. While the emphasis in the first two stages is primarily on service design and, more specifically, on service personalization and differential pricing, in the third stage it is on organizational and process design to offer the customer ubiquitous access and immediacy. Stage I has become known as 100-percent focus on the customer. The core idea is that information and communication technology should be used first to personalize the relationship with the customer and second to broaden the organizational response to the customer’s needs. The personalization of the relationship involved customer recognition and familiarity, implying even friendship, which is neither necessary nor sufficient for customer service. Broader organizational response (Siguaw et al., 1994) is achieved by disseminating the customer information to other employees to offer their services to the customer. In implementing Stage I CRM bank branches (see Figure 4), for example, closed their doors to the customers, only to open them on the insertion of a bank card. This ‘‘key’’ is used to identify the customer to the employees in the branch. Thus, not only do bank tellers personally greet the customer, but also different specialists are informed about the possibility of approaching the customer and offering him or her other banking services. To their disappointment, banks like Midland Bank (UK), now acquired by HSBC, discovered that 51 percent of their customers preferred not to visit the branch if they could avoid it. The unsatisfactory result of implementing Stage I CRM is that it broadens the scope of attention, but not the scope or scale of the service offered.

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Stage II CRM, known also as 360-degrees view of the customer (see Figure 5), was first implemented by Lucent Technologies (Galbreath and Rogers, 1999), and can be characterized as a sophisticated variant of its predecessor. The person-to-person model was further enhanced by adding technologies supporting: prediction of customer buying patterns; and price differentiation. The core idea behind the new model is that superior market performance is the result of superior skills in understanding the customer (Narver and Slater, 1990). New CRM technologies, such as CRM portals, data warehouses, predictive and analytical engines, etc., facilitate the collection, analysis and Department 1 Department 2

Customer Walks in

Focus shift

Customer

Figure 4. Core CRM concept: 100 per cent focus on the customer

Department 3

Department 4 Department 5

Department 1

Department 2

Customer

ie w *

*360 Department 4

v

w

0 36

Figure 5. Core CRM concept: 360-degrees view of the customer

rees

ie

d

eg

v

Department 5

de gr e es

Department 3

distribution of customer data internally (Eckerson and Watson, 2001). As a Organizational result of the analysis, customers are segmented and offered products and design for e-CRM services that better fit their buying profiles. The differentiation in service allows for differentiation in prices, which increases profit margins. Smart cash registers that offer price discounts to grocery shoppers have contributed to increase gross margins from 0.49 to 1.2 percent (Shapiro and Varian, 1999). 227 Many CRM projects are currently at Stage II, and many of them fail to replicate the effect in the grocery industry. Why? The combination of personalized offerings and differentiated prices more often than not tends to decrease the scope of customer service. Better profiling allows products and services to be pushed to customers, but it also allows for pushing only the high margin products and services. Furthermore, high predictability of customer needs and wants allows one to increase the differentiated price. A coupon aims to induce a leaving customer to come back to the store, and thus has to offer the customer considerable savings. On the other hand, an intelligent vending machine that recognizes both temperature and demand changes can self-adjust the prices of the cold drinks, leaving the customers with the bitter feeling of being used. Many customers stopped using online ticketing after discovering that comparing prices led to increase in the prices and, the closer the flying date, the higher the price given on subsequent price inquiries. The disadvantageous differential pricing is the result of the fact that the transaction costs have not decreased proportionately for customers and corporations. The cheaper it becomes for corporations to tailor customerspecific services, the more costly it becomes for the customer to do product and price comparisons, which in fact narrows the customer’s choices. As a result, the customer feels as if he or she has lost some of the equality and bargaining power in the relationship, and returns to use more traditional distribution channels. The limitations of Stage II CRM arise from the fact that it treats the customer as the end node in the supply chain, and thus relies on push technologies that limit the scale and scope of service to prevent information overload. Despite their limitations Stages I and II CRM emphasize three important areas: (1) relevance of the service to the customer; (2) responsiveness to needs; and (3) sensitivity to demand. The difference with the emerging Stage III e-CRM is not what but how corporations ensure that the services are relevant to the customer, solved in a timely manner, and on demand. The distinct feature of Stage III CRM is the integration of the information and processes from the previous two stages in a ubiquitous demand chain in which scale and scope are increased through timeand location-independence and immediacy. Time- and location-independent access alone is not sufficient to make the organization ubiquitous, e.g. multiple

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access channels are available in Stage II with little effectiveness. Access is only good if it leads to the solution of a problem. Without immediacy, the value of universal, multi-channel, time- and location-independent access is limited by the familiarity of the customer with the organization’s products, services and processes. In the two-tiered ubiquitous CRM architecture these services are organized in the self-service layer accessible through multiple channels, as shown in Figure 6. However, global enterprise offers hundreds of thousands of services and products, of which the customer is unaware, and the number grows in proportion to the number of alliances and partnerships. The real-time exception-handling layer (Figure 6) ensures that the customer can efficiently be introduced to these unknown to him or her services. Brokerage firms were the first to become ubiquitous by giving their customers the ability to schedule transactions from anywhere, at any time, and regardless of their complexity. Redesigning the corporation for e-CRM Figure 6 presents a simple view of the information and transaction flow in an organization providing time and location independence and immediacy. Yet, operationalizing the concept in a large enterprise is not as simple as it looks. The pyramidal structure, characterized by horizontal and vertical segmentation, increases productivity and lowers prices but it also creates information and transaction flow barriers. Under the pyramidal organizational design paradigm it takes less time to produce than to service a product, which is why many mass manufacturers replace rather than repair products. Service is more difficult to provide, because segmentation obstructs the backward flow of information from the customer to the right specialist in the production and delivery chain. Consequently, the model is inadequate for information-rich services, which raise many questions and require a deeper reach of specialists compared with off the shelf products. Furthermore, corporations are dynamic entities, and continuous reorganizations and employee internal mobility complicate the information and process integration necessary to make the demand chain ubiquitous. Yet, the pyramidal structure is not coincidental (Jaques, 1990). It allows the CEO to monitor the efficiency of the organization, by providing the CEO with a full view of the entire organization, its divisions and operating units. Specialist 1

Figure 6. Core CRM concept: ubiquitous organization

Firm

Self-Service Front End

Customer

Uniform Communication Channels

Specialist 2

Real Time Requests Brokerage (Back End)

Specialist 4 Specialist 5

Specialist 3

Furthermore, the organization and its information system are designed to Organizational provide such a view from anywhere and at any time, because executives today design for e-CRM are highly mobile and demand information in real time in order to make quick decisions. In fact, CEOs have ubiquitous access to the corporate supply chain. But an efficient organization may be ineffective, if its customers fail to reach it, even if it can reach them. To prevent such a problem, the customer-end 229 architecture should be redesigned as a mirror image of the CEO’s architecture (see Figure 7). The CEO’s organizational view is realized by the addition of a cross-functional layer underneath the CEO, which aggregates information from the different silos. The accounting department, for example, aggregates information from the divisions based on common standards, such as profit, loss, and various margins. To make the demand chain ubiquitous requires the addition of resources analogous to the CEO’s cross-functional layer at the bottom of the pyramid to: . design self-service processes; . handle exceptional requests; . redesign exceptional requests into self-service processes; . ensure continuity during organizational restructuring; and . ensure process consistency across business units and multiple channels.

Effectiveness Layers

Efficiency Layers

CEO/President Functional Areas (Finance/Planning)

Div 1

Div 2

Div 3

Div 4

Self-Service Design Self-Service

Real Time Internal Service Brokerage

Cross-Functional Service Provision Customer

Customer View CEO View Customer’s view is a mirror image of CEO view

A self-service process is analogous to the process of buying goods off the shelf in a supermarket. The service process has to be intuitive and it requires some familiarity of the customer with it. Even though many services fall within this category, not all are as easy to design as the tracking of a shipment with FedEx. Situations with which the customer is unfamiliar require exception handling,

Figure 7. e-CRM organizational architecture

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which necessitates both understanding and fulfilling the request. Contrary to all beliefs customers do not want their requests to be satisfied immediately. All they need is the assurance that the right specialist is looking into the problem. However, this is not equivalent to an automated response that the request is queued for processing. Exception handling requires a process of real-time brokering of the request. Customers can describe problems, but cannot define them, for they are not specialists. Therefore, the request needs to be forwarded to a wider range of specialists to determine the exact fit. Chubb, for instance, provides insurance for non-standard risks. Thus, it is very likely that it will not have a precedent or that the description of a previous case will not to be specific enough to be able to filter the expert in a database. The only way to solve such a problem is to broker it in real time until an agent with the right expertise bids to solve it. Once an exceptional request is handled, it can be converted into a self-service process, which may be placed in a customer folder or offered to all customers. Very customer-specific processes may be placed in individual customer folders in order not to overload other customers with the existing possibilities. Since processes are easily transferable, if the need arises they may be placed in other customers’ service folders or made available to all customers. For instance, once a customer becomes familiar with uploading promotional materials on Kinko’s servers, he or she can then use self-service processes to order them to be printed and delivered to any location. This is a process that started as an exception process for more sophisticated customers but is coming to be offered widely and used by all customers. The cross-functional team needs to ensure the continuity of the processes during the phases of restructuring and re-engineering. Restructuring and reengineering affect the efficiency layers. Any structural changes that are not reflected in the customer view will cause discontinuity in the demand chain. The discontinuity may create high risks for customers that rely on self-service processes, especially if the exception-handling process is not as timely as the self-service process would have been. Global finance transactions are one of the areas most susceptible to such risks. Finally, process consistency is required to ensure: first, that processes are functionally identical and familiar across different channels and, second, that identical processes are used when the services are different but the transaction flow is logically equivalent. We emphasize that process differentiation should be minimal and justified by the peculiarity of the channels of communication. The visualization of content in M-banking is different from Web banking, but transaction-wise there is no difference. Similarly, services differ across departments and divisions, but the transaction flow is often the same. Recognizing the equivalence of such processes made GE create cross-departmental teams to disseminate the use of existing processes across all operational units. This not only speeds adoption, but also eliminates redundancies in process design and implementation. Conclusion Companies that strive to have global operations, for example, J.P. Morgan Chase & Co., are already developing global infrastructure for ubiquitous

access. Such infrastructure offers sustainable competitive advantage, not only Organizational because it is difficult to replicate and capital-intensive, but also because of its design for e-CRM value to the customer. First, from a customer point of view the value of timeand location-independent access increases in proportion to the scale and scope of services that can be immediately processed. Second, the organization designed to handle customer requests anywhere, at any time and 231 instantaneously will attract not only customers but also the business of other corporations, which will want to be integrated in its ubiquitous demand chain. Today many companies create ad hoc cross-functional teams during the implementation of various aspects of e-CRM. Bell Mobility sets-up a crossfunctional team of 15 to 20 people to act as a support mechanism during the implementation of M-banking solutions for Canadian banks, because the initiative impacts the work of many different departments (Harter, 2000). While ad hoc, created temporary cross-functional teams speed up the implementation of e-CRM, once dissolved the company cannot ensure immediacy and continuity. Corporations that organize the customer end cross-functional team as a distinct organizational layer develop a specific capability with distinct competitive advantage, that is even more difficult to replicate, for customers become accustomed to convenience. References Alchian, A. and Demsetz, H. (1972), ‘‘Production, information costs, and economic organization’’, American Economic Review, Vol. 62, pp. 777-95. Casson, M. (1987), The Firm and the Market: Studies on Multinational Enterprise and the Scope of the Firm, MIT Press, Cambridge, MA. Chandler, A.D. (1990), Scale and Scope: The Dynamics of Industrial Capitalism, Belknap Press, Cambridge, MA. Chandler, A.D. Jr and Daems, H. (Eds) (1980), Managerial Hierarchies: Comparative Perspectives on the Rise of the Modern Industrial Enterprise, Harvard University Press, Boston, MA. Coase, R.H. (1988), The Firm, the Market, and the Law, University of Chicago Press, Chicago, IL, pp. 19-33. Datamonitor (1999), Banking and E-commerce – More than Just Another Distribution Channel, Special Report, Datamonitor, New York, NY. deJong, J. (2001), ‘‘Manage your invoices over the Internet’’, PC World, 21 April, pp. 144-6. Eckerson, W. and Watson, H. (2001), ‘‘Harnessing customer information for strategic advantage: technical challenges and business solutions’’, Industry Study, LLC, p. 6. Ernst & Young (1999), ‘‘Customer relationship management’’, Special Report: Technology in Financial Services, New York, NY. Galbreath, J. and Rogers, T. (1999), ‘‘Customer relationship leadership: a leadership and motivational model for the twenty-first century business’’, The TQM Magazine, Vol. 11 No. 3, pp. 161-71. Geijsbeek, J.B. (1974), Ancient Double-entry Bookkeeping: Lucas Pacioli’s Treatise, (AD 1494, the earliest known writer on bookkeeping), reproduced and translated with reproductions, notes, and abstracts from Manzoni, Pietra, Mainardi, Ympyn, Stevin, and Dafforne, Scholars Book Co., Houston, TX. Harter, B. (2000), ‘‘Cashing in on m-banking’’, Wireless Review, February 15, pp. 30-6.

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Inc. Tech 2001 (2001), ‘‘E-tailing by the numbers’’, Inc. Tech 2001, No. 1, April, pp. 46-50. Jaques, E. (1990), ‘‘In praise of hierarchy’’, Harvard Business Review, January/February. Kafka, F. (1956), The Trial, translated by Willa and Edwin Muir, Modern Library, New York, NY. Kelly, J. (2000), Voice over IP, MCK Communications, pp. 5-24. Mandel, M.J. and Hof, R.D. (2001), ‘‘Rethinking the Internet’’, Business Week, March 26, pp. 117-41. Narver, J. and Slater, S. (1990), ‘‘The effect of a market orientation on business profitability’’, Journal of Marketing, Vol. 54, pp. 20-35. Pacioli, L. (1963), Pacioli on Accounting, McGraw-Hill, New York, NY. Peppard, J. (2000), ‘‘Customer relationship management (CRM) in financial services’’, European Management Journal, Vol. 18, pp. 312-27. Shapiro, C. and Varian, H. (1999), Information Rules, Harvard Business School Press, Boston, MA, pp. 19-51. Siguaw, J., Brown, G. and Widing, R. (1994), ‘‘The influence of market orientation of the firm on salesforce behavior and attitudes’’, Journal of Marketing Research, Vol. 31, pp. 106-16. Smith, A. (1963), An Inquiry into the Nature and Causes of the Wealth of Nations, with an introduction by M. Blaug, R.D. Irwin, Homewood, IL. Stinchcombe, A.L. (1990), Information and Organization, University of California Press, Berkeley, CA. Williamson, O.E. (1985), The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, Free Press, New York, NY.

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A framework for best practices in electronic commerce awareness creation Anastasia Papazafeiropoulou

Electronic commerce awareness 233

Centre for Strategic Information Systems (CSIS), Department of Information Systems and Computing, Brunel University, Uxbridge, UK

Athanasia Pouloudi and Georgios Doukidis eLTRUN – the eBusiness Centre, Department of Management Science and Technology, Athens University of Economics and Business, Athens, Greece Keywords E-commerce, Innovation, Small to medium-sized enterprises Abstract The rapid growth of electronic commerce technologies and practices has created a tremendous need for awareness creation for organisations such as small and medium-sized enterprises which seem to lack the necessary information about technology, business practices, investment cost and human capital. Often, the professional organisers of awareness activities are also uncertain about best practice in electronic commerce awareness creation. Thus, although a number of initiatives have taken place in Europe, they have failed to produce the expected results. This paper describes how a project funded by the European Commission (WeCAN) defined and evaluated a number of awareness models in electronic commerce in order to support organisations involved in awareness creation such as chambers of commerce, consulting companies and higher educational institutions.

1. Introduction Electronic commerce is a powerful new way of conducting business and one that presents many opportunities for companies and consumers. Yet, despite the advantages that its technologies and practices offer, it has not been adopted as anticipated and has not reached its full potential. Several country-specific barriers and factors have slowed down the wide acceptance of electronic commerce. Small and medium-sized enterprises (SMEs), in particular, hesitate to adopt it for reasons that include resistance to change, lack of education about the potential of electronic commerce and lack of trust in the security of electronic commerce transactions. OECD (1998) reports that lack of awareness is one of the most frequently reported barriers in the adoption of electronic commerce by these companies today, as they do not seem to realise the business opportunities offered by electronic commerce. According to a more recent report, Internet uptake is lower in smaller than in larger firms (OECD, 2000), while reports from various OECD countries confirm that there is a correlation between the rate of adoption of the Internet and the firm size. More specifically, according to national statistical resources from Australia, Denmark, Finland, Japan and The

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Netherlands (OECD, 1999), while the Internet penetration in large firms in 1999 was between 80 per cent and 86 per cent and for firms with 20 employees and more ranged from 61-95 per cent, for small and very small firms this number falls to a range between 19 per cent and 57 per cent. As SMEs constitute a significant part of the European economy (e.g. OECD, 1997), the full potential of electronic commerce in this region will not be achieved until use of the various technologies is more widely accepted within the SME community. To meet this objective appropriate awareness models must be used to reach different SME audiences and encourage electronic commerce adoption. It is important to note that, when we use the term awareness creation, we do not refer only to the initial stage, where companies are totally unaware of electronic commerce and need basic information in order to take a decision towards its adoption. We also refer to the provision of information and consultancy to companies that are at the decision and/or implementation phase. The paper presents a multiple case study that was conducted in eight European countries and aimed at the definition and testing of best practice models, addressing electronic commerce awareness creation for SMEs. The case study included the implementation of 14 awareness activities for the investigation of seven awareness models. The research recognised the importance of ‘‘policy intermediaries’’ (Papazafeiropoulou and Pouloudi, 2000), such as chambers of commerce, trade associations and professional education institutions. More specifically, these organisations were seen as an important target group of the proposed models. By raising the awareness of these professional bodies, the research envisaged helping them improve and enhance the awareness activities that they would organise in turn for the benefit of the broader SMEs community. The paper is structured as follows. In the next section we describe the importance of awareness creation for the diffusion of electronic commerce. In section 3, we present the WeCAN project, an initiative funded by the European Commission for the definition of the best awareness models in the European region. In section 4 we present the findings of the project and in section 5 we draw some conclusions about the future of awareness creation about electronic commerce in Europe and present areas for further research. 2. Awareness creation: an important process for electronic commerce diffusion According to Rogers (1995, p. 5), diffusion is the process by which an innovation is communicated through certain channels over time among the members of a social system. All stages of the innovation diffusion process (i.e. knowledge, persuasion, decision, implementation, and confirmation) are related to the need for information that the users of the innovation have in order to move from one stage to another. Thus, awareness creation and information provision are considered to be very important elements for the adoption of an innovation.

Electronic commerce can be viewed as a technological and business innovation, since it introduces new methods in: . communications (e.g. Chellappa et al., 1996); . business transactions (e.g. Bryntse, 1998; Crocker, 1996; Currie, 1999; de Kare-Silver, 1998; Henning, 1998); . market structure (e.g. Fong et al., 1997; Giaglis et al., 1999); . education (e.g. Daniel, 1999; Murison-Bowie, 1999); . work (e.g. Doukidis et al., 1998; HCWD, 2000). At the moment, awareness in electronic commerce is problematic, especially for small and medium-sized enterprises (SMEs). OECD (1998) reports that lack of awareness is one of the most frequently reported barriers in the adoption of electronic commerce by these companies today, as they do not seem to realise the business opportunities offered by electronic commerce. They also find it difficult to access information about cost, human resources and specific industry sector needs. Additionally, lack of trust in electronic transactions (e.g. (Hart and Saunders, 1997; Wilson, 1997), which is also reported as one of the main reasons for the relatively low electronic commerce adoption, can be attributed in part to the lack of awareness about the possible risks and corresponding preventive measures. Thus, awareness is considered to be a fundamental element of electronic commerce diffusion. Governments in Europe and the USA have realised the need for awareness creation in the business community as well as for the public in general. Thus, they support the effort to enhance the awareness and confidence of citizens and companies in electronic commerce and the development of relevant skills and IT literacy (EU-US, 1997). However, the efforts made by public and private organisations to promote electronic commerce have not produced the expected results. The Wide ElectroniC Awareness Network (WeCAN) project was initiated to examine why this may be the case and on the basis of empirical evidence in the European region suggested a framework for good practice in electronic commerce awareness creation[1]. The rationale for the project is presented in the next section. 3. WeCAN: rationale and description The WeCAN project was proposed to investigate the existing awareness models in electronic commerce that were being used across Europe by considering examples of best practice in various countries. The project lasted 13 months (September 1998 to September 1999) with the participation of eight European Union (EU) countries. The organisations that constituted the consortium of the project were active in the field of electronic commerce awareness creation in their local markets. Three types of organisations were involved: chambers of commerce and industry, private consultants, and higher educational institutions (see Table I).

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Type of organisation

Country

Name

Private consultants

Austria Italy The Netherlands Spain

ODE CE Consulting EDI-FORUM CETEMMSA

Higher educational institutions Greece UK

Table I. WeCAN project consortium

Chambers of commerce and industry

France Germany

Athens University of Economics and Business Cardiff University Paris Chamber of Commerce and Industry DIHT (Deutscher Industrie-und Handelstag)

All the organisations involved in the project had long experience in awareness creation and were in direct contact with managers of SMEs. The partners evaluated a number of models within the existing awareness programmes in the European region. For each model, a framework was developed, setting out the pre-requisites for success. The defined awareness models were distributed to a wide audience, targeting in particular professional organisers of electronic commerce awareness activities. Owing to the originality of the project and the lack of existing methodologies in the field, the methodology that was finally used was a mixture of various methods and practices. More specifically, three main processes were followed (Figure 1): (1) Collection of information about existing awareness initiatives. During the first phase of the project the partners collected existing information about awareness initiatives that were taking place in Europe, at the time. For this purpose a Web-based database was built and the partners had to register any known activities implemented within their organisation or in their country in general. Apart from recording the partners’ activities, the project team encouraged organisations from other European countries to register their activities in the database. The incentive for this action was free delivery of the project’s results to these organisations. At the end of this phase the database contained more than 150 entries with records from all EU member states. (2) Definition of best awareness models. After the collection of a large volume of information about electronic commerce awareness activities

Figure 1. Project methodology

in Europe the extraction of the best of those models took place. The technique that was used was strengths weaknesses opportunities threats (SWOT) analysis. Every entry of the database was (SWOT) analysed in terms of: .

medium;

.

target audience;

.

focus and scope of activity;

.

best practice examples;

.

evaluation approach;

.

marketing and PR; and

.

supplementary information.

This analysis was useful for the grouping of similar activities under the same category. For example, a very large number of entries referred to awareness items such as leaflets, booklets, promotional Web sites etc. All these entries were grouped in an ‘‘awareness material’’ model. The result of this analysis was the definition of 13 best practice awareness models that were grouped in three categories (see section 4). The definition of these 13 models was enhanced after the execution of the case studies, where the partners gained experience about the application of the models. (3) Case studies. After the definition of the best awareness models, the consortium implemented these models in different European business environments in order to validate their selection and make improvements in their description. The method used at this stage was case study. According to Yin (1984) exploratory case studies are useful when the researcher is not testing an existing theory but explores an innovative problem. In the case of the WeCAN project the issue under investigation (awareness creation about electronic commerce) was an innovative idea, while the consortium was in direct involvement with awareness creation activities. These facts led to the selection of an exploratory, multiple case study (14 cases) with the objective of exploring the implementation of various models in different national and organisational settings. More specifically, seven models were implemented with the members of the consortium taking the role of the organisers of the activities. The case studies lasted four months and included the implementation of 14 case studies in eight countries. An evaluation procedure took place subsequently on the sites with the distribution of questionnaires to the participants in the event (SME managers in their majority) as well as the organisers. The organisers were interviewed in order to get their feedback on organisational, financial and technical issues. The participants were asked to evaluate the activity as a whole. The evaluation

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procedure resulted in the models’ enhancement according to the experience gained from the case studies results. This enhancement included information such as: . success factors for funding; . attracting participants and marketing; . risks to be considered and how to be avoided; . limitations and best budget allocation. For example, the low audience participation in a case could help the organisers to give suggestions about the need for enhanced marketing for the event beforehand. 4. Project results The main output of the project was a guide with a full description of the best practice models and implementation guidelines for those. The target group for this guide was professional organisers of electronic commerce awareness activities and its purpose was to offer practical support for their work. The awareness models in their final form have been grouped in three categories. Category 1: general awareness activities . Awareness material. This model covers all types of activity that rely on using awareness material to encourage SMEs to adopt electronic commerce. Typical examples of the material are: books, newsletters, brochures, CD-ROMs, magazines, articles, videotapes, Web sites, presentations, road-maps, guidelines and case studies. . Prize award. This model is based on increasing awareness through the public recognition of exceptional work undertaken by selected SMEs in respect of their use of electronic commerce. Different award categories could include Web site design originality and creativity, good Webbased marketing strategy, well presented and useful Web site content, innovative online business processes etc. . Road show. This model is focused on the provision of best practice examples and information on electronic commerce to SMEs located in rural areas. The participants in such events are usually unaware of the advantages of electronic commerce but they are willing to learn about new ways of doing business or even have immediate plans to invest in electronic commerce. . Seminars and workshops. This model is one of the most widely used and aims at raising initial awareness for SMEs and motivating them in order to invest in electronic commerce. Through this model SMEs gain the necessary information that will help them describe the possible suitability of electronic commerce to their business.

Showroom and exhibition. This model is based on the concept of an exhibition centre for new technologies that includes electronic commerce applications. The centre is organised into various specialist areas, where different live presentations take place. There are separate stands and visitors can move freely between them.

Electronic commerce awareness

Category 2: intermediaries-oriented activities . Intermediaries networking. This model describes how a network can be organised among intermediaries in order to create a favourable environment for increasing electronic commerce activities. A ‘‘virtual’’ centre linking together all intermediaries can be created at a local, regional, national or even international level. . Training the trainers. This model is aimed at educating intermediaries, who in turn will raise awareness and provide support within the SME community. Through the use of this model local intermediaries can get the necessary know-how and skills to help SMEs in the field of electronic commerce without the need for outside support. . Trust and confidence. This model covers the activities of intermediary bodies positioned as ‘‘trusted third parties’’ (TTPs), guaranteeing and/or validating the content of an online information, offer or transaction. The model can cover simple awareness raising for the need for trust and confidence tools or support awareness among intermediary bodies to help them position themselves as TTPs and help create the necessary co-operative consortia to develop these activities.

239

.

Category 3: Focused SMEs support . Community networking. This model consists of bringing together SMEs from a specific industry sector or geographical location, providing them with appropriate awareness and subsequently implementing various electronic commerce solutions, which meet the needs of the group. The group can then promote electronic commerce to other SMEs. . Customised support. This model is based on providing SMEs with customised advice that meets individual companies’ specific requirements. It provides an informed and impartial sounding-board for different groups of SMEs, typically those who need extra help and support before taking a new step in electronic commerce. . Hands-on trials. The model is based on the concept that SMEs’ awareness activities can be significantly improved by the use of relevant best practice examples. These can gain even more credibility, if they are related to local or regional companies. This model consists of working with groups of SMEs, typically 15-20, in a defined area in order to develop the experience and knowledge that can subsequently become best practice examples.

Table II. Model selection matrix Wide

Road-show

Local to regional

Aware

Medium

Wide

Training the trainers

Low

Medium

Local to Full range international

Showroom and exhibition Wide

High

High

Medium

Medium

High

Low Low

High

High

Low

Low

Effectiveness Potential and potential reach

Category 2 – Intermediaries-oriented activities Intermediaries networking Wide National to Aware international

Local

Seminars and workshops Wide

Local to national

Not aware Willing to implement Any

Not aware

Specific

Prize award

Local to national

Any

Category 1 – general awareness activities Awareness material Specific Local to national

Geographical Target audience coverage awareness

Parameter

Medium

Medium

Medium to high

Medium

High

Low to medium

Low to medium

Time and resources

Increases reach and effectiveness of e-commerce awareness activities (Continued)

Support measure for transfer of experience and knowledge

Ideal for demonstrating ecommerce to a wide range of users

A starting-point to establish relationships with SMEs

Appropriate for large unaware audiences

Excellent for wide media coverage

Easy deployment Appropriate for support to other models

Comments

240

Model

Business functions focus

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Hands-on trials

Tools assessment

Training courses

Local

Local

Local

Local

Specific

Looking for implementation support

Looking for implementation support Looking for implementation support

Willing to implement

National to Looking for international implementation support

Customised support

Trust and confidence

Geographical Target audience coverage awareness

Local

Specific

Model

Category 3 – focused SME support Community networking Specific

Business functions focus

Medium Medium

High High

Low

Low

High High

Low

High

High

Medium

Effectiveness Potential and potential reach

Parameter

Low to medium

Medium

High

Medium

Medium

High

Time and resources

Improves uptake by exchanging information between SMEs Strongly increases the probability and efficiency of implementation Provides excellent knowledge base for further activities Ideal to test new tools inside SMEs Effective in covering both technical and business issues

Informed recommendation Encouraging and facilitating implementation

Comments

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Table II.

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Tools assessment. This model is aimed at helping to increase the uptake and integration of electronic commerce tools within user-companies. It could include dissemination of tools test results, demonstrations of new tools and negotiations for special offers to SMEs with tool providers. Training courses. This model is aimed at increasing the awareness of SMEs about electronic commerce and training them in a range of specific topics. As a result SMEs should acquire the necessary know-how and skills to start planning and implementing electronic commerce applications themselves. This model is useful for a more mature audience and companies that have a basic understanding about electronic commerce and need further guidance in their effort to implement it.

Each one of these models was presented in terms of description, goals, target groups, and success/failure factors. The description of the models was enhanced after the finalisation of the case studies, where a section called ‘‘implementation guide’’ was added. This section included specific information on practical implementation issues such as: framework, search for partners and sponsors, time frame, requirements, marketing and promotion, costs/financial aspects and evaluation. Furthermore, a matrix was constructed in order to assist the target audience to select the most appropriate models according to their specific needs. In this matrix the main criteria for selecting a suitable model were described. These were target audience, type of activity, scope, awareness level, duration and cost of the foreseen activity (see Tables II and III). Tables II and III are a practical guide that helps organisers of awareness activities to select the model that best suits their needs. After selecting the appropriate model, the organisers can refer to the implementation guidelines of the model in order to get a detailed description of the best practices for the application of the model. The compact format of this matrix makes it useful also for considering combinations of complementary models. For example, all models that are addressed to local or regional levels can be considered for the organisation of an activity with local character. The selection of the parameters that are analysed in this matrix is the result of feedback taken from organisers of awareness events, when they were asked about what issues they consider more important when they organise an activity. These guidelines and the matrix have been printed in the format of a booklet with 10,000 copies. A total Parameter Value

Table III. Values

Low Medium High

Effectiveness (percentage of SMEs actually implementing after action)

Potential reach (No. of SMEs)

Time and resources (Cost)

< 5 per cent 5-30 per cent > 30 per cent

< 50 50-300 >300

< Euro 20K Euro 20-200K > Euro 200K

of 4,000 copies were distributed by the European Commission, and the remaining 6,000 by the project consortium. 5. Conclusions Awareness creation is an essential element in each phase of dissemination of technology and business innovation like electronic commerce. It is reported that small and medium-sized enterprises seem to lack the necessary information in terms of technology, human resources, business practices and cost in order to proceed to full electronic commerce adoption. In this paper we presented an initiative (sponsored by the European Commission) in electronic commerce awareness creation in the European region. The initiative aimed at supporting professional organisers (policy intermediaries) in implementing appropriate electronic commerce awareness activities. To this end, a number of best practice awareness models were defined and specific implementation guidelines were produced. Some interesting observations were made during the life-span of the project. For example, it was observed that in the European region (especially in memberstates of the European Union), where electronic commerce is by now widely known, there is a need for a shift of focus from general awareness to the more advanced activities. More specifically, direct contact with intermediaries and SMEs indicated that these companies are now more in need of customised and focused support. As a result, models in category 1 (general awareness activities) should be substituted more and more by those in categories 2 (intermediaryoriented activities) and 3 (focused SMEs support). This is not the case for countries where electronic commerce is still in its infancy. The focus in these cases should still be on general awareness creation. Further research in the field could include further analysis of the case study results. A comparison of the models’ implementation by various types of organisations in various settings can give interesting results. For example, we could observe how an educational institution would organise a seminar differently from a private consultant, or how similar organisations in different countries approach awareness creation. Additionally, it would be worth testing the models in European countries that are not members of the European Union, examining the correlation between the ‘‘technological maturity’’ of the country and the implementation of the specific models. South Eastern Europe, for example, is a region with very different characteristics in terms of maturity in the use of technology and offers useful insights for the application of the awareness creation models in different national and business contexts. Note 1. WeCAN (Wide ElectroniC Awareness Network) was a European Commission (DG III F6)funded project under the Esprit programme.

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References Bryntse, K. (1998), ‘‘EDI and public procurement: how EDI affects the working procedures of public procurement’’, in Andersen, K.V. (Ed.), EDI and Data Networking in the Public Sector, Kluwer Academic, New York, NY, pp. 199-221. Chellappa, R., Barua, A. and Whinston, A. (1996), ‘‘Looking beyond internal corporate Web servers’’, in Kalakota, R. and Whinston, A. (Eds), Readings in Electronic Commerce, Addison-Wesley, Reading, MA, pp. 311-21. Crocker, D. (1996), ‘‘An unaffiliated view of Internet commerce’’, in Kalakota, R. and Whinston, A. (Eds), Readings in Electronic Commerce, Addison-Wesley, Reading, MA, pp. 3-27. Currie, W. (1999), ‘‘Meeting the challenges of Internet commerce: key issues and concerns’’, paper presented at the 5th International Conference of the Decision Sciences Institute (DSI ’99), Athens, 4-7 July. Daniel, J. (1999), ‘‘The rise of the mega-university’’, in Leer, A. (Ed.), Masters of the Wired World Financial Times-Pitman Publishing, London, pp. 333-42. de Kare-Silver, M. (1998), E-shock: The Electronic Shopping Revolution: Strategies for Retailers and Manufacturers, Palgrave Macmillan, Basingstoke. Doukidis, G., Poulymenakou, A., Terpsidis, I., Themisticleous, M. and Miliotis, P. (1998), ‘‘The impact of the development of electronic commerce on the employment situation in European commerce’’, Athens University of Economics and Business, Athens. EU-US (1997), ‘‘Joint EU-US statement on electronic commerce’’, EU-US, 5 December. Fong, T.K., Chin, D., Fowler, D. and Swatman, P.M. (1997), ‘‘Success and failure factors for implementing effective agriculture electronic markets’’, paper presented at the 10th International Conference on Electronic Commerce, Bled. Giaglis, G., Klein, S. and O’Keefe, R. (1999), ‘‘Disintermediation, reintermediation, or cybermediation? The future of intermediaries in electronic marketplaces’’, paper presented at the 12th Bled Electronic Commerce Conference, Bled, 7-9 June. Hart, P. and Saunders, C. (1997), ‘‘Power and trust: critical factors in the adoption and use of electronic data interchange’’, Organization Science, Vol. 8 No. 1, pp. 23-41. HCWD (2000), ‘‘Work trends survey, nothing but Net: American workers and the information economy’’, Heldrich Center for Workforce Development. Henning, K. (1998), The Digital Enterprise. How Digitisation Is Redefining Business, Random House Business Books, New York, NY. Murison-Bowie, S. (1999), ‘‘Forms and functions of digital content in education’’, in Leer, A. (Ed.), Masters of the Wired World, Financial Times-Pitman Publishing, London, pp. 142-51. Organisation for Economic Co-operation and Development (OECD) (1997), ‘‘Global information infrastructure-global information society (GII-GIS), policy requirements’’, OECD, Paris. Organisation for Economic Co-operation and Development (OECD) (1998), ‘‘SMEs and electronic commerce’’, paper published by the Directorate for Science, Technology and Industry Committee, OECD, Paris. Organisation for Economic Co-operation and Development (OECD) (1999), ‘‘Business-to-business electronic commerce: status, economic impact and policy implications’’, OECD, Paris. Organisation for Economic Co-operation and Development (OECD) (2000), ‘‘Realising the potential of electronic commerce for SMEs in the global economy’’, OECD, Bologna. Papazafeiropoulou, A. and Pouloudi, A. (2000), ‘‘The government’s role in improving electronic commerce adoption’’, paper presented at the 8th European Conference on Information Systems, Vienna, 3-5 July. Rogers, E.M. (1995), Diffusion of Innovations, Free Press, New York, NY. Wilson, S. (1997), ‘‘Certificates and trust in electronic commerce’’, Information Management & Computer Security, Vol. 5 No. 5, pp. 175-81. Yin, R.K. (1984), Case Study Research: Design and Methods, Sage, CA, Beverly Hills, CA.

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B2B-enhanced supply chain process: toward building virtual enterprises Mike Serve and Dave C. Yen

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Miami University, Oxford, Ohio, USA

Jyun-Cheng Wang National Chung Cheng University, Chia-Yi, Taiwan, and

Binshan Lin Louisiana State University in Shreveport, Shreveport, Louisiana, USA Keywords Supply-chain management, Internet, Business-to-business marketing, E-commerce Abstract Successful supply chain management requires a change from managing individual functions to integrating activities into the key supply chain process. The advantages far outweigh the effort involved in accessing the final product; a seamless supply chain that operates fluidly and benefits the entire chain. In this paper, the merit of supply chain and B2B is discussed, and the impacts on each other identified. With the groundwork built, the concept of B2B marketplaces as the participating units in a supply chain process in order to enhance the business process is employed. Virtual enterprises can use this extended form of supply chain as its building-blocks.

1. Introduction The structure of activities within and between companies is a critical cornerstone of creating unique and superior supply chain performance (Hakansson and Snehota, 1995). Many executives in leading companies believe that competitiveness and profitability can increase, if internal key activities and business processes are linked and managed across multiple companies. Successful supply chain management requires a change from managing individual functions to integrating activities into the key supply chain process. Unfortunately, both upstream and downstream portions of the supply chain have usually interacted as disconnected entities receiving sporadic flows of the information over time (Lambert et al., 1998). A business process can be viewed as a structure of activities designed for action with a focus on end customers and on the dynamic management of flows involving products, information, cash, knowledge and ideas (Stock and Lambert, 2001). In an exploratory study involving 30 successful supply chain redesign practitioners, Hewitt (1994) found that companies identified between nine and 24 internal business processes. The two most commonly identifiable processes were order fulfillment and product development. Given the important roles that supply chain process plays, it is essential to enhance the functions and operations of supply chain to improve the possibility of success. This paper deals with some background in supply chain process, and discusses the issue of how B2B impacts it. The emphasis will be on how to

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apply B2B as an enhancement to streamline supply chain management. One of the future directions proposed by this paper is to take advantage of the capability of the B2B system in order to help businesses move toward virtual enterprises. 2. Building elements of supply chain process Supply chain management (SCM) is a technique for linking a manufacturer’s operations with those of all of its strategic suppliers and its key intermediaries and customers. The approach seeks to integrate the relationships and operations of immediate, first-tier suppliers and those several tiers back in the supply chain, in order to assist second-, third-, and fourth-tier suppliers in meeting requirements like quality, delivery and the timely exchange of information. Firms that embrace supply chain management also solicit ideas from key suppliers and involve them directly in the new product development process. By managing supply chain costs and linking supplier capabilities to new product development, the purchasing function is advancing corporate performance in many organizations (Gurin, 2000). The basic original make-up of the model is as follows. It links supplies and inventories to actual needs. It allows a company to plan and stock according to actual supply levels in partnership with key customers and accounts. SCM is an effective strategy for manufacturers. Companies can link sales and marketing, distribution, and manufacturing processes and partners together for a more unified and timely business approach to the market and customer. By establishing these supplybased links, companies can build bridges and establish partnerships with suppliers, customers and carriers to more effectively reduce operating cost, improve customer service and expand into markets. Most successful supply chains have devised approaches for the participants in the supply chain to work together in a partnering environment. Supply chains are not effective and, in reality, are not supply chains when the participants have an adversarial relationship. Supply chain partnerships form the foundation. Several additional dimensions seem to distinguish effective from less effective supply chains. The specific goals of supply chain management are to coordinate processes in order to reduce waste, reduce order-to-delivery cycle time, develop a flexible response throughout the supply chain, and reduce unit cost. Waste can be reduced within the supply chain by three primary means: (1) minimize duplication; (2) achieve a level of uniformity among operations and systems; and (3) to increase quality. Maintaining inventories at specific, and critical, points within the chain can minimize duplication. By doing this, there will be less unnecessary inventory backed up inside the chain. Additionally, the company with the greatest

understanding of ordering patterns can coordinate demand planning to further allow the chain as a whole to carry less wasteful inventory. By keeping operations and systems uniform, there is more efficiency within the chain, because minor changes that can slow down the chain will be minimized. For example, a common production planning system will allow the partners in the chain to maintain timely and relevant information that will, in turn, allow for more efficient production schedules. In a similar way, maintaining high quality products will allow each partner to reduce not only replacement costs, which consist of the cost of the part but also the additional costs associated with holding back the final product for the customer. Reducing order-to-delivery cycle time enables supply chain members to reduce inventories in the system, thereby increasing the efficiency of the supply chain. Additionally, partners can reduce the amount of time it takes to receive payment after producing the given supply, thereby reducing the opportunity cost of capital to manufacture a supply and ultimately improving the financial performance of the company. Third, another ambition of supply chain management is to develop a flexible response system throughout the supply chain. By synchronizing their systems, partners within the supply chain can quickly adjust to customer requirements in a cost-effective manner, giving them more flexibility to deal with unique situations. A unique situation may arise when a customer needs a supplier to customize an order. By being flexible, the supplier will be able to meet the needs of the customer, giving them extra value. The final goal represents the desire to reduce total costs in a supply chain by reducing the unit costs. Applying proper supply chain management methodologies can allow partners to operate with efficiencies. After a given level of performance desired by the customer is determined, a partner can learn how to supply on that level, using this repetition to reduce inefficiencies within their isolated processes. Basically, a supplier can provide the lowest possible cost for a product or service (Hutt and Speh, 2001). A healthy supply chain will have a number of benefits. It will reduce inventories, increase inventory turns, increase customer service and responsiveness, reduce cost associated with inefficient logistics management, increase return on assets, streamline purchasing procedures, and improve forecast and central planning abilities. A successfully implemented SCM program is a demand-driven flow-through process, where customer demand initiates an automatic series of logistical, manufacturing and purchasing decisions designed to replenish the right product, in the right place, in the right amount, at the right time and results in reducing the cost for all. A disadvantage to SCM is that it is fairly difficult to maintain. Lines of communication must be open to all the different vendors that operate throughout the chain. It is also not an easy task to make sure that individual operators in the chain do what is best for the supply chain, not necessarily what is best for them. If a single supplier takes advantage of the chain and thinks about him/herself

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rather than concerning him/herself with the chain as a whole, the supply chain can be destroyed and all the benefits mentioned above will be lost. 3. Business-to-business (B2B) process Business-to-business (B2B) online commerce is expected to be embraced by almost all businesses that conduct B2B commerce in the material world. Thus, great sums of gross merchandise will likely be traded back and forth via the Internet. Companies such as Cisco Systems, Dell Computer, Intel Corporation, and W.W. Grainger were the first to move their B2B processes online (Chopra and Meindl, 2001). Less tech-centric companies are following suit, with automakers, wholesalers and diversified companies like General Electric launching major online business initiatives (Larson, 2000). There are basically two different types of B2B companies, horizontal and vertical. Vertical companies work within an industry (vertical) and typically make their money from advertising on specialized sector-specific sites or from transaction fees from the e-commerce they may host. The two largest vertically-oriented B2B companies are Internet Capital Group and VerticalNet, each of which owns numerous subsidiaries operating in hundreds of different verticals (Roberti, 2000). Horizontal companies are a completely different breed and operate at different levels across numerous different verticals. Whether it is Ariba, enabling companies to electronically produce raw goods, i2, helping to make manufacturing processes run more efficiently, or Siebel Systems, empowering salesforces with critical information, most horizontal companies make their money by selling software and related services. There are four general exchange types: (1) buyer-managed; (2) supplier-managed; (3) distributors/market makers; and (4) content aggregators. Large buyers have established their own exchanges, most of them private, and usually in conjunction with technology partners. Sourcing networks, a consortium of buyers aggregating their purchases, would also fit this model. In most cases, the buyer is looking to more efficiently manage the procurement process, lower administrative costs, and ensure more uniform pricing. Most of the buyer-managed exchanges are private and inside the firewall of the buyer. Content is hosted and managed by the buyer. However, some are public, placed in a separate venture, and are meant to attract other buyers in the same industry. Suppliers are getting requests to push their catalogs through these private and public exchanges. These exchanges are easier to set up, since the buyer often has the power in the relationship. Producers with dominant market share or limited, proprietary product establish supplier-managed exchanges. Large suppliers or distributors that

serve fragmented, small buyers may be better served by running their own marketplace, since their customers might alternatively set up a series of small, buyer-managed exchanges. Distributors/market makers are independent exchanges not dominated by buyers or sellers. These firms tend to be venture-backed and were early dotcom innovators. The distributors take title to provide anonymous delivery and live off product mark-up. Market makers are pure exchanges that thrive off order matching and transaction fees. Some of these can be specialized by transaction types (auction houses versus real-time bid/ask). Content aggregators take on the job of building and maintaining multi-vendor catalogs. A total of 60 per cent of suppliers maintain their catalogs on paper. The remaining 40 per cent have digital catalogs that are in poor shape with many abbreviations and redundancies and were designed for machine-to-machine interaction. Companies like Requisite Technology are willing to scan-in content off paper, clean it up, categorize it and structure it for parametric searching. A supplier can submit changes to the content with powerful tools and the content aggregator approves it before placing it online (Phillips and Meeker, 2000). B2B process holds many positive attributes. First, it can reduce purchasing costs. One of the easiest ways that a company can cut costs is by remodeling the way it purchases raw goods. The National Association of Purchasing Managers says that the average manual purchase order costs a company $79. This is because locating goods needed and then filling out the necessary paperwork is a labor-intensive process. Searching for products online requires much less time and electronically processing an order streamlines the ordering procedure. B2B process also increases market efficiency. Using the Internet, companies can quickly and easily get price quotes from numerous suppliers. By increasing the number of sellers, buyers are more likely to get a better price, and vice versa. Just as eBay has created an efficient market for everything from Barbie dolls to old Atari games, B2B hosts make connections between buyers and sellers that may not otherwise have happened (Larson, 2000). Another attraction is the increased market intelligence. Related to finding good prices, B2B hosts give producers a better insight into the demand levels in any given market. Spot price levels can quickly be determined in everything from paint pigments to plastic cups. This allows companies to make better decisions regarding what and what not to produce. Also, a decrease in inventory levels should occur. Using B2B technologies, companies can better utilize their inventory and raw materials. The Internet allows even more time to be shaved off for companies that use ‘‘just-in-time’’ manufacturing techniques. In essence, it allows firms to use less working capital to do the same amount of work, freeing these funds to be invested elsewhere. The overriding attraction that runs throughout online B2B is that it can make companies much more efficient. Increased efficiencies mean reduced costs, which is a goal that interests every company, thus making the potential B2B e-commerce industry enormous.

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An irony that occurs from the B2B transformations is that brick-and-mortar companies may wind up saving the online marketplaces that they once found so threatening. Many old-economy companies were leery of exchanges, because they did not want to compete only on price. But in the scramble to come up with their own e-commerce strategies, they are turning to online marketplaces (Roberti, 2000). Many of the early arguments for marketplaces – aggregation of purchasing to lower costs, improving market efficiency – are being replaced with arguments in favor of supply-chain improvements, collaborative design environments and the like. In developing additional capabilities beyond their early procurement-based solutions, leading players, such as Commerce One and Ariba, are already moving in this direction. Furthermore, it is rapidly becoming apparent that profitable revenue streams for the marketplace itself are highly suspect and, with no profits, the future equity value of these ventures is questionable. 4. B2B-enhanced supply chain process Supply chain process is both a boundary-spanning and a function-spanning endeavor. The underlying premise of supply chain process is that waste reduction and enhanced supply chain performance come only when there are both intrafirm and interfirm functional integration, sharing and cooperation. Thus, each firm within the supply chain must tear down the functional silos within its organization and foster true coordination and integration of marketing; processes among all the supply chain participants must be integrated and coordinated. Firm-wide integration is a necessary, but not sufficient, condition for achieving the full potential benefits of supply chain process. Integration must be taken to a higher plane, so that functions and processes are coordinated across all the organizations in the supply chain. It is widely believed that the company that is most closely aligned to consumers or end-users at the point of sales will eventually become the channel master and control its supply chain. During the past few decades, power has shifted away from manufacturers and toward retailers in consumer packaged goods (CPG) and end-users in industrial goods industries. However, electronic connectivity afforded by the Internet is now expected to drastically change supply chain control. Innovative companies, termed by AMR Research e-supply chain innovators (eSCIs), will gain control by reconfiguring their supply chains, using new Internet technology to connect to trading partners in real time (Del Vecchio, 2000). Supply chain management seeks to create an ‘‘overlap’’ among participants in the supply chain, where the partners share a long-term commitment and an interwoven relationship not unlike a good marriage. Until some type of partnership is in place, the true benefits of supply chain integration cannot be achieved. A recent study in the UK demonstrated that, when supply chain partnerships exist, superior levels of performance result (Electronic Buyers News, 2000).

Not only do effective supply chains conduct business as partners, they also openly share information across the supply chain. Intelligence about the customer and what the customer has ordered is transmitted upstream, so that every organization in the supply chain has visibility re the information and can respond accordingly. When information is made immediately available to supply chain members, tier 1 and tier 2 suppliers can act immediately, thereby eliminating the delays that created inefficiencies in the past. This allows the supply chain to reduce inventories and speed up the cash flow process. Successfully aligning both internal and external processes is the ultimate goal of supply chain management (Gurin, 2000). Electronic connectivity will enable eSCIs to execute cross-enterprise processes and integrate with trading partner operations, moving them from enterprisecentric supply chains, in which an enterprise drives multiple processes, toward synchronized electronically-connected supply chains, where one process drives more than a single enterprise. Within these new Internet-connected supply chains, eSCIs will become the channel masters, coordinating trading partner activities with new business models that dominate some aspect of supply chain process. In this regard, multiple channel masters are likely to emerge within some supply chains, and not only those that control the point-of-sale selling processes, but also those that dominate through distribution or manufacturing excellence. For example, Cisco Systems, Inc. and Ingram Micro, Inc., leaders in the high-tech industry, have dominated by evolving virtual business models through tight coupling with suppliers and customers. By its nature, the high-tech industry is at the forefront of technological advancement. Concerning supply-chain management, high-tech has spurred more than a few supply chain alterations. The high tech industry is now at the forefront of e-business, with processes such as outsourcing of manufacturing, collaboration with suppliers and customers, and configure-to-order fulfillment leading the charge. While each of these is an important innovation, they collectively present unique supply chain process challenges for integrating and providing visibility re information, resources planning and metrics of overall performance. As a result, high-tech industry supply chains have become insular. Various high-tech companies are responding, and they are already well under way in reconfiguring their virtual and physical assets to put together what has been pulled apart. But, to be successful, companies will have to reassemble supply chains around new and changing e-business models (Commins, 2000). The benefits of developing supply chain efficiencies using B2B are many. Collaboration among supply chain vendors improves demand forecasts, promotes efficient inventory management, and reduces cycle times. The Internet provides the benefit of centralized data and real-time feedback with a more economical architecture. All that is needed is an industry-standard Web browser (e.g. Internet Explorer), and businesses are on their way. They can then use the Internet to market and sell products, communicate with customers, and electronically link with business partners (Del Vecchio, 2000).

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However, supply chain partners do not achieve this without cost. Even in the case where each participant shows evident willingness to cooperate, businesses are still subject to the problem of one link fails, the entire chain is defunct. We propose that, in order to make SCM more resistant to unexpected failure, it is useful to use B2B as a substitute for each participating business. In other words, what we envision is a supply chain linking many B2B marketplaces, as opposed to linking to many businesses. SCM will effectively use B2B marketplaces as its buffer. And it is expected that this kind of configuration can streamline logistics and smooth channel management. Furthermore, by standardizing the operating procedures, functional policies and executive policies among the participating business units, the forms of virtual enterprises are taking shape. 5. Conclusion The integrated concept of using B2B marketplaces as the participating units in a supply chain will definitely benefit the business process and avoid the obvious weakness of traditional supply chain. Successful B2B-enhanced supply chain process should be able to handle three major challenges toward virtual enterprises: paying close attention to real-world business process, adapting automated systems to business behavior, and integrating content and collaboration technologies with crucial information systems. First, B2B process has opened up all kinds of doors when it comes to supply chain management, enabling quick and clear contact, immediate feedback, as well as many other cost-saving capabilities. As the business world continues to evolve, so too does B2B. It has moved from a pure form of meeting customers’ needs to other new forms, such as offering Web space for business transactions to take place. Second, the value and benefits that are being received from those who practice supply chain process are far too numerous and valuable to be excused. The advantages far outweigh the effort involved in accessing the final product; a seamless supply chain that operates fluidly and benefits the entire chain. Third, suppliers, manufacturers and customers need to see far enough into one another’s operations to dicker over prices and schedules, synchronize production runs and shipments, fine-tune logistics, and make plans for supply chain process in various time periods (Lin and Hsieh, 2000). All this requires the aggregation and exchange of diverse forms of content. Content management becomes an extension of conventional document management, with many of the same requirements, plus the need to publish via the Internet and other messaging systems. References Carbone, J. (2000), ‘‘Value-added distribution: buyers look for supply chain management services’’, Purchasing, 19 October, p. 83. Chopra, S. and Meindl, P. (2001), Supply Chain Management: Strategy, Planning and Operation, Prentice-Hall, Upper Saddle River, NJ.

Commins, P. (2000), ‘‘Which B2Bs are rule breakers?’’, 12 July, available at: www.fool.com/ portfolios/rulebreaker/2000/rulebreaker00712.htm Del Vecchio, J. (2000), ‘‘E-business software applications’’, 11 July, available at: www.fool.com/ research/2000/foolsden00711.htm Electronic Buyers News (2000), ‘‘The future of electronics supply-chain’’, 27 November, p. 24. Gurin, R. (2000), ‘‘Real-time decision making fuels SCM growth’’, Automatic I.D. News, September, p. 1. Hakansson, H. and Snehota, I. (1995), Developing Relationships in Business Networks, Routledge, London. Hewitt, F. (1994), ‘‘Supply chain redesign’’, The International Journal of Logistics Management, Vol. 5 No. 2, pp. 1-9. Hutt, M.D. and Speh, T.W. (2001), Business Marketing Management: A Strategic View of Industrial and Organizational Markets, Harcourt, Fort Worth, TX. Lambert, D.M., Cooper, M.C. and Pagh, J.D. (1998), ‘‘Supply chain management: implementation issues and research opportunities’’, The International Journal of Logistics Management, Vol. 9 No. 3, pp. 9-11. Larson, P. (2000), ‘‘A short intro to business-to-business e-commerce’’, 16 March, available at: www.fool.com/research/2000/features00316.htm Lin, B. and Hsieh, C.T. (2000), ‘‘Online procurement: implementation and managerial implications’’, Human Systems Management, Vol. 19, pp. 105-10. Phillips, C. and Meeker, M. (2000), ‘‘The B2B Internet report: collaborative commerce’’, Morgan Stanley Dean Witter Equity Research, April. Roberti, M. (2000), ‘‘B-to-B evolution, not revolution’’, 25 August, available at: www. thestandard.com/article/display/0,151,17993,00.html Stock, J.R. and Lambert, D.M. (2001), Strategic Logics Management, McGraw-Hill/Irwin, New York, NY.

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Unleashing the integration potential of ERP systems The role of process-based performance measurement systems Sergio Beretta University of Padova, Padova, Italy Keywords Resource management, Process control, Performance measurement Abstract Despite the large investments recently made in ERP systems, many companies are beginning to admit that the real impact of ERPs on management styles and practices is actually well below expectations, especially on the front of organizational integration. It is argued that ERP systems possess integrating capabilities only at a potential stage: their simple physical implementation is not enough to activate their inner potentialities. ERP systems can enact substantial organizational integration, only if they rely on a sound business process architecture. When the process dimension is absent from the implementation, the integration potential of ERP systems is frozen. It is argued that this situation can be unfrozen by making processes visible: the introduction of a process-based performance measurement system can help to unleash the power of integration, by making the processes visible to people.

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Foreword In recent years enterprise resource planning (ERP) systems have represented for large companies one of the most relevant areas of investment in IT (Davenport, 1998). By the end of the 1990s, on the wave of the Y2K syndrome and of the imminent conversion of most European currencies to Euro, a vast majority of large multinational companies in both Europe and the USA started IT investment programs aimed at the implementation of ERP systems (Freeman and Meador, 1997; Themistocleous et al., 2001). The promises made to top managers by ERP vendors and consultants were too appealing to be refused: replacing all the fragmented legacy systems with a single package that would integrate the whole information system of the company; turning the old functionally based management systems to new, process-based management systems; adopting best practices for each of the most relevant processes managed inside the company. In brief: getting direct control of the company through a pervasive integrated information system. As a matter of common experience, the implementation of these applications has proved to be very complex and extremely expensive in terms of both financial resources and organizational costs connected with the process of change management that they promote (Bancroft et al.,1997; Subramanian and Lacity, 1997; Markus, 2001) . Owing to the relevance of the investment made, top managers that have supported the decision to introduce ERP systems feel now the need to measure and communicate the financial return on this investment to shareholders and its impact on management systems to line managers.

The measurement of the financial returns of this kind of investments is quite Integration controversial. Despite the number of methodologies proposed to measure the potential of ERP bottom line contribution of IT investments (Moad, 1995; Mayor, 2000), the use systems of traditional measures, based on the calculation of the return on capital employed or on expected cash flows, presents severe limitations and consistent drawbacks (Amigoni, 1998; Hirschheim and Smithson, 1999). Nonetheless the 255 impact of their implementation on the operating performance of a company can be appreciated by focusing the measurement process on the improvements that they produce in the performance of business processes (Beretta, 1998; Dutta and Manzoni, 1999). According to this perspective, instead of aiming at measuring the end result of an ERP implementation at the bottom line of profit and loss statements, the impact could be appreciated at the business process level by measuring the improvements generated along various dimensions of performance : quality, timeliness, efficiency, among others. Unfortunately sometimes the improvements measured after ERP implementation are quite poor (RFP Wizard, 1997). The reason is that ERP systems, like other management systems such as TQM or ABM, are potential value generators: their physical implementation is simply not enough to activate their inner potentialities. It is contended that, in order to unleash their integration capabilities, the adoption of a business process perspective is required. Conceptually, the adoption of a process perspective would help managers: .

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to focus on substantial aspects of management (i.e. practices as opposed to performance score-cards) (Crowe et al., 1997); to avoid adopting static interpretative models of the organization (Lehman, 1985); to define with precision the goals and the scope of the ERP’s implementation (Ascari et al., 1995; Morris, 1996).

As a matter of fact, as business processes are just conceptual schemes, in order to make them relevant for managers that are constrained into the hierarchical grids of functional organizations, at first they must be made visible. In this paper it is contended that process-based performance measures (PBPM) can support this effort, as the close link between performance and practice that is intrinsic to the concept of process makes PBPM relevant from both the result measurement and the resource management perspective. On the one hand, PBPM can offer a sound base for measuring the improvement generated through the implementation of ERP systems. On the other hand, PBPM can guide the process of performance improvement by enabling the deployment of ERP’s expected benefits. The aim of this paper is to propose a methodological approach to designing process-based performance measurement systems that can help management to enact the potentialities of ERP systems[1].

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The contribution of ERP systems to value generation In a competitive environment that is characterized by increasing levels of complexity, the need for integration is increasing more and more. Integration is the quality of the state of collaboration existing among the departments that are required to achieve unity of effort by the demand coming from the environment (Lawrence and Lorsch, 1967). Integration is more than simple co-ordination of actions: in order to avoid that mechanistic coordination efforts turning into elements of rigidity, firms need to decide and act according to common shared meanings built upon the same cultural values, shared languages and diffused visions (Krackhardt and Hanson, 1993). So integration implies the creation of a context that helps co-ordination. Moreover, integration – as a strategy for resource leveraging – is a prerequisite for building competitive advantages (Hamel and Prahalad, 1990; Collis and Montgomery, 1998). IT can contribute to satisfying the integration needs of the firm in different ways (Barley, 1986; Scott Morton and Benjamin, 1986; Konsynsky and McFarlan, 1990): mainly by increasing the transfer rate of information among people and units (drastically reducing transaction costs and increasing the reactivity of the system) and by changing the nature of interaction among resources (the so-called electronic integration effect) (Jonscher, 1994). More specifically, ERPs support the management of organizational interdependencies by enabling cross-functional information flows, language sharing and cognitive integration among functional units (Beretta, 1998). Pervasiveness of information and the adoption of a native language are among the many technological peculiarities of these systems, which nurture their integration attitude (Bancroft et al., 1997). The end result of combining these peculiarities with powerful data management technologies and effective workflow management technologies is a new generation of application tools that can give access to integrative capabilities never available before. The enactment of integration through the implementation of ERP systems The fact that ERP systems embed high integrative potentialities does not mean that their physical implementation simply turns those potentialities into reality. The potential of integration embedded in ERP systems has to be enacted in order to be fully deployed in the management of the firm. In order to be effective, integration has to be leveraged along three dimensions (Dossi, 1999): (1) Information integration. One dimension of integration has to do with the capability of transferring information efficiently throughout the whole organization through data and objects (Ruh et al., 2000): the connection of the information generated in different parts of the firm is a basic component of the integration capabilities of an organization (Galbraith, 1973; Tushman and Nadler, 1978; Wang et al., 1998).

(2) Cognitive integration. Effective integration requires that the different Integration perspectives related to the various professional realms involved in the potential of ERP process are matched, i.e. that each professional should understand the systems point of view of the other professionals (Beretta, 1998). This does not mean that any perspective has to be accepted a-critically. The point is that in functional organizations quite often the simple understanding of 257 different needs is made difficult by the cognitive filters that permeate the borders of functional units (Daft and Lengel, 1986; Boisot, 1987). This makes communication difficult. Reciprocal understanding may help each manager to take into consideration solutions that can be mutually satisfactory. (3) Managerial integration. Integration has also to affect the personal commitment of each manager. The nature and relevance of the economic responsibility assigned to managers and of the connected incentive systems play a significant role in enabling or opposing organizational integration (Vancil, 1979; Merchant, 1989). ERP systems support the various dimensions of integration: .

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the uniqueness of the database and the adoption of workflow management systems support the integration of the information flows that connect the different parts of the firm; ERP systems provide management and the other operators with standardized practices, thus offering cognitive schemes that facilitate coordination; ERP systems offer a dual focus to management attention, balancing local (unit) performance with the overall (process) performance.

The genuine orientation of ERP systems toward integration derives from the combination of two key components: the use of technologies that enable integration and the adoption of a process view of business management (Figure 1). The first element is the most evident and the one that has attracted the attention of CIOs, the typical owners of the implementation of ERP systems. Unfortunately, sometimes the technological potential of ERPs is sacrificed to partial implementations that exclude some elements of the business model (business areas, functions, processes) or some modules from the ERP’s kernel (RFP Wizard, 1997). Because of this choice, conceptually inconsistent with the idea of an integrated system, the global integration potential of the system is mutilated (Morris, 1996). According to practitioners, quite frequently the introduction of ERP systems follows a three-step process (Bancroft et al., 1997): (1) Implementation of a few basic modules of the ERP system – this step is frequently made from a quite conservative perspective in order to limit the amount of change introduced.

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Figure 1. The ERP philosophy

(2) Extension of the scope of the ERP system – this step often reflects the same conservative perspective of the previous one: automating the ‘‘as is’’ status of practices seems to be a highly diffused approach. (3) Transformation of business process – this is the step that, according to most of the BPR literature, should boost the business process performance (Venkatraman, 1994): by leveraging the inner flexibility and the best practice repository of the ERP systems, management could start a radical change in management processes and systems. The fact is that many companies plan to undertake this step only when the ERP system has been stabilized and has been accepted inside the firm. According to this line of reasoning, the radical performance improvement expected from the implementation of an ERP system should be closely linked to the completion of the third step (Bensaou and Earl, 1998). The point is that this step implies the reconsideration of the business process infrastructure of the company. Implementations aiming to preserve the

functional logic of the organization as it is can severely undermine the expected Integration results. potential of ERP One of the consequences of the ERP’s implementation module by module (i.e. systems functional unit by functional unit) is that the organization is not challenged to adopt the process view. In extreme but not rare cases, the implementation of ERPs simply automates the existing procedures, whose integration 259 potentialities remain hidden in the functional silos forming the information systems. The second element, the adoption of a process view of the firm, even if less visible than the first, is the real conceptual keystone of the integration potentialities of ERP systems, as it has shaped the technological choices that are at the bottom of the configuration of the majority of ERP suites (Bancroft et al., 1997). This point deserves special attention. The adoption of a process view Viewing the organization through the lens of business processes enhances the search for integration as a way for value generation (Keen, 1997). Basically, a business process is the medium that combines activities efficiently and effectively, in order to generate value for a specific customer. According to this perspective (Amigoni, 1998) (see Figure 2): . activities are aggregations of tasks that absorb resources; . products and services are valuable for the customer, only if they make available to him/her functionalities that are appreciated, i.e. for which he/she will pay; . business processes are the flows of information that connect activities and shape the use of resources. A process is a conceptual scheme that allows management to design and appreciate the links connecting a set of activities that, even if belonging to

Figure 2. Processes and value creation

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different professional realms, are connected by relevant information flows, and whose combination leads to an output that is relevant for a customer or for the whole firm (Dossi, 1999). The business process is the locus where the firm’s resources and competencies are activated in order to create organizational capacity gaps which can generate a sustainable competitive advantage. According to this view a business process is more an abstraction than an infrastructure: in this sense it must not be confused with the concept of procedure. A procedure is a predetermined sequence of activities: for this reason procedures are rigid structures that perform well only when the operating context is well-known and relatively stable. A process is a flexible structure, inside which information and activities can be combined in different ways consistent, with the nature of the context and with the goals that are pursued (Lorino, 1995). The process is not an operational routine: it is the locus where different stakeholders can share their knowledge and experience. So the business process perspective offers a cognitive context that can help to overcome the functional borders and to integrate the contents of knowledge of the different functional silos. While organizational units are containers of resources, business processes are operating loci for action: it is where activities are managed and resources are consumed. So the business process perspective assures a strict integration between decisions and actions. For this reason adopting a process view greatly enhances the quality and effectiveness of learning processes (Davenport and Prusak, 1998). The goal of any process is the delivery of a relevant output for a well defined customer: the process is a conceptual scheme that helps managers to appreciate the usefulness of any specific activity . Without this scheme the recognition of value-adding and non-value-adding activities has no clear criteria to which to refer (Greenwood and Reeve, 1994). In fact an activity can be appreciated per se only from the resource consumption side. In order to appreciate its capability to add value, it has to be positioned inside a process: the process finalizes the role of any activity and in this way it enacts the potential value of the resources absorbed by that activity. It is contended that the adoption of business processes as structural components in the implementation of ERP systems enables the enactment of the three dimensions of integration (informational, cognitive, managerial). As a conceptual scheme for defining the information flows that should connect the various activities in order to get a valuable output, the concept of business process promotes the search for informational integration. As the locus where different professional mindsets are confronted and where local knowledge is combined to get a relevant output, the business process framework promotes cognitive integration among the participants. As the end goal of the business process is to satisfy a well defined customer through the release of valuable functionalities, the business process concept promotes co-operation and convergence of efforts among managers (i.e. managerial integration), versus the

internal competition induced by functionally-oriented organizational models. Integration So the reinforcement of the concept of business process is at the same time a potential of ERP premise for a successful implementation of, and a result of the effective systems functioning of, ERP systems. The integrating roles of performance measures and the need for process-based performance measures Business processes are a natural bridge linking strategies of value generation to concrete decisions and actions. In fact value generation is a complex process that requires: . the design of a business processes system that, in a coordinated effort, releases the functionality demanded by customers through an efficient use of resources; . the management of the complex interactions linking all the organizational units that work on the process. As a matter of fact, firms are not organized by processes: they are still organized by functional units, which represent the infrastructure for managerial decentralization. So there is a concrete risk that the process view (hidden in the business architecture of the ERP system) is systematically challenged by the functional view (promoted by the daily functioning of the organization). Against this risk, it is necessary to make processes visible to people and to make process performance relevant to them. Process-based performance measurement systems can help to get this result. Performance measures are relevant both to internal decision makers (as they supply information that facilitates their decision making and motivates their actions and behavior) and to the whole organization (as they address people’s efforts in ways that promote efficiency of the organization) (Belkaoui, 1980). Performance measures promote integration by facilitating communication inside the organisation (Johansson and Ostman, 1995). They support vertical communication in two ways: (1) The principal, through the choice of the performance measures and by determining their standard values, exercises his influence by expressing his expectations. (2) The subordinate can use both the objective-setting and the result measurement phase in order to build a constructive and living dialogue with his principal. Performance measures can be an important basis for internal discussions. Performance measures also support horizontal communication, helping the members of a certain unit to establish useful interaction also with the units that provide inputs to their activities and with the units which are the receivers of their output.

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So, performance measures: . Are conceived as a signal of requested behavior, can be powerful pedagogical instruments to clarify areas of responsibility for different players and management expectations (Merchant, 1985). . Stimulate players to improve their knowledge of their sphere of activity and its economic structure. They contribute to the building-up of knowledge, by stimulating the learning process about how efficiency and effectiveness can be improved. They stimulate inquiry: by formulating questions, by investigating problems and by finding answers, they provide knowledge about the contribution of each single unit to the firm’s goals (Bruns and McKinnon, 1992). .

Thanks to their integrating properties, performance measures can support process management both on the operational side (connecting activities along the work flow) and on the cognitive side (developing integration knowledge) (Lorino, 1996). Process-based performance measures promote process integration: . by connecting the different activities along the process – through the explication of the relationships connecting the various activities, they make processes visible to people; . by enabling the generation of process knowledge – through the dialectical confrontation of the local pieces of knowledge generated inside each unit interested by the process, they promote the search for the improvement of process performance; . by making the process output relevant for each individual and unit – through the measurement of the contribution given by each participant to the attainment of the process goals, they offer a basis for the implementation of incentive compensation plans. Moreover, the process perspective enables the integration of the performance measurement system into performance improvement: as process measures refer directly to specific operating contexts, they naturally support performance improvement plans through the identification of best practices (Beretta et al., 2000). As value generation does not rely only on the management of processes individually taken, but depends also on the quality of the strategic and operational connections linking different business processes into a process architecture (Ould, 1997), a measurement model is needed. The measurement model should be aimed at connecting the process-based performance measures, on the one side, with the strategic vision of the company and, on the other side, with its organizational structure. In order to offer substantial elements to support the previous argumentation, the paper will now analyze and discuss the case of a large multinational chemical company that, after the partially successful implementation of an

ERP system, has decided to re-focus its performance measurement systems on Integration the process dimension. potential of ERP The role of process-based performance measures in promoting integration: the case of the Chemical Co. The decision to implement a process-based performance measurement system Chemical Co.[2] implemented SAP R/3 in the 1998-1999 period. It was a decision mainly driven by the need to adapt the company’s information system to both Y2K and Euro currency, according to the technological choices made by the holding company of the group to which Chemical Co. belongs. The project of SAP implementation was not only favorably accepted by the top management of Chemical Co., it was even warmly sponsored, as it was seen to be a powerful enabler for the introduction of new management models, focused on customer satisfaction and based on process management. An incremental strategy of implementation was chosen : it was decided that initially SAP R/3 had to be applied to the ‘‘as is’’ management systems of the company, making minor changes to the management practices that were in use. No particular plan of change management was activated apart from the obvious training of the people that would use the new application. About one year after the end of the implementation phase, the top management began to realize that the impact determined by the introduction of SAP upon both the management style and the management practices of the company was substantially weaker than expected[3]. The diagnosis was that, as the implementation of SAP did not emphasize enough the need to adopt a new, process-based view of the firm, substantially people continued to act as before. As the conceptual framework underlying SAP implementation was not clear, the new practices introduced by SAP were perceived as being distant from the present organization model: people began to look at SAP as a set of new procedures bringing rigidity into the organization and many complaints were expressed about the fact that SAP was less effective than some of the previous applications in guiding daily operations[4]. In the end, people reacted, resisting the innovation: improvement was stopped from the bottom. On this wave of mounting dissatisfaction, the CEO decided to launch a pilot project of change management aimed at unleashing the potentialities of SAP as an enabler of performance improvement and focused on the strategic role of process-based performance measures. ‘‘Making processes visible to people in order to make people conscious of the need to manage processes instead of activities’’ was the slogan that inspired a change program, whose aim was to make people conscious of the impact of their actions upon value generation. The change program was articulated into three steps: (1) making people conscious of processes (recognizing business processes); (2) making people conscious of process performance (introducing a processbased performance measurement system); and

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(3) making process performance relevant to people (linking process performance to management performance appraisal). Because of the nature of the business (development, manufacturing and sale of potentially highly dangerous chemical products in a very competitive environment), top management decided to start the change program without weakening the functional departments that, at the moment, were the owners of the technological and market competencies needed to compete. It was decided to start with the first two steps (recognizing business processes and introducing a process-based performance measurement system), with the aim of bringing to light, through process measures, the process dimension of management and to promote the search for process integration all over the company. The strategy chosen was to leverage the inner process orientation of SAP (see Figure 3): . making process visible – through its database management potentialities SAP would make available data organized by process already existing in SAP business process repository; . measuring business performance – once business processes were identified; SAP database management tools would support processbased performance measures; . establishing process ownership – SAP would also conceptually support the design of a process-based organization, when needed. The choice of the pilot context The brief presentation of the company experience that will follow is focused on the project of establishing a measurement system for the plant maintenance process.

Figure 3. Exploiting the inner process orientation of SAP

The plant maintenance process was chosen as the pilot process because of its Integration relative evidence (as it could be identified quite easily) and of its criticality. The potential of ERP easy identification would help to set a measurement methodology that could be systems easily shared with the line managers. The criticality of the process would attract the interest of line management on the project. In fact the plant maintenance process is crucial for the company on three sides: 265 (1) Cost. Even if the process accounts only for a limited percentage of the company’s turnover, this is one of the most relevant aggregates of costs that are manageable in the short period and, moreover, plant maintenance is tightly connected with minimizing the risk of unexpected interruptions of the production flow that could generate potential sales losses. (2) Safety. As the safety standards adopted by the company are extremely high, plant maintenance is one of the most reactive leverages that management can use to accomplish with the company’s standards. (3) Quality. As maintenance is one of the key elements for the good functioning of the chemical process, quality of products is significantly affected by the maintenance process. Three plants located inside one of the production sites of the company (site Alpha) were identified as the pilot contexts for the design, implementation and fine-tuning of the new measurement system. The main criteria for the selection of the pilot plants were, on the one side, the different technological contexts of the three plants; on the other side, the high variety of operating conditions that characterized each of the plants. This strategy of variety generation was adopted in order to promote the design of a flexible methodological approach that could be diffused all over the many operating plants of the company. A roll-out plan was also defined for the succeeding diffusion of the methodology to the other plants and production sites. The organization of the project An inter-functional plant committee was appointed by the top management with the goal of designing and implementing a process-based performance measurement system for the plant maintenance process. The inter-functional committee was made up of the functional managers of the operating units mainly involved in the maintenance process, both as suppliers of maintenance services and as users (plant managers). The production site general manager was appointed as the president of the committee, with the responsibility of reporting to the company’s top management. An external consultant was hired as a facilitator and mentor of the process. A manager from the organization department at headquarters was included in the working group with the task of aligning the evolution of the project to the company’s strategic guidelines and policies, eventually promoting a re-thinking of current guidelines and policies. The CEO was the official sponsor of the project.

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The definition of the contents of the pilot project The first task of the committee was to define the contents of the pilot project. This implied a close consideration of what had to be defined as the plant maintenance process. The identification of this process was not particularly difficult, even if the system of activities that concern the plant maintenance in a chemical plant is quite complex: plant maintenance activities compose a vast repertoire of extremely differentiated tasks that present different time frames (emergency calls versus yearly planned plant-cleaning programs) and that incorporate different technologies. Basically there are three main contexts for plant maintenance: (1) Precautionary maintenance – as chemical plants require systematic work of cleaning and replacement of parts and components that are subject to (or at risk of) corrosion, all the activities connected with structural maintenance, which can be planned in advance, are organized around processes that schedule the contents of those activities, their execution time and the quantity and quality of the resources needed. (2) Amending maintenance – as sections (or components) of chemical plants may break or begin to work off safety conditions or under productivity standards, immediate actions have to be taken in order to re-establish the regular operating conditions. (3) Upgrading maintenance – as any chemical plant can be upgraded from time to time through the replacement (or the adding) of sections and components (valves, fuses, filters, pipes, etc.), all these activities tend to be structured in revamping projects. As these projects require the scheduling of production stops, frequently their contents mix up upgrading and precautionary activities. What is common to each of these aggregates of activities is that: . In order to produce a valuable output in terms of restoration (or modification) of the plant state, a set of maintenance activities has to be coordinated: diagnosis of the breakage (or qualification of needs), intervention planning, acquisition of resources, maintenance actions, checking and testing are the basic phases of any operating process in the area of maintenance. . The plant manager is the key customer of the maintenance process: the plant is the receiver of the functionalities released by the maintenance process. . Any act of maintenance requires a production stop, whose length affects the feasibility of production plans and possibly the fulfillment of sales orders: minimizing production stops is the basic functionality demanded by the internal client. . The diagnosis of the technical contents of the maintenance activities may require a site visit or even the opening of the plant section in order

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to appreciate the real status and to define the required actions: the Integration context of maintenance is largely uncertain. potential of ERP Any maintenance action requires specific professional competencies systems that eventually can be combined together: single maintenance actions can be outsourced to external suppliers, but the quality of their coordination is largely responsible both for the efficiency and for the 267 effectiveness of the maintenance process.

Given the relevance of amending maintenance, in terms of both the amount of resources absorbed and the absolute criticality of assuring timely and successful reactions to unexpected breakages, the committee decided to focus the pilot project on the amending maintenance process (AMP). The startingpoint of the process was set at the identification of a specific need to have an amendment made to a machine or to a section of the plant. The end of the process was set in correspondence with filing the technical diagnosis of the maintenance action, once it has been concluded. Through individual interviews and workshops that involved the components of the committee and a number of key users of the AMP (mainly the section managers), the structure of the process was clarified and its component phases were identified. A schematic presentation of the process is proposed in Figure 4. The design of the measurement model The measurement model adopted was articulated into the following elements: . company vision; . process mission; . business process architecture/structural performance drivers; . process goals; . key performance indicators/operating performance drivers (by phase); . organizational unit performance measures. A simplified representation of the measurement model is proposed in Figure 5. Company vision It was decided that the design of the measurement system for the AMP should move from the definition of the process mission. The key question was: how can this process contribute to value generation in the light of the strategy followed by the company? The first step consisted of acquiring the company’s strategic vision. The company vision emphasized the importance of balancing the search for growth and profits with the need for ensuring a safe environment for both employees and the local communities hosting the company’s plants. The large amount of resources devoted by the company to safety and environmental programs in recent years gave consistency to the strategic vision.

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Figure 4. A schematic presentation of the amending maintenance process

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Figure 5. The measurement model

Process mission Subsequently the plant manager was asked to declare the mission of the maintenance process at his/her plant, in the light of the company’s strategic vision. The result was a mission articulated on five points. The AMP had to: (1) minimize the environmental risk as well as the risk of injuries to employees and to the local community; (2) accomplish with the quality standards fixed by the company policies; (3) re-establish the good functioning of the plant according to the plant needs; (4) be coordinated with the other planned maintenance activities; (5) accomplish with the expense levels budgeted for each period. The definition of the process mission was a sound exercise to compare the different perspectives presented by each of the functional departments involved in the process: it was a first formal moment of recognition and reciprocal understanding of the different points of view proposed by people working on the same process for the same final goal. Business process architecture It also offered the opportunity to put forward a different view of the organization. The effort made to identify the key business processes, insisting

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on the maintenance area, promoted a new way to look at the organization. It became clear that the firm is not only the simple sum of business processes but also the system of dynamic relationships between them through which value is generated. For this purpose the concept of business process architecture was introduced. According to this perspective, the contribution to value generation of the AMP depends not only on the quality of the internal resources and competencies that the process can activate, but also on the quality of the relationships established with other business processes. Processes can be linked one to the other by different kinds of relationships: .

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Sequentiality. For technological or organizational reasons, the input of some processes is the output of other processes. In our case, the amending maintenance process could not be started until the completion of the section-cleaning process, i.e. until the interested plant had been stopped and a preliminary check on the safety of the working environment had been made by the section manager. Support. Some processes may support the functioning of other processes. In the case of the AMP the process of diagnostic filing, which collects all the data generated by technical and economic diagnoses related to any maintenance action made inside the plant, supported the decision of the plant manager regarding the nature of the maintenance actions that had to be undertaken. Constraint. Some processes may constrain the management of other processes. In the case of the AMP, the process of suppliers’ qualification and selection (centralized at headquarters) set rigid constraints to the flexibility and, to the same extent, to the quality of the maintenance services that could be bought externally.

A simplified representation of the business process architecture of the company’s maintenance system is proposed in Figure 6. According to this view it is important to recognize that the performance of a process may be affected by the performance of connected processes. As an example, the timeliness and quality of the cleaning and safety assurance process are extremely critical for the performance of the AMP on both the cost side (working in sections of the plant that are not well cleaned implies the use of protection-suits that reduce the efficiency of the workers) and the time side (since the section has not been de-gassed and cleaned, the maintenance team cannot start its action). The purchase process is also extremely critical on both the time side and the quality side. And so other processes deeply influence the performance of the AMP. So the constraints set by other processes (structural performance drivers (Leibfried and McNair, 1992)) influence the process performance. In the case examined, the competence of the personnel of maintenance services suppliers, the cleanliness and safety of the plant sections, the quality of the information

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Figure 6. A schematic presentation of the business process architecture

filed in the diagnostic archives were among the structural performance drivers that deeply affected the performance of the AMP. Process goals Once the conditions of the external context were set, process goals could be defined according to the dimension of performance highlighted by the process mission: . safety (of the operating conditions of the AMP); . quality (of the output of the AMP); . timeliness (of intervention); . efficiency (in terms of both cycle time and amount of resources applied); . respect of budget. For each of the process goals, a metric was defined in order to track the process performance in the light of the process mission. SAP was the basic supplier of the data needed to fill the performance data warehouse. The metric adopted combined both static measures (expressing the degree of accomplishment with the targets assigned) and dynamic measures (expressing the degree of improvement). Key performance indicators In order to bring measures next to actions, process goals were deployed upon the component phases of the AMP. For each phase of the process, through interviews, analysis of the existing operating procedures and open discussions in dedicated workshop, the committee defined:

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the main functionalities released – to both internal clients (other phases) and external clients (the plants); the amount and quality of the resources applied; the constraints received from other phases; the constraints imposed on other phases.

The purpose was both to clarify the supplier-customer internal relationships which linked the different phases and to identify the organizational units that worked on each phase. The explication of internal supply chains always risks reinforcing internal competition (Lorino, 1995): the adoption of a process vision was expected to promote constructive dialectics among the different units through the clear identification of common goals. At the same time, constructive confrontation, on the one side, helped people to understand mutually the different perspectives and requirements of each unit; on the other side, it enabled the identification of critical areas in the management of key activities and fostered a structured thinking about the adequacy of the existing organization in facing the increasing competition. A couple of examples may help to clarify the point. First, maintenance interventions are activated by production departments through the release of order requisition documents that should contain all the basic information concerning the reason for the demand for intervention and the diseases faced in the department. This information should guide the start of the AMP: if the quality of information contained is high, the specialists can be easily identified and the maintenance intervention can be rapidly scheduled. Otherwise, a site visit has to be made in order to formulate a reliable diagnosis of the disease. In order to measure the quality of the information contained in the order requisition documents, a sample of documents was submitted for analysis and the quality of their contents was correlated with the efficiency and quality of the subsequent maintenance actions. The results of the analysis demonstrated beyond any doubt that the quality of the diagnosis made inside the department deeply affects the effectiveness and the efficiency of the AMP. Second, cost data revealed a progressive tendency of plant managers to minimize precautionary maintenance programs (that require long production stops that have to be scheduled well in advance) in order to stay flexible and reactive to demand peaks. As a consequence of this maintenance strategy, the work load of the resources demanded by the amending maintenance process had continuously increased in recent years, without a proportional increase in the amount of budget assignments. Consequently, the response time of the amending maintenance process began to increase. As a reaction, an emergencycalling strategy began to be diffused among plant managers: in order to have rapid answers, plant managers began to bias the local diagnosis process, calling for emergency intervention, even when there was no emergency at all. Measuring the frequency of emergency calls raised by each plant manager and comparing the plant internal diagnosis with the final judgement expressed by

the AMP team after the site visit revealed the relevance of the problem and Integration activated a round-table on the impact of the emergency-calling strategy potential of ERP diffusion on the quality of the services released by the AMP. Ultimately this led systems to a proposal for a new graduation of urgencies and to a rough estimation of the real impact of urgency calling on the efficiency and effectiveness of the maintenance process. The analysis of data concerning the frequency of 273 emergency calls, seen from a process perspective, revealed the establishment and the progressive reinforcement of a negative spiral of ever increasing inefficiency due to this strategy. Process measures were the key to raising the consciousness of the problem for client managers. The identification of functionalities and resources relevant for each phase offered a basis for the definition of key performance indicators (KPI), through which performance standards for each objective could be systematically monitored phase by phase along the dimensions proposed (safety, quality, timeliness, efficiency, respect of budget). The identification of constraints imposed by other phases (operating performance drivers (Beretta and Dossi, 1998)) together with KPIs enriched the set of measures that had to be used in order to appreciate the performance of each phase. Organizational unit performance measures With the definition of KPIs, a chain of measures connecting local operations to process mission was built. What was missing was the link with the existing organization. Processes are abstractions, while concrete organizations are made up of functional units that manage resources. Any under-evaluation of this gap is risky, as measures that only reflect the process view may have little or no grip on people’s behavior. From the beginning the committee opted for a soft implementation of the measurement system. First, management workshops were organized during the design phase in order to acquaint people with the process perspective and present the new measurement system as a tool available to line managers to assist them in the identification of performance improvement areas through the contextualization of their activities along the maintenance process. Little emphasis was put on the responsibility aspects of the new measurement system. A second step was the organization of management workshops aimed at discussing the evidence brought about by the new system. Even if the second phase of the project is only at its beginning, the project committee has formulated some guidelines based upon the expected fall-out of the pilot project and has taken a few actions. A process facilitator was appointed with the task of promoting improvements in the process performance, moving from the indications offered by the performance measurement system. He is the leader of a process team, made up of the managers of the outstanding units working on the process. The process team is expected to play an integrative role, representing the natural context for the discussion and, possibly, the solution of the problems that

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process measures highlight. In order to favor corrective actions and constructive criticism of the existing organizational structure and procedures, the process facilitator was chosen among people having a recognized leadership, based on knowledge of the whole process and of the resources applied (he should have accumulated experience as leader of different units working on the process). Moreover, the people chosen were in charge of one of the key units working on the process, both because its functionalities are critical for the quality of the process performance and because the unit absorbs a relevant amount of resources. He reports to the plant manager in terms of accomplishment of the process mission as stated. The process performance represents a relevant component of his MBO system. The next step will be moved in the area of unit performance measurement, linking functional responsibility measures to the process KPIs. The purpose is to focus the attention of the unit managers on those performance dimensions that are critical for the process performance. It is expected that the existing responsibility structure, largely based on the application of the controllability issue to a functional structure, would only partially fit with the structure of the KPI system. That would open some gaps among the behaviors imposed by the existing structures and procedures, the behaviors suggested by the process view and the real behaviors of people. At that point it is expected that there would be enough process culture to start a process of re-alignment of the organization’s roles and rules to the process view. The implementation of the ERP system would then possibly move to the final stage: that of business (and organizational) transformation. Conclusion Sometimes the full expression of the integration potential of ERP systems is drastically limited by their functionally-oriented implementation, i.e. by implementations aligned with the existing functional organization. One of the consequences of this pattern of implementation is the simple automation of the existing procedures. If not supported by a process-oriented structure, nor by a process-based measurement system, ERPs’ integration potential remains hidden in the functional information silos. Bringing to light the process dimension can be a strategy for promoting integration and generating the need for a change in the organization’s roles and rules. Measurement systems can play an important role in the re-discovery of the process dimension of the organization. First, process-based measurement systems can facilitate business processes modeling, giving substance to business processes as mechanisms that can orient daily operations to value generation. Second, process-based measures can represent a common language through which people who are deeply entrenched in functionally fragmented organizations can communicate. Third, process-based measurement systems, bringing to light evidence of the inadequacy of functional organizations in facing the increasing

competition, can activate a re-thinking of the organization’s structures and Integration mechanisms. potential of ERP In conclusion, the introduction of process-based measurement systems can systems represent a relevant opportunity for enacting the integration potential that is latent in ERP systems, leveraging their informational integration capabilities. Once processes have been recognized by the organization, the last phase of the 275 ERP implementation process can be started: by supporting change management processes, ERPs can really promote and support the firm’s business transformation. In the words of Handy (1994): ‘‘Counting makes it visible, and counting makes it count’’. Notes 1. The empirical evidence on which the paper is based has been offered by the detailed study of the implementation of an ERP system in a large multinational chemical company. Many of the general considerations expressed here are based on the evidence presented by a large number of managers in the seminars that have been conducted on a quarterly basis since 1998 at Bocconi University Business School. The conceptual foundations of the paper were set partly in a seminal research project directed by the author on the performance measurement of ERP systems implementation in business firms, and partly in the ‘‘Excellence in finance – benchmarking’’ project, a research project managed inside CESAD, a research center of Bocconi University, from 1994 to 2000, with the participation of about 100 medium to large companies. 2. The information, opinions and data on which the case study is based were collected through a series of personal interviews that involved 19 first- and second-line managers from 14 operating units. Those managers also attended five management workshops distributed over a six-month period, where the hypotheses, the implementation guidelines and the first results of the process-based performance measurement system were discussed. 3. Interview with the CEO of Chemical Co. 4. Interview with the components of the Strategic Program Committee. References Amigoni, F. (1998), ‘‘Alla ricerca di una giustificazione razionale all’adozione degli ERP’’, in Amigoni, F. and Beretta, S. (Eds), Information Technology e Creazione di Valore, Egea, Milano. Ascari, A., Rock, M. and Dutta, S. (1995), ‘‘Reengineering and organizational change: lessons from a comparative analysis of company experiences’’, European Management Journal, No. 1. Bancroft, N.H., Seip, H. and Sprengel, A. (1997), Implementing SAP R/3: How to Introduce a Large System into a Large Organization, Manning, Greenwich, CT. Barley, S.R. (1986), ‘‘Technology as an occasion for structuring’’, Administrative Science Quarterly, Vol. 31 No. 1. Belkaoui, A. (1980), Conceptual Foundations of Management Accounting, Addison-Wesley, Reading, MA. Bensaou, M. and Earl, M. (1998), ‘‘The right mind-set for managing IT’’, Harvard Business Review, September-October. Beretta S. (1998), ‘‘La misurazione dell’impatto dei sistemi ERP’’, in Amigoni, F. and Beretta, S. (Eds), Information Technology e Creazione di Valore, Egea, Milano.

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Lawrence, P. and Lorsch, J. (1967), Organization and Environment, Harvard Business School Press, Boston, MA. Lehman, M.M. (1985), ‘‘Programs, life cycles and laws of software evolution’’, in Lehman, M.M. and Belady, L.A. (Eds), Program Evolution: Processes of Software Change, Academic Press, London. Leibfried, K.H.J. and McNair, C.J. (1992), Benchmarking. A Tool for Continuous Improvement, Harper Business, New York, NY. Lorino, P. (1995), ‘‘Le deploiement de la valeur par les processus’’, Revue Franc¸aise de Gestion, June/July/August. Lorino, P. (1996), Comptes et Recits de la Performance, Les Editions d’Organisation, Paris. Markus, M.L. (2001), ‘‘Viewpoint: reflections on the systems integration enterprise’’, Business Process Management Journal, Vol. 7 No. 3. Mayor, T. (2000), ‘‘Value made visible’’, CIO, May. Merchant, K.A. (1985), Control in Business Organizations, Ballinger, Cambridge. Merchant, K.A. (1989), Rewarding Results: Motivating Profit Center Managers, Harvard Business School Press, Boston, MA. Moad, J. (1995), ‘‘Time for a fresh approach to ROI’’, Datamation, February. Morris, P.W.G. (1996), ‘‘Project management: lessons from IT and non-IT projects’’, in Earl, M. (Ed.), Information Management: The Organizational Dimension, Oxford University Press, Oxford. Ould, M. (1997), ‘‘Designing a re-engineering-proof process architecture’’, Business Process Management Journal, Vol. 3 No. 3. RFP Wizard (1997), ‘‘Dealing with the aftershock of a new SAP implementation’’, Datamation, April. Ruh, W., Maginnis, F. and Brown, W. (2000), Enterprise Application Integration, Wiley, New York, NY. Scott Morton, M.S. and Benjamin, R.I. (1986), ‘‘Information technology, integration and organizational change’’, MIT CISR Working Paper, No. 138, April. Subramanian, A. and Lacity, M. (1997), ‘‘Managing client-server implementations: today’s technology, yesterday’s lessons’’, Journal of Information Technology, Vol. 12. Themistocleous, M., Irani, Z. and O’Keefe, R. (2001), ‘‘ERP and application integration: exploratory survey’’, Business Process Management Journal, Vol. 7 No. 3. Tushman, M. and Nadler, D. (1978), ‘‘Information processing as an integrating concept in organizational design’’, Academy of Management Review, July. Vancil, R.F. (1979), Decentralization: Managerial Ambiguity by Design, Irwin, Homewood, IL. Venkatraman, N. (1994), ‘‘IT-enabled business transformation: from automation to business scope redefinition’’, Sloan Management Review, Winter. Wang, R., Lee, Y., Pipino, L. and Sirong, D. (1998), ‘‘Manage your information as a product’’, Sloan Management Review, Summer.

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Busli Chan and Suliman Al-Hawamdeh Division of Information Studies, School of Computer Engineering, Nanyang Technological University, Singapore Keywords E-commerce, Central government, Knowledge management, Information technology, Infrastructure, Singapore Abstract With the advent of Internet technology and its rapid growth during the last few years, electronic commerce has become an increasing reality. While e-commerce still constitutes a small part of many countries’ economies, it is seen by many as an opportunity to reduce cost and improve productivity. This is true, as many economies are transferring themselves into knowledge-based economies, where information and innovation are the competitive instruments. Singapore as a small country with limited natural resources realized the importance of the new economy and the need to position itself as an information and knowledge hub in Asia. The government has taken an active role in the establishment of an e-commerce infrastructure. The government’s vision is to build a premier service hub in the region with global orientation, and focusing on new high growth hub services. This paper reviews the development of e-commerce in Singapore and studies its impact on the development of the information society in Singapore.

Business Process Management Journal, Vol. 8 No. 3, 2002, pp. 278-288. # MCB UP Limited, 1463-7154 DOI 10.1108/14637150210428970

Introduction The Web and the Internet make tremendous impacts on society, particularly its effect on the way companies conduct their business and activities. In the knowledge-based economy, many organizations are forced to re-think their business strategies and move away from the traditional approach to organizing and measuring their economic activities. They are forced to adopt new and more innovative ways of maximizing the use of information technology and the Internet in their business activities. Improving productivity, reducing cost and enhancing customer support are some of the key competitive factors in any successful enterprise. Geographical locations and size of operations are no longer important factors, as small companies are now able to sell their products on the Internet and penetrate new markets in a very short time. Singapore is a small country with a population of about four million. It has a small market and limited natural resources that made it almost impossible to depend on these resources for its growth. Prompted by the advances in the Internet and the Web, Singapore is entering the information age, where knowledge has become recognized as being the major force behind its competitive success. The Singapore Government has recognized the importance of knowledge assets in the new economy and the need to invest in its people to remain competitive. As a result, the government encourages organizations to make use of the available infrastructure to increase productivity and efficiency in their operations. With Singapore positioned as an information gateway in the

region, the country’s aspiration to become a global hub is attractive to many organizations with global operations. The Singapore Government has initiated the e-commerce plan to promote e-commerce and to encourage business to take advantage of the existing e-commerce infrastructure. The Government in cooperation with the National Computer Board, now known as the Infocomm Development Authority of Singapore (IDA), has facilitated the e-commerce infrastructure and operation in Singapore (www.ec.gov.sg). E-commerce is the use of inter-networked computers to create and transform business relationships. A broad definition of e-commerce is that it is dependent on the digital communication and information technology (Kardaun, 1999). E-commerce is expected to lead to a simpler and more efficient way to conclude a business transaction. It is commonly associated with the buying and selling of information, products and services through the Internet. This business definition of e-commerce can be broader or narrower. The broader terms used are usually e-business, or e-commerce in a narrower sense. Key to the narrower definition is the transactional aspect (Colecchia, 1999). E-commerce is defined as including any form of commercial transactions of goods and services of any kind, conducted over computer networks, whether they are open or closed networks (Wong and Lam, 1999). Government initiatives on e-commerce The Singapore Government has taken an active role in the establishment of the e-commerce infrastructure. It played the role of catalyst to initiate and encourage the private sector to take part in developing e-commerce. As the Singapore Government recognizes the potential of e-commerce and its impact on the economy, it is taking the leading role in implementing and using e-commerce. The rapid deployment of the Internet in Singapore is the result of a concerted planning effort by the Government to develop a National Information Infrastructure (NII) and promote the use of information technology in all sectors of society (Chaudhry and Al-Hawamdeh, 1998). The Singapore Government has used information technology to stimulate economic growth and achieve national competitiveness. A comprehensive information technology plan called ‘‘IT 2000’’ was launched in 1991 as a framework to guide Singapore IT development into the twenty-first century (National Computer Board, 1992). This plan seeks to transform Singapore into an intelligent island. In line with the vision of the ‘‘IT 2000’’ plan, an advanced National Information Infrastructure (NII) has been developed to link computers and other information appliances in homes, offices, schools and factories across the country. To support the services envisioned in the national IT plan, a unique project called ‘‘Singapore ONE’’ has been undertaken for the development of a nation-wide broadband infrastructure that will deliver multimedia services to end-users at high speed (www.s-one.com.sg). This network is expected to provide excellent communication support to exploit electronic information in the country. Recently a plan has been introduced for e-commerce and business applications of the Internet (Figure 1).

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Figure 1. ‘‘Singapore ONE’’ project

Electronic commerce hotbed In cooperation with the National Computer Board, the Government has launched the Electronic Commerce Hotbed (ECH) program, which provides a Web site hosting comprehensive information on e-commerce in Singapore (Figure 2). It is an initiative to address pressing issues related to e-commerce promotion and implementation. The approach used is to pool the resources of the major stakeholders of electronic commerce, such as technology companies, merchants, infrastructure providers, policy makers and researchers. Together

Figure 2. Government Web site on e-commerce

with the industry partners such as IT companies and financial institutions, the government has developed infrastructure to support e-commerce, such as online banking, online payment systems and other intermediary e-commerce services. The electronic commerce hotbed focused on seven major areas (Electronic Commerce Promotion Group, 2000). These areas include: (1) Deploy show-case applications. These show-case e-commerce applications are being deployed through partnership efforts. (2) Address policy concerns. Enabling e-commerce raises many legal, regulatory, trade, financial and economic issues. A Policy Committee has been established to address these issues. The committee is chaired by the Monetary Authority of Singapore (MAS). (3) Resolve uncertainties. A technical framework for emerging solutions and services is being created. These will serve as tools to help organizations plan for electronic commerce. Pilots are used to evaluate key technologies and to prepare the industry for international competition. Technical standards in electronic commerce are also being established through the National Information Infrastructure (NII) Standards Program. (4) Institute into infrastructure. This is where directory, identification, security and payment services are being set up to support and speed up the adoption of e-commerce. (5) Educate and train. Education and training programs include high-level envisioning and strategic planning workshops for senior business executives, technical sessions for the IT industry and awareness programs for the public. Courses are also being offered under the Critical IT Resource Program (CITREP). (6) Provide incentive schemes for innovation. Risk- and cost-sharing schemes are in place to help the local industry embark on innovative e-commerce projects. (7) Establish international linkages. To position Singapore as an e-commerce hub, strategic alliances with international counterparts are being established. The program aimed at helping companies and other organizations in the following ways: . Developers can now locate and obtain toolkits and software support for infrastructure technologies easily. This means that businesses and technology companies can focus on developing their services. . Businesses, technology companies and infrastructure providers can use the ECH pilots to establish the feasibility of e-commerce technologies. . All players in e-commerce now have a platform and channel for raising and solving policy issues.

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Singapore e-commerce master-plan This e-commerce master-plan was launched in September 1998, to drive the pervasive use of electronic commerce in Singapore, and to strengthen Singapore’s position as an international e-commerce hub. The target is to have S$4 billion worth of products and services transacted electronically through Singapore, and 50 per cent of businesses to use some form of e-commerce by the year 2003 (IDA, 1997). There are five main thrusts in the e-commerce master-plan. The five main thrusts are: (1) To develop an internationally linked e-commerce infrastructure. This thrust aims to strengthen Singapore’s position as an e-commerce hub. It focused on the role of financial and logistics sectors in driving this thrust. The role of the financial sector is to provide efficient electronic transactions between businesses. And the role of the logistics sector is to put a well-connected logistics infrastructure in place to support the requirements for delivery of physical goods. This will position Singapore as a center of e-commerce infrastructure development, where international infrastructure players in areas such as trading platforms, trust management and rights management systems will hub to develop and deploy services here. (2) To jump-start Singapore as an e-commerce hub. This initiative will focus on the sectors in which Singapore has an inherent advantage as a hub, especially in business-to-business services. These advantages include a stable and excellent financial infrastructure, a transport and logistics infrastructure that is well-known for its efficiency, and strong telecommunications connectivity and e-commerce infrastructures. Incentive schemes and other support programs will be used to attract international and local companies to base their e-commerce hub activities in Singapore. (3) To encourage businesses to use e-commerce strategically. This thrust aims to help businesses exploit e-commerce to enhance their productivity and competitiveness. These will be achieved through many education and other support programs. Simple and easy-to-use trading platforms are being provided, and a usage promotion drive will be launched to bring about widespread participation of SMEs. (4) To promote usage of e-commerce by the public and businesses. This thrust will enable Singapore citizens and businesses to enjoy the benefits that e-commerce can bring and, at the same time, create an e-commerce-savvy culture. Mass education efforts will be used, in which e-commerce will be taught in business and professional courses in tertiary education institutions. (5) To harmonise cross-border e-commerce laws and policies. This thrust is key to enable businesses to trade confidently with overseas partners.

Besides putting in place legislation that is internationally consistent, Singapore will work with its major trading partners to align one another’s e-commerce laws. These five thrusts will be implemented through specific programs and projects. A key supporting program is Singapore’s efforts to become a leader in the emerging and dynamic e-commerce scene. In particular, the Department of Statistics is leading an initiative to measure the growth of the e-commerce services sector, the contribution of e-commerce to growth in GDP and the volume of goods transacted through e-commerce. In addition, research for ecommerce would be expanded to include policy research as well as market research. Partnerships with academia and industry to jointly sponsor and contribute to research would be sought. Local enterprise e-commerce program To encourage adoption of e-commerce by industry, the government provides various assistance schemes and also proactively builds greater awareness and deeper understanding on the use of e-commerce. In conjunction with the rapid growth of e-commerce in Singapore, the government launched the Local Enterprise E-Commerce Program in November 1998 to build up e-commerce applications and encourage local companies to implement e-commerce in their business operations. A total budget of S$9 million was set aside to assist those companies. The program provides 50 per cent funding of cost incurred by the companies that implement e-commerce in their business operations. To strengthen its support for e-commerce development in Singapore, a fourpronged approach has been taken by the government to bring about pervasive and strategic adoption by industry (Chen, 1999). This approach is: (1) To encourage academia, consultants and businesses to take up thought leadership projects on Singapore and the region. The government has established a research agenda, and will provide seed funding for work in these areas. (2) Government will build up research capability by encouraging leading e-commerce research companies to be based in Singapore. It will also encourage local establishments to link up with international research centers in order to learn from others and to share expertise. (3) To facilitate and generate forums for discussion on the latest thinking on the e-commerce concept and its implementation. (4) To assume greater leadership at international policy forums on e-commerce. The role played by government should be able to create an environment for successful competition and to encourage but not necessarily force investment. It must abolish many possible restrictions on market entry and ensure that the market is fair for all operators and services providers. In other words, it is necessary to have a regulatory framework that will promote investment in

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innovative technology and adoption of e-commerce, and to foster the creation of new products and services. Approved cyber-trader scheme In order to realize the goal of becoming an international e-commerce hub, the Singapore Government introduced the Approved Cyber-Trader Scheme (ACT), to encourage local and foreign companies based in Singapore to use the Internet for their offshore trading and to base these trading activities in Singapore. The objective of the ACT scheme is to promote Singapore as the region’s e-commerce hub by anchoring e-commerce core players in Singapore and helping local companies to regionalize. Approved companies will enjoy concessionary tax incentives on offshore income derived from transactions through the Internet. To qualify, companies are expected to invest in and use Singapore as the base for electronic commerce activities. In this case, e-commerce is more than simply setting up a Web site and getting orders through e-mails. The infrastructure to fulfill orders, market the products, provide for online after-sales assistance, secure transacting etc. must be in place to qualify for this scheme. Singapore electronic transaction (SET) project The Singapore electronic transaction (SET) pilot, jointly sponsored by Citibank, IDA and Visa and MasterCard, was launched in September 1996 to help secure the use of credit cards in electronic payment in Singapore (Kanagasundram, 1998). The SET project formed an important part of the ECH Program, to speed up the realization of e-commerce. SET addresses consumer, merchant and member concerns over the security of the Internet shopping and provides the infrastructure that will enable electronic commerce to grow. Under the SET project, thousands of Visa cardholders in Singapore will be able to safely purchase goods or services over the Internet from dozens of participating merchants. Success factors There are many major changes nowadays in the way organizations and businesses conduct their business activities in Singapore. Many organizations have their own Web site and sell products or provide services to customers through their Web site with the support of Internet technology. This has been the result of the implementation of the e-commerce concept in their business activities. With the e-commerce initiatives, the result seen today is that many businesses in Singapore are tapping into existing e-commerce platforms to enable their online businesses. More and more small and medium-sized enterprises are making use of the e-commerce infrastructure. For example, in the book and stationery trade sector, they are now making use of the Internet to improve their business competitiveness using the Booknet trading platform (www.Booknet.com.sg). Retailers, distributors and publishers are already using the system, which is an integrated solution that includes software for the

point-of-sale, inventory management, order processing, purchase order, sales analysis, accounts payable, accounts receivable, general ledger and an e-commerce gateway. In grocery retail, shops and suppliers are making use of the ShopNet trading platform (www.ShopNet.com.sg). This system helps retailers and suppliers to improve productivity through electronic commerce over the Internet (Figure 3). In 1999, an Infocomm Manpower Survey found that there is high demand for infocomm manpower in Singapore (www.ida.gov.sg). Averaging 10,000 jobs per year, jobs in the area of e-commerce development experienced the highest growth rate. This showed that more and more businesses in Singapore are implementing e-commerce. Another study by PricewaterhouseCooper found that most SMEs identify e-commerce as an important factor to improve customer services and exchange of information. This study also predicts that more SMEs will adopt e-commerce applications as a result of the government’s effort to encourage the private sector to adopt e-commerce (Shapiro, 1999). A survey on ‘‘ICT adoption by businesses in Singapore’’ found that most businesses in Singapore have been implementing IT in their business activities during the last few years. Over 80 per cent of the organizations surveyed have access to the WWW and over half of the organizations have implemented e-commerce in their businesses. The Center for Management Innovation & Technopreneurship in the NUS survey on business-to-businesss e-commerce in Singapore found that over 73 per cent of the companies surveyed have corporate access to the Internet and over one-third of the companies have implemented business-to-business

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Figure 3. ShopNet Web site

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e-commerce (www.fba.nus.edu.sg/cmit). Companies that are already procuring via the Internet are fairly upbeat about the growth prospects of their e-commerce trading activity. Around 95 per cent of companies expected an increase in their e-commerce transaction value over the years. About 25 per cent expected procurement value to grow by more than 50 per cent. Companies that are already selling via the Internet showed optimism about the growth potential of their e-commerce sales transactions with their business partners. All of them expected an increase in their sales value over the years. About 19 per cent expected the sales value to grow by at least 50 per cent. So far, the government e-commerce initiatives have showed significant positive results today, as more and more companies are implementing e-commerce business applications in Singapore. The government’s e-commerce objective to position Singapore as a global e-commerce hub will likely soon become reality with the advent of technology and the government’s efforts to promote e-commerce and encourage businesses to take part in it. With the e-commerce infrastructure available and already in place there will be more companies to adopt e-commerce in Singapore, as predicted by several studies mentioned earlier. Impact of e-commerce on the information society in Singapore E-commerce brings public administrations closer to society. It improves and extends services provided to the community and makes them accessible to everybody. An active public sector in the information society will provide better services to the community as well as offer the chance to develop new products and services, which could also be of advantage on the global market. This will have an impact on the economy, social welfare and cultural aspect. The Singapore Government has undertaken a major review of the way they do things and how the public sector can harness infocomm technologies. This is reflected in the e-government action plan, which aims to better serve Singaporeans in the new knowledge-based economy. E-government is an important pillar of the Infocomm 21 plan to help Singapore make the transition to the new knowledge-based economy (www.ida.gov.sg). Determining the economic and social impacts of e-commerce is a question of monitoring and measuring changes in society. There is a risk that the rapid incorporation of IT technology will, in the short term, result in job losses for certain qualified personnel and lead to structural unemployment. In the medium and long term, it will eventually contribute to job creation, particularly in new areas such as media creation and information services. The products and services of the IT industry are changing. With the emergence of multimedia services, many organizations nowadays implement e-commerce to provide faster and more efficient services in the new economy in order to survive in global competition. As mentioned earlier, studies have showed that there will be higher demand for workers in the e-commerce area, in which employment is among the top five jobs in the future. Therefore, the impact of e-commerce on employment is that

individuals are being forced to enrich themselves with necessary IT skills as well as e-commerce understanding. People are willingly forcing themselves to learn more about IT and to become more Internet-savvy. Eventually, this will likely lead more and more people being trained in this IT sector, and will create a change from the industrial society to information society. Technological innovation will also cause fundamental changes in enterprise organizations. Future evolution will be based on the externalization of non-strategic activities to foster greater flexibility and development of economic intelligence in companies, which will enable them to anticipate market trends . With the emergence of the e-commerce and information technology, companies are being confronted with tougher competitive pressure on the local market, which is forcing them to adapt their advertising and commercial strategies as well as their customer strategy. E-commerce offers the opportunity to small and medium-sized enterprises to take on and compete with larger enterprises. Small companies, despite their size, can also have a global presence through their Internet site, which is a costeffective medium to expand the organization’s network and provide immediate awareness in the market. E-commerce serves as a catalyst for competition in the global marketplace. It is a key concept that will help business to be more competitive in the marketplace. New competitors will attempt to use ecommerce to carve a niche in the market. By capturing the lower transaction costs associated with e-commerce, companies are able to enhance competition through cheaper communication and information. Therefore, e-commerce will help businesses to increase efficiency in conducting their activities, and will also force them to adopt it in order to be able to remain competitive in the marketplace. Information is increasingly recognized as the fundamental source of wealth in the knowledge economy. A major concern from the emergence of information technology and e-commerce is that market forces may lead to a concentration of investment in high bandwidth infrastructure. This area appears to be the most profitable sector in this new economy, offering value-added services to people in this area, which subsequently will be detrimental to those outside it. Therefore, technology changes may threaten cultural values in the society. In the Singapore context, people are more open to market forces. Therefore it is inevitable that Singapore will enter the new information age, and Singaporeans will have to be prepared for this information society. As a result of e-commerce implementation and its wide implementation in Singapore, the government introduced the e-ambassador program (www.ida.gov.sg). E-ambassador refers to the involving of the early adopters of infocomm technology in order to help the late adopters and the uninitiated to become comfortable and adept at using technology. The program has created awareness of infocomm-savvy people to share their knowledge and volunteer in guiding those late adopters of infocomm technology. In relation to the development of an information society in Singapore, this has resulted in more

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and more Singaporeans becoming familiar with information technology, as it moves toward the information era. Conclusion The Singapore Government has taken an active role in the establishment of e-commerce infrastructure. It played the role of catalyst to initiate and encourage the private sector to take part in developing e-commerce. With the ecommerce initiatives, the result seen today is that many businesses in Singapore are tapping into existing e-commerce platforms and infrastructure to enable their online businesses. Statistics and fact finding by various organizational bodies have shown that the trend to adopt e-commerce by private sectors is promisingly high and these organizations also have gained benefit from the government e-commerce plan. The government e-commerce’s objective to position Singapore as a global e-commerce hub is becoming reality with the advent of technology and the government’s efforts to promote ecommerce and encourage businesses to take part in it. The impact of the ecommerce initiatives has resulted in changes in society. The impact not only is in changing the way organizations conduct their business activities but also in having changed society’s mindset of information communication technology, which eventually facilitate shifting the trend from being an industrial to a knowledge- and information-based society in Singapore. References Chaudhry, A.S. and Al-Hawamdeh, S. (1998), ‘‘National infrastructure development and Internet applications in Singapore’’, SLA – AGC Proceedings, Bahrain, 25-27 November, pp. 41-50. Chen, J. (1999), ‘‘Opening address by acting Minister for Communication and Information Technology and Minister of State for National Development at the Conference on the Measurement of Electronic Commerce’’, E-commerce and Official Statistics, Singapore Department of Statistics, Singapore. Colecchia, A. (1999), ‘‘Defining and measuring electronic commerce: towards the development of an OECD methodology’’, E-commerce and Official Statistics, Singapore Department of Statistics, Singapore. Electronic Commerce Promotion Group (2000), press release, 20 June. IDA (1997), press statement, Infocomm Development Authority of Singapore, available at: http:// www.ncb.gov.sg/ncb/press/1997/3307.asp Kanagasundram, A. (1998), ‘‘Secure electronic transaction (SET) for credit card payments through the Internet’’, Electronic Commerce Initiatives of ESCAP, United Nations, New York, NY. Kardaun, J.W.P.F. (1999), ‘‘Monitoring e-commerce – too early or too late?’’, E-commerce and Official Statistics, Singapore Department of Statistics, Singapore. National Computer Board (1992), A Vision of an Intelligent Island: The IT 2000 Report, National Computer Board, Singapore. Shapiro, J. (1999), SME Electronic Commerce Study, PricewaterhouseCooper, Singapore. Wong, J. and Lam, E. (1999), ‘‘Measuring electronic commerce in Singapore: methodological issues and survey findings’’, E-Commerce and Official Statistics, Singapore Department of Statistics, Singapore.

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The knowledge of coordination for supply chain integration Togar M. Simatupang, Alan C. Wright and Ramaswami Sridharan Institute of Information Sciences and Technology, Massey University, Palmerston North, New Zealand

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Keywords Coordination, Supply chain management, Logistics, Information exchange Abstract Increasing competition due to market globalisation, product diversity and technological breakthroughs stimulates independent firms to collaborate in a supply chain that allows them to gain mutual benefits. This requires the collective know-how of the coordination mode, including the ability to synchronise interdependent processes, to integrate information systems and to cope with distributed learning. However, research into coordination has paid little attention to acknowledging different modes of coordination. This study promotes the notion of mutuality and the focus of coordination in order to establish a comprehensive taxonomy of coordination modes. Four different modes of coordination have been identified: logistics synchronisation, information sharing, incentive alignment, and collective learning. The knowledge of coordination is then proposed as an explicit understanding about key drivers of coordination modes that have positive impacts on supply chain performance. This paper also presents a research agenda.

Introduction A firm needs to develop effective coordination within and beyond its boundaries in order to maximise the potential for converting competitive advantage into profitability (Dyer and Singh, 1998). Coordinating the rate of order fulfilment to match actual consumption is successful from the customer’s point of view, if it results in satisfying a customer’s delivery date and lowers logistics costs. WalMart, for instance, shares point-of-sales data – including sales and stocking data – with its key suppliers (Simchi-Levi et al., 1999). Tracking daily sales enables the suppliers to differentiate popular from slow-moving items and to respond quickly either to replenish or to discontinue the items in retail stores. Tight coordination between Wal-Mart and its key suppliers dramatically increases product availability and reduces inventory costs. Coordination among independent firms, such as raw-material suppliers, manufacturers, distributors, third-party logistics providers and retailers, is the key to attaining the flexibility necessary to enable them to progressively improve logistics processes in response to rapidly changing market conditions. Poor coordination among the chain members can cause dysfunctional operational performance. Some of the negative consequences of poor coordination include higher inventory costs, longer delivery times, higher transportation costs, higher levels of loss and damage, and lowered customer service (Lee et al., 1997). Since The authors wish to thank Dr Majed Al-Mashari, the Editor, and anonymous reviewers for their constructive suggestions that have substantially improved the appearance of this article.

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changes that occur in any one of the chain members are likely to affect the performance of the others, coordination is useful for managing interdependent logistics activities in order to mitigate demand variability and unnecessary inventory. A process of planning, executing and controlling the interdependencies of activities carried out by different supply chain members or business units in order to create value for the end customer is known as supply chain management (Lambert et al., 1998). Given the critical importance of coordination, few researchers have appeared to develop and test the concept of coordination in the supply chain. Senge (1990) popularised systems thinking that can be used to understand the reality of logistics and coordinate the chain members in order to create collective knowledge. Konijnendijk (1994) examined the coordination process at tactical and operational levels about product specification, volume, mix and lead-times between sales and manufacturing in engineer-to-order (ETO) companies. Stank et al. (1999) studied inter-firm coordination processes characterised by effective communication, information exchange, partnering and performance monitoring in food industry supply chains. Lee et al. (1997) suggested channel coordination, operational efficiency and information sharing to improve the overall supply chain performance. Current research often emphasises a single coordination mode as the act of managing specific objects such as interdependent processes, information and knowledge. Little attention has been given to exposing different coordination modes and their interactions. The exception was Lee (2000), who provided an interesting concept of supply chain integration that consists of information sharing, logistics coordination and organisational relationship linkage. Pyke et al. (2000) shared this concept and tested it in an empirical study. However, Lee (2000) considered only the coordination mode due to process realignment and said nothing about combining different modes of coordination. Unlike Lee’s approach, this study considers information sharing as a special type of coordination mode. The objective of this study is to formulate a framework of the knowledge of coordination that unifies the different modes of coordination required to integrate the supply chain processes of different partners in order to achieve chain profitability. It is argued that, if the supply chain members want to maintain their competitive edge by innovation throughout the supply chain network, then the creation of shared context for improvement is essential. The question is how to achieve the best fit among the supply chain partners, so that the tasks of different players are completed in a manner consistent with the mutual goal, because supply chain performance depends on how well all members work together and not on how well each member performs separately. The notions of mutuality and focus of coordination are adopted to build a taxonomy of different coordination modes. The idea of mutuality refers to combining efforts among independent firms (MacNeil, 1980). Mutuality consists of complementarity and coherency of activities among the chain members, whereas the focus is on emphasising operational and organisational

linkages. Four coordination modes are identified in the taxonomy: logistics synchronisation, information sharing, incentive alignment and collective learning. Each coordination mode has typical problems that require specific resolutions. Integrating the acts of different players to achieve the common goal requires knowledge of coordination. Knowledge of coordination consists of an explicit understanding about key drivers of coordination modes that have significant impacts on supply chain performance. The paper begins by presenting a revisited taxonomy of coordination modes. The following sections briefly discuss each coordination mode. Next, a special section is devoted to demonstrating the idea of the knowledge of coordination in supply chain management. A discussion section provides general comments and implication for further research. The concluding section summarises the important ideas of the paper. A taxonomy of coordination modes A symbiotic relationship becomes important to facilitate networking among divisions within a firm, or between firms in a supply chain. The main concern of supply chain management is how to coordinate the independent players to work together as a whole to pursue the common goal of chain profitability in changing market conditions. Generally, Malone and Crowston (1994) define coordination as the act of managing interdependencies between activities performed to achieve a goal. In the supply chain context, coordination can be viewed as an act of properly combining (relating, harmonising, adjusting, aligning) a number of objects (actions, objectives, decisions, information, knowledge, funds) for the achievement of the chain goal. Since the nature of an object of coordination varies, a separate coordination mode is required to manage a specific object. Although the chain members implicitly apply different coordination modes to assist one another to manage processes, capabilities and information in response to market uncertainty, little attention has been paid to distinguishing and unifying them. This section presents a comprehensive taxonomy of coordination that attempts to differentiate and classify different coordination modes in order to gain a better clarification. A taxonomy of coordination refers to the act of classifying different coordination modes under one roof. Presenting different coordination modes under one roof makes it possible to understand why scholars and practitioners work with different objects and concentrate upon different modes of coordination. The proposed taxonomy looks at two dimensions: the mutuality of coordination and the focus of coordination (see Figure 1). The following paragraphs discuss the logics underlying the proposed taxonomy. The mutuality of coordination can be defined as the underlying values of responsibility among partners with a strong emphasis on sustaining relationship in order to build effective goal attainment. The literature of social contract has recognised that any relationship among business partners must contribute to a climate of mutuality (see Campbell (1997) for a theoretical framework of mutuality in business relationships). MacNeil (1980) argues that

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Figure 1. A taxonomy of coordination modes in a supply chain

some degree of mutuality is important to strengthen the closeness of the relationship that results in better-coordinated activities among trading partners. The mutuality norm suggests that each partner contributes to significant values and is entitled to an equitable distribution of exchange outcomes. The collective responsibility is meaningful, if the partners share mutual accountability in attaining a better performance. For example, the retailer and the manufacturer share joint responsibility to implement the initiative of quick response as a strategy to cut lead-times and increase the speed of product introduction to the market. Besides the joint responsibility of creating value, both partners share the mutual savings, which result from quick response such as lowered logistics costs and increased profit. The literature of systems thinking also advocates that the mutuality among chain members provides the opportunity to focus on operational improvement that has a dramatic impact on the overall chain performance (Senge, 1990; Goldratt, 1994). Coordination will fail, where perceptions of mutuality for other members and commitments to the system (holism) are absent (Lee et al., 1997; Checkland, 1999). The mutuality of coordination is required to enable chain members to share explicit understandings about the overall picture of end-toend supply chain processes and the focus of improvement (Goldratt, 1994). For example, the visibility of demand information helps the chain members to eliminate unnecessary inventory and deliver products and services according to the actual demand (Simchi-Levi et al., 1999). The mutuality of coordination can be divided into two main dimensions, namely complementarity of processes and coherency of understanding. Complementarity refers to how the chain members collectively manage interdependencies between logistics activities to create value. Interdependence is the degree to which one process depends on the other to achieve the overall value creation processes. Managing logistics processes along the supply chain and removing economic barriers such as incentive misalignment are the concerns of complementarity. Milgrom and Roberts (1990) initiate the concept of complementarity between interdependent activities and modern manufacturing. They argue that modern manufacturing does not involve small adjustments made independently but rather substantial and coordinated changes in the overall business processes from material procurement to product delivery. Complementarities among those activities lead to increases in mutual values such as increased sales and lowered logistics costs that can be shared by the participating members. Similarly, complementarity of the

logistics processes across the supply chain leads to substantial benefit for all members. When chain members synchronise decision making about value creation to ensure a seamless flow of goods and services and coordinate the benefit sharing associated with logistics improvement, they are likely to shape complementarity. Coherency refers to the degree of consistency of reasoning across organisational borders through diffusing common understanding. To meet the requirements for coherency, the chain members need to share information and knowledge that can be used to make sense of the process interdependencies and to manage uncertainties along the supply chain. Lissack and Roos (2001) verify the fact that organisations must find ways to make sense about their identity in a turbulent environment in order to build a coherent viewpoint and actions. Coherency can be seen as the alignment of context, viewpoint, purpose and actions to attain the shared goal through information sharing and collective learning. For example, when knowledge of market and technology is diffused in meaningful ways, the chain members are able to coordinate the product development processes to launch innovative products on time. The second dimension is the focus of coordination on either operational or organisational linkages. Linkages exist when activities taken by one chain member affect activities or outputs of another chain member. Therefore, linkages are the interfaces between firms where chain members need to coordinate their joint decisions. Operational linkages focus on the integration of interdependent processes and information flows that provide ways for partners to carry out logistics planning and day-to-day transactions. Recognising operational linkages allows the chain members to contribute to, and become involved in, the operational decision making. Organisational linkages consist of interconnected actors who perceive and argue about their own interests in carrying out collective action. Appreciating organisational linkages allows them to understand partnership activities and bargaining realities. Both of these linkages provide the groundwork for successful coordination. As shown in Figure 1, four coordination modes can be identified based on the two dimensions of coordination: (1) logistics synchronisation; (2) information sharing; (3) incentive alignment; and (4) collective learning. Each coordination mode has different contexts and emphasises different cognitive processes. The coordination of logistics synchronisation is responsible for ensuring alignment between logistics process activities to deliver products and services to fulfil customer needs and wants (Fisher, 1997). The coordination of information sharing attempts to realise the coherency of information, while actors cooperate with one another and follow rules of diffusing information across borders (Lee, 2000). Incentive alignment attempts

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to provide various mechanisms to distribute benefits and risks associated with logistics functions to motivate independent actors in order to achieve supply chain profitability (Lee, 2000; Simatupang and Sridharan, 2002). The coordination of collective learning deals with how to tackle the coherency problem of initiation and diffusion of knowledge across borders (Senge, 1990; Sawhney and Prandelli, 2000). The following sections discuss strategies of each coordination mode and expose insights from real world applications. Logistics synchronisation Logistics synchronisation means recognising and concerting improvement initiatives that significantly contribute to value creation in the acquisition, consumption and disposition of products and services in today’s rapidly changing markets. This typical coordination refers to the market mediation function of a supply chain that aims to match the variety of products reaching the marketplace with customer needs and wants (Fisher, 1997). Understanding customer demand and concerting inventory management, facility and transportation between partners help to realise dramatic improvements in the forms of rapid response to customer requirements, lowered inventory costs, improved product availability, minimum obsolescence and minimum variance of any unexpected events such as forecasting errors and delays that disrupt chain performance (Lambert et al., 1998). Logistics synchronisation also assists participating members to resolve role conflict, so each member can perform specific tasks and assume certain responsibility to ensure the attainment of chain profitability. The real challenges include focusing on core activities that provide real value to the customer, and subordinating other supporting activities to ensure the value creation process. Analysing the value creation process across the supply chain can provide a road-map for strategic initiatives that clarify specific roles for each participating member. Govindarajan and Gupta (2001) suggest three interrelated areas to ensure logistics synchronisation: (1) customer definition; (2) customer value identification; and (3) value creation process design. If the chain members can dramatically redefine the customer base, reinvent the concept of customer value, and redesign the end-to-end value chain architecture, then they are likely to create competitive advantage from the customer’s viewpoint. Several strategies of logistics synchronisation have been developed based on the principles of logistics management – such as collaborative logistics processes, operational flexibility, logistics postponement and collaborative transportation. The collaborative logistics processes refer to joint decision making such as assortment planning, joint forecasting, joint inventory management and replenishment (Simchi-Levi et al., 1999). Operational

flexibility aims to provide various demand response strategies by considering supply capacity such as make-to-forecast, locate-to-order, amend-to-order and build-to-order (BTO) (Holweg and Pil, 2001). Logistics postponement refers to delaying product differentiation to the latest possible time until customer orders are received (van Hoek, 2001). Collaborative transportation attempts to employ the third-party logistics providers to accomplish in-bound and outbound logistics. Direct shipping, warehousing, and cross-docking are three distinct out-bound strategies to deliver goods to end customers (Simchi-Levi et al., 1999). Employing those strategies often depends on specific industry characteristics. For example, the fashion industry often faces high demand uncertainty, short selling period, long procurement lead-time, high variety of customer preferences and mark-down risk of product obsolescence. Collaborative forecasting, inventory management and rapid response fit the requirements of the apparel industry (Fisher, 1997). Benetton, Nike and Dell are examples from the real world that show how supply chains are synchronised to create customer value. Benetton applies the postponement strategy to produce a large variety of coloured garments in a short selling season by developing a production process in which the garment is dyed after being knitted (Dapiran, 1992). Traditionally, thread was dyed and then the garment was knitted. The problem with this sequence is that the knitting is slow and thereby requires a high stock of finished garments to fulfil standard customer service. Benetton uses postponement to make better decisions about colours that reflect the market trend. Since the cost of the production process with postponement is more expensive, Benetton still operates the traditional process to produce items with low demand uncertainty. Nike has reaped profitability by concentrating on its strengths in designing and marketing high-tech and fashionable footwear for sports and fitness (Tully, 1993). Nike established one small manufacturer that makes some sneaker parts. Other supporting activities such as footwear production are subcontracted to suppliers in Taiwan, South Korea and other Asian countries. Synchronising its speciality and its suppliers’ capabilities allows Nike to build-in flexibility to keep up with the changing tastes of customers. Dell prospers by focusing on two aspects of the computer business: direct sales and build-to-order production (Magretta, 1998). It sells personal computers directly to customers and thereby eliminates the reseller’s mark-up and the costs and risks of large inventories of finished products. Build-to-order production means that a product is customised and manufactured according to specific customer request. Dell owns no plants but leases two small factories to assemble computers from outsourced parts. Internet-based technology is used for just-in-time ordering and to share daily schedules with the suppliers. The suppliers utilise shared data to plan and adjust procurement and production in order to deliver parts and components to the factory only when they are needed for assembly. Dell’s strategies of direct sales and build-to-order production have proven successful in minimising inventory and bringing new products to

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market quickly, enabling it to increase market share and achieve high returns on investment. Information sharing The coordination of information sharing attempts to make relevant, accurate and timely information available to the decision-makers (Lee, 2000). Chain members often have different private information, which is often not shared with others – thus asymmetric information is inherent in supply chains (Simatupang and Sridharan, 2002). For example, the retailer has better projected customer demand compared with the manufacturer (Lee et al., 1997). The manufacturer has better information about products, delivery lead-times and production capacity than the retailer. Traditional communication between the manufacturer and the retailer is made through periodic ordering in large batches. This ordering behaviour distorts original demand information, because demand variance becomes larger, as order data percolate to the upstream members. The idea is, then, to share demand information with the upstream members. The visibility of demand data and inventory at the point of sales allows the upstream members to update forecasts and ensure continuous replenishment of the products. Information technology (IT) such as the Internet, intranet, software application packages and decision support systems can be applied to facilitate information sharing with customers and partners, and optimisation of supply chain performance. IT applications for customer orientation include informational facility (i.e. online information about custom and standard products, a comprehensive, frequently asked questions section, contact person, return policy, etc.) and transactional facility (e.g. online order submission, order modification, order notification, order tracking, security of online payment and technical assistance). IT applications for partner orientation enable participating members to gain visibility about customer demand (e.g. customer profiles, products, prices, locations, quantity and demand patterns), resource planning (e.g. forecasting, shipping schedules, inventory, capacity, location, lead-times and products), and contract status such as price, automatic ordering, order-status tracking, invoicing, auction, incentive score-board and electronic payment. This level of information sharing acts as the glue that integrates all chain members. IT, for instance, enables chain members to monitor the order fulfilment process from manufacturing, shipping and order receiving. IT applications for optimisation provide analysis of supply chain status and various intelligent recommendations for operational and tactical decisions (Simchi-Levi et al., 1999). The coordination of collection, processing and dissemination of information among the chain members must be accompanied by the readiness of the chain members to use shared information in the execution of logistics tasks that contribute to operational and financial performance. For instance, the manufacturer needs to reengineer its operation for late-phase differentiation to take advantage of receiving real-time customer orders (Simchi-Levi et al., 1999).

The reason is that information sharing provides more mutual gains from the replacement of physical costs with information costs and less from reductions of exchange costs of information (Lee and Whang, 2001). The physical costs include the expenses associated with the conversion, transportation and storage of goods from material sources to end customers. The movement of physical goods also runs various risks such as inventory costs, obsolescence, damage, loss and spoilage. Therefore, the use of information sharing to substitute physical processes creates more benefits. To achieve success, the chain members need to have logistics synchronisation that consists of formal processes to improve customer value and profitability in response to shared information. Several examples from the real world testify that information sharing provides necessary visibility of the global scope in order to enable better decisions to be made in order to maximise the total profit. Wal-Mart considers the broader scope – including supplier information – when trying to set the optimal inventory levels. The firm requires information that includes demand patterns, inventory-carrying costs, ordering costs, costs of stocking-out, and the upstream suppliers’ lead-times and variability. Check-out scanners are used to capture detailed data of demand patterns and inventory-on-hand at the points of sale. Collecting detailed data of demand patterns, margins and supplier information assists Wal-Mart to determine the optimal stocking quantity at each of its stores and to decide when to reorder products from the suppliers. Dell substitutes information for inventory and delivers a finished product only when it has a real demand from an end customer (Schonfeld, 1998). Dell provides visibility of customer orders, inventory levels and replenishment needs regularly to its component suppliers. Those suppliers are able to see what parts Dell needs today and what parts will be needed in the coming week. All chain members reap the benefits of information sharing. The suppliers can increase the accuracy of their forecasts, cut shipping lead-times and reduce inventory on-hand. Dell is able to create excellent order-to-delivery time for its direct customers. Benetton electronically receives orders and sales information from hundreds of company agents located around the world (Dapiran, 1992; Camuffo et al., 2001). By tying its logistics and manufacturing systems in with its suppliers and company agents, Benetton can achieve both the best cycle times in the industry and near-perfect customer service levels. It has also reduced costs from lost sales and mark-downs. Levi Strauss, another fashion firm, also capitalises on information sharing and computerised fabric cutting to customise a variety of jeans for different customers (Schonfeld, 1998). With the increase in customisation, Levi Strauss can charge premium prices for personally fitted jeans. Incentive alignment Incentives define how decision-makers are to be rewarded or penalised for the decisions they make. Existing incentives influence individual member

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behaviour and its interaction with other partners. Conflict of interest is likely to occur when the existing incentives lead to actions that maximise personal gain but often reduce the total profitability (Clemons and Row, 1993). Traditional incentive schemes are often based on local costs and short-term concessions that attempt to fill the gap in inventory between chain members. The perverse incentives, such as local inventory cost, transportation cost and lot-size-based quantity discounts, often do not support the value creation process of improving customer services, because those incentives are tied to the action of reducing the internal costs of one stage of the supply chain. This local optimisation often sacrifices the total profit (Simchi-Levi et al., 1999). For example, the manufacturer rewards the retailer based on the number of units or lot-size purchased over a set period. The retailer takes advantage of this quantity discount by loading up inventory. Then it sells the product later at the regular price (forward-buying) or sells it to other retailers for profit (diversion) (Clemons and Row, 1993). One way to resolve such a conflict of interests is to offer incentive schemes linked to the global performance that reflects both value creation for the customers and profitability (Simatupang and Sridharan, 2002). This coordination mode is called incentive alignment that induces the partner behaviour, which is consistent with customer focus and total profit (Lee, 2000). Firms that share complementarity of business process will attempt to resolve incentive misalignment in mutually satisfying ways based on a relational contract especially to manage risks associated with demand uncertainty. A relational contract specifies parameters such as price, quantity, time and quality that guide how a buyer places orders and a seller fulfils orders. Examples come in many forms including relationship pricing (i.e. volumebased quantity discounts, functional allowances and promotional allowances); a subsidy for products returned, consignment and price protection; capacity reservation such as back-up agreements and quantity flexibility contracts; tying bonuses to desirable performance, such as minimising forecasting errors, sales-through, customer service, speed of delivery and product availability; stabilising the transfer price, such as an every-day-low-price (EDLP) and everyday-low-cost (EDLC), and gain-sharing schemes (Stern et al., 1996; Simchi-Levi et al., 1999) . Examples from the practical world suggest that incentive alignment can motivate chain members to satisfy customer needs and increase their total profit. Benetton uses quantity flexibility contracts that allow its retailers to change the order quantity of the coloured kit garments after observing early demand (Dapiran, 1992). The retailers are required to commit a number of units several months before the start of the season. They can increase and lower the order quantity for each colour by a certain percentage, but not the aggregate quantity of the product, because aggregate forecasts are more accurate compared with forecasts for individual colours. All parties reap benefits from the quantity flexibility contract. As the demand for fashion apparel is often uncertain several months before the selling season, the retailers can take

advantage of updated demand forecasts and adjust buying decisions closer to, or during, the selling season. Order commitments from the retailers allow Benetton to apply tailored sourcing that substantially reduces costs. Benetton subcontracts the committed portions with low demand uncertainty to low cost sources that have long lead-times of several months. When the updated demand forecast exceeds expectation, Benetton can ensure product availability at the retailer stores by subcontracting the reordering portion to flexible sources that have short lead-times of several days. Dell encourages its parts suppliers to deliver in small batches to increase inventory speed in compensating with higher order commitment and cash receivables (Magretta, 1998). Quantum Chemical Company uses gain-sharing contracts with its third-party logistics providers (Lambert et al., 1998). Instead of using a fixed management fee or a cost-plus basis, Quantum offers an incentive scheme tied to surpassing expectations in order accuracy, on-time delivery, inventory accuracy, eliminating customer complaints and reporting timeliness. This scheme motivates the logistics providers to guarantee service and cost savings. Suppliers of computer hardware offer a subsidy on price protection, mid-life returns and end-of-life returns to motivate their resellers to maintain a high level of product availability (Campbell and Pereira, 1998). This subsidy is given to compensate for the sharp decline in the retail price and technology over the life cycle of the computer hardware due to rapid innovation and new product introductions. Collective learning The coordination of collective learning deals with how to tackle the coherency problem of initiation and diffusion of knowledge across organisational borders (Sawhney and Prandelli, 2000). Special emphasis is placed on practical learning from one another for understanding and creating tacit capability in implementing particular logistics improvement initiatives. Mastering tacit capability involves intensive dialogue, experimentation and discussion of data, information and knowledge to attain collective sense making (Senge, 1990). The objective of the coordination of collective learning is to extend each partner’s capability that is useful for accomplishing ongoing improvement. The coordination of collective learning not only consists of analysis and synthesis of ongoing improvement, but also includes how to ensure the buy-in of key collaborators in the implementation phase. The key collaborators must embrace the necessary changes to implement the solution. The initiator of a breakthrough solution should be able to overcome the layers of resistance to change that consist of disagreement about the nature of the problem, disagreement about the direction of the solution, disagreement as to whether the solution will result in the desired effects that are necessary for the organisation, disagreement as to whether or not the solution has disastrous side-effects, disagreement that the solution is viable in the environment, and unverbalised fear (Smith, 2000). This structural approach in achieving buy-in paves the way for creating, adopting and diffusing useful knowledge for

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building commitment to change. There are various means of transferring knowledge to support this change process, including personal communication (meeting, discussing by telephone, e-mail, etc.), codified communication (reports, drawings, etc.), joint training and apprenticeship. Several examples from real world application show that collective learning can be used to improve the capabilities of managing the supply chain. Close customer relationships allow Dell to understand and satisfy their needs (Magretta, 1998). Dell segments its customers into categories such as consumer, medium business, large corporate, government and education. With direct contact, it is possible to gather credible data about customer needs and buying trends. Each segment has its own sales, marketing and technical support teams. This method allows Dell to tailor marketing, sales and services strategies to the unique requirements of each of those types of customers. Through collective learning, Dell is able to extend the skill of demand forecasting that guides the design of product and ordering flows from the customers to the suppliers. Sport Obermeyer, a manufacturer of fashion ski-wear, constantly experiences the risks of demand uncertainty such as stock-outs of popular styles during the selling season and left-over stock of the duds at the end of the season (Fisher, 1997). Accurate response was adopted to coordinate three strategies consisting of reducing uncertainty (e.g. collecting additional data on early sales), avoiding uncertainty by cutting lead-time, and hedging against residual uncertainty such as maintaining buffers of stock. After acquiring the skill of accurate response, Sport Obermeyer was able to improve demand forecast, shorten the procurement lead-time, and discover a means of selecting which styles to make early. This new capability assisted Sport Obermeyer to increase profit and improve product availability. Benetton and its retailers have jointly learned to adopt sophisticated marketing techniques, such as in-store testing and monitoring market trends in styles, sizes and colours to obtain a better understanding of customer preferences and expectations (Camuffo et al., 2001). Benetton uses the skill of capturing customers’ last-minute needs to design and offer an appreciated variety of fashion goods to the right customers. Towards the knowledge of coordination The knowledge of coordination is defined as an explicit understanding about key drivers of coordination modes that affect supply chain performance. Key drivers refer to a number of solutions or interventions in a specific coordination mode to improve supply chain performance. For example, key drivers of logistics synchronisation, such as reducing uncertainty, reducing variability and lead time reduction, have dramatic impacts in reducing inventory costs and increasing the level of customer service. The chain members need to articulate their understanding about the principles of coordination modes and make it available to others. This explicit understanding allows them to anticipate subtle interactions and unintended consequences. A web of causeand-effect, for example, can be presented with the use of a rich picture

(Checkland, 1999), cognitive maps (Eden and Ackermann, 1998), systems thinking (Senge, 1990), and thinking process (Goldratt, 1994). Each method of eliciting and displaying explicit understandings has its own strengths and limitations. Two related concepts are used to verify the knowledge of coordination in the supply chain: the individual contribution of coordination mode in attaining supply chain integration and the use of the drivers of coordination modes to attain operational excellence. Figure 2 depicts the conceptual framework of the knowledge of coordination used to scrutinise the contribution of each coordination mode in order to achieve an integrated supply chain. The recursive interplay between an integrated supply chain and the four modes of coordination generates four loops of contributions. The first loop consists of the value creation process that is designed to improve both individual and overall supply chain performance through implementing improvement initiatives. Ongoing initiatives offer the focus of improvement that directly impacts on supply chain profitability. Participating firms coordinate both the process and outputs of logistics activity to match supply and demand (Fisher, 1997). An integrated supply chain is expected to result in improved customer service levels, lowered costs and increased sales. In turn, improved performance resulting from coordinated actions augments the level of collaboration to enhance logistics synchronisation. The second loop is concerned with facilitation that enables participating members to have visibility of customer demand, product movement and performance metrics. Shared information provides visibility enabling consideration of a global scope to make better decisions that optimise supply chain performance. Thus, visibility assists chain members to integrate logistics processes that can be optimised to increase responsiveness to changing market conditions. As visibility intensifies among chain members, it generates the

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Figure 2. The recursive interplay between an integrated supply chain and the four coordination modes

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Figure 3. Key drivers of coordination modes leading to supply chain performance

necessity to reveal more accurate and timely private information such as sales data, costs-related data and processes-related data. Third, an incentive scheme is often offered before the mutual benefits are realised. As shown in the motivation loop of Figure 2, an incentive scheme is designed to motivate the chain members to align decisions and actions with supply chain profitability. A certain level of chain performance is expected to be realised that leads to mutual benefits. Some, or all, of the mutual benefits which result from better coordination can be distributed in more incentives. Higher gains from incentives would influence the behaviour of decision makers to improve chain performance. This process will continue to shape a loop of motivation. Finally, the capability loop intends both to combine fragmented skills and to enable chain members to acquire new skills from one another. Collective learning can be effective in enhancing capability to carry out improvement initiatives. However, collective learning is a give-and-take proposition. Besides closing its own skill gaps, a partner must contribute unique capabilities to maintain influence in the supply chain. A coordinated supply chain allows participating members to develop collective capability. In turn, this collective capability offers new understanding about market opportunities. As a result of collective learning, trust between parties begins to grow and this leads to an increase in confidence for further innovation of performance improvement. The knowledge of coordination can be used to expose the interaction of key drivers of coordination modes affecting supply chain performance. A simple cause-and-effect diagram in Figure 3 shows the fact that the drivers of coordination modes lead to the realisation of operational and financial performance. For example, analysis of customer needs may reveal that product availability is highly valued by customers. Thus, improved product availability leads to customer loyalty, which, in turn, leads to increased sales. Once the framework has been applied to understand the interaction of key drivers among the coordination modes and their impacts on supply chain performance, the focus and leverage for productive change can be identified. To illustrate, logistics synchronisation specifies what are the most effective initiatives, who will carry out optimisation, and the measures of success. This coordination mode interacts with other types of coordination modes. The coordination of collective learning uses the contents and context of logistics synchronisation as learning subjects. Logistics synchronisation also determines information needs that guide information sharing and the basis of

measures for incentive alignment. Similarly, other coordination modes also contribute to the act of logistics synchronisation. Incentive alignment motivates the chain members to optimise the logistics processes by splitting the savings resulting from the coordinated efforts. Collective learning assists chain members to catch up with the capabilities required to create logistics innovations. Information sharing eliminates lack of visibility about product movement and logistics processes. To sum up, an understanding of the interaction of the drivers among coordination modes is important for devising a means of harmonising them in an attempt to attain superior supply chain performance. The experience of Dell provides an example of how to use the knowledge of coordination to improve supply chain performance (Govindarajan and Gupta, 2001; Holweg and Pil, 2001). Dell coordinates information sharing, incentive alignment and collective learning to focus on direct selling and build-to-order. Direct selling allows Dell to have better understanding about customer needs and wants. This knowledge can be used to improve the accuracy of demand forecasts. Dell also shares demand information and daily schedules with its component suppliers. Its suppliers use this shared information to improve their internal operations, so as to be capable of providing just-in-time delivery. Just-intime delivery significantly reduces the level of unnecessary inventory and increases cash conversion time. Just-in-time production also means delivering more products with the latest technology and customised configuration to end customers. Satisfied customers provide cash receivables and loyalty to Dell. The knowledge of coordination about build-to-order, visibility of demand information, inventory speed, and supplier and customer relationships demonstrates how Dell and its suppliers can reap mutual benefits, such as customer satisfaction, profitability and high market share. Discussion and future research Dealing with interdependency and handling uncertainty are the two most frequent objectives of research that aims to integrate independent players in order to achieve the collective goal. The interesting question is whether phenomena of cognition at the individual level can contribute to strategies at the global level (i.e. a total system). This integration effort requires different modes as means for working together and inviting people from the entire system to participate in collective enquiry. Four types of coordination modes have been identified in this study: (1) logistics synchronisation; (2) information sharing; (3) incentive alignment; and (4) collective learning. Each coordination mode has its key drivers used to leverage performance. The knowledge of coordination is proposed as a collective understanding about the

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drivers of coordination modes that can be used to improve supply chain profitability. The contribution of the conceptual framework to the current research is to address the basic challenges of mutuality in supply chain management. The primary challenge is to overcome the risk that supply chain members are not all focused on improvement initiatives. The secondary challenge is to mitigate the risk that individual members do not share their private information in an optimum fashion with their partners. The tertiary challenge deals with alleviating the lack of motivation for individual members to align local decisions with the mutual goal. Furthermore, it is often found that participating members either do not reveal the knowledge they have or they choose to make use of it for their own advantage. The knowledge of coordination is akin to what Kogut and Zander (1992) have called ‘‘combinative capacity’’, that is the ability to generate innovative combinations based on knowledge and capabilities distributed throughout the supply chain network. Thus, the knowledge of coordination offers the opportunity to pave the way to understanding how the relational view is able to create conditions for attaining a common goal among independent parties. Several key issues of the knowledge of coordination are open areas for future research. An empirical study is required to examine the impact of tying together key drivers of coordination modes on supply chain performance. How to capture arguments and propositions of key managers about main drivers of improvement in a supply chain is a critical issue, because an explicit understanding shows the relationship between collective action, commonly held beliefs and supply chain performance. Illustrating this understanding by way of causal maps creates an opportunity to identify obstacles and devise proper interventions. An explorative study is necessary to examine the real value of the knowledge of coordination in the practical world. Since the knowledge of coordination in real life is embedded in the mental models of the participants who are involved in the partnership, the case study method seems suitable to elicit excellent practices in the real world implementation (Yin, 1994). Covington (2000) and Akkermans et al. (1999) provide two examples of using the case study method to capture the mental models of decision-makers in the specific supply chain. Covington (2000) conducted a case study on how to resolve supply chain discontent in the apparel industry in order to improve the chain’s performance for the good of all involved. Akkermans et al. (1999) elicited mental models from various experts about vicious cycles frustrating the implementation of effective international supply chain management. Several issues of each coordination mode also call for further exploration. Table I shows several key questions for future research. Empirical study of the value of logistics synchronisation would be useful to identify and focus on the most effective initiatives for value creation. Further research is required to develop coordination methods of matching different segments of customer needs and wants and tailored improvement initiatives. Those coordination

Effectively creating information visibility for logistics planning and execution Ensuring relevant, accurate and timely data

Focus on motivating individual members

Effectively co-discovering and developing new capabilities

Information sharing

Incentive alignment

Collective learning

How does one define and measure the value of information sharing in substituting information for physical processes? What types of information will be captured and how is it going to be used to make better decisions? How does one capitalise on a decision support system and the Internet to mitigate demand and supply uncertainties?

How does one tailor the initiatives to match with different segments of customer values? How does one focus on value creation and subordinate other supporting activities? What are the common metrics that one can use to evaluate mutual success?

Applying new capabilities to accelerate improvement and overcoming resistance to change

How does one use collective learning to accelerate performance improvement? How does one define and measure the progress of collective learning? How does one resolve resistance to change?

Negotiating successfully for Can logistics synchronisation be used as a basis to offer mutual gains and risks incentives for chain members? How does one design a commercial incentive that allows independent members to create customer value? How does one predict and measure the impact of incentive alignment on the actual behaviour?

Substituting information for physical processes. Mitigating demand uncertainty Using technology to monitor supply chain status and provide intelligent response

Jointly implementing the Maintaining focus, most effective initiatives for subordinating other value creation supporting activities, and ensuring successful initiatives

Logistics synchronisation

Attributes of future research Practical concerns Research questions

Agreeing on joint efforts

Coordination mode

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Table I. Key research questions for further research

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methods should be able to take advantage of scale economies and rapid response at different stages along the supply chain to compensate for risks associated with demand uncertainty and inventory obsolescence. Common metrics also need to be defined to guide the implementation process of selected initiatives on creating customer value. An important area of future research into information sharing deals with how to define and measure the real value of substituting information for physical processes (Lee and Whang, 2001). For example, developing a mechanism to both use and share updated demand information to direct final shipments to customers provides the possibility of reducing inventory costs and mark-downs. Incentive alignment is an active stream of research (Clemons and Row, 1993). Further research is required to properly design incentive schemes, different from those of traditional centralised planning, which need to be customised to the newly emerging kind of supply chain partnerships. For example, the computation of equitable mechanism for sharing the increase in profit or cost reduction is relatively new and needs further development (Lee et al., 1997). Moreover, logistics synchronisation requires independent partners that separately make and carry out different levels of tactical and operational decisions. Future research is needed to develop different incentive schemes that can be offered to the partners based on their performance to make and carry out decisions at specific levels. Capacity reservation, for instance, is a useful means of aligning tactical decision with the speed of delivery to replenish mid-season fashion goods. Finally, further research is required on how to use collective learning to accelerate supply chain improvement, how to define and measure the progress of collective learning, and how to overcome resistance to change. Several suggestions for measuring this progress include the learning speed (i.e. learning curve) to acquire a new capability, the intensity of capability improvement (e.g. assortment planning, demand forecasting and accurate response), and the scope of learning application (e.g. improved customer service level, reduced lead-times and lowered logistics costs). Conclusions Different coordination modes are required to synchronise interdependent activities, ensure visibility to match supply and demand, align actions and decision with the chain profitability, and acquire new capabilities from joint efforts. Based on dimensions of the mutuality and the focus of coordination, four modes of coordination have been identified, namely logistics synchronisation, information sharing, incentive alignment, and collective learning. The four coordination modes are simultaneously required to help participating members to advance supply chain profitability. Armed with this concept, all players will know where there is a need for matching processes, information, incentives and capabilities, so that they can carry out their valueadded tasks in support of the larger vision. The conceptual framework of the knowledge of coordination has been presented to help practitioners and scholars understand the interplay among

key drivers of coordination modes that have significant impact on supply chain performance. The knowledge of coordination is useful for bringing people together to inquire into the key drivers of coordination modes, identify obstacles and engage in joint problem solving. It is hoped that this article brings insights of how to fulfil the basic proposition of the supply chain initiative – namely, that the coordinated efforts provide larger benefits than the individual firm can attain alone. References Akkermans, H., Bogerd, P. and Vos, B. (1999), ‘‘Virtuous and vicious cycles on the road towards international supply chain management’’, International Journal of Operations & Production Management, Vol. 19 Nos 5/6, pp. 565-81. Campbell, A.J. (1997), ‘‘What affects expectations of mutuality in business relationships?’’, Journal of Marketing Theory and Practice, Vol. 5 No. 4, pp. 1-11. Campbell, S. and Pereira, P. (1998), ‘‘Top two distributors get OEM parts pricing’’, Computer Reseller News, No. 813, 26 October, pp. 1-2. Camuffo, A., Romano, P. and Vinelli, A. (2001), ‘‘Back to the future: Benetton transforms its global network’’, Sloan Management Review, Vol. 43 No. 1, pp. 46-52. Checkland, P. (1999), Systems Thinking, Systems Practice: Includes a 30-year Retrospective, Wiley, Chichester. Clemons, E.K. and Row, M.C. (1993), ‘‘Information, power, and control of the distribution channel’’, Chief Executive, Vol. 85, May, pp. 64-7. Covington, J.W. (2000), Tough Fabric: The Domestic Apparel and Textile Chain Regain Market Share, Chesapeake Consulting, Severna Park, MD. Dapiran, P. (1992), ‘‘Benetton – global logistics in action’’, International Journal of Physical Distribution & Logistics Management, Vol. 22 No. 6, pp. 7-11. Dyer, J.H. and Singh, H. (1998), ‘‘The relational view: cooperative strategy and sources of interorganizational competitive advantage’’, Academy of Management Review, Vol. 23 No. 4, pp. 660-79. Eden, C. and Ackermann, F. (1998), Making Strategy: The Journey of Strategic Management, Saga, London. Fisher, M.L. (1997), ‘‘What is the right supply chain for your product?’’, Harvard Business Review, Vol. 75 No. 2, pp. 105-16. Goldratt, E.M. (1994), It’s Not Luck, North River Press, Great Barrington, MA. Govindarajan, V. and Gupta, A.K. (2001), ‘‘Strategic innovation: a conceptual road-map’’, Business Horizons, Vol. 44 No. 4, pp. 3-12. Holweg, M. and Pil, F.K. (2001), ‘‘Successful build-to-order strategies start with the customer’’, Sloan Management Review, Vol. 43 No. 1, pp. 74-83. Kogut, B. and Zander, U. (1992), ‘‘Knowledge of the firm, combinative capabilities, and the replication of technology’’, Organization Science, Vol. 3 No. 3, pp. 383-97. Konijnendijk, P.A. (1994), ‘‘Coordinating marketing and manufacturing in ETO companies’’, International Journal of Production Economics, Vol. 37 No. 1, pp. 19-26. Lambert, D.M., Stock, J.R. and Ellram, L.M. (1998), Fundamentals of Logistics Management, Irwin/McGraw-Hill, Boston, MA. Lee, H.L. (2000), ‘‘Creating value through supply chain integration’’, Supply Chain Management Review, Vol. 4 No. 4, pp. 30-6.

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