Internet Strategy: The Road to Web Services Solutions

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Internet Strategy: The Road to Web Services Solutions Matthew W. Guah Warwick University, UK Wendy L. Currie Warwick University, UK

IRM Press Publisher of innovative scholarly and professional information technology titles in the cyberage

Hershey • London • Melbourne • Singapore

ii Acquisitions Editor: Development Editor: Senior Managing Editor: Managing Editor: Copy Editor: Typesetter: Cover Design: Printed at:

Renée Davies Kristin Roth Amanda Appicello Jennifer Neidig Lisa Tosheff Cindy Consonery Joyce Li Integrated Book Technology

Published in the United States of America by IRM Press (an imprint of Idea Group Inc.) 701 E. Chocolate Avenue, Suite 200 Hershey PA 17033-1240 Tel: 717-533-8845 Fax: 717-533-8661 E-mail: [email protected] Web site: http://www.irm-press.com and in the United Kingdom by IRM Press (an imprint of Idea Group Inc.) 3 Henrietta Street Covent Garden London WC2E 8LU Tel: 44 20 7240 0856 Fax: 44 20 7379 3313 Web site: http://www.eurospan.co.uk Copyright © 2006 by Idea Group Inc. All rights reserved. No part of this book may be reproduced, stored or distributed in any form or by any means, electronic or mechanical, including photocopying, without written permission from the publisher. Product or company names used in this book are for identification purposes only. Inclusion of the names of the products or companies does not indicate a claim of ownership by IGI of the trademark or registered trademark. Library of Congress Cataloging-in-Publication Data Internet strategy : the road to web services solutions / Matthew W. Guah and Wendy L. Currie, editors. p. cm. Summary: "This book tells you how to create, execute and evolve a customer-centric approach for your Internet-based management strategy"--Provided by publisher. Includes bibliographical references and index. ISBN 1-59140-763-X (hc) -- ISBN 1-59140-764-8 (sc) -- ISBN 1-59140-765-6 (ebook) 1. Business enterprises--Computer networks--Management. 2. Information technology--Management. 3. Web services--Management. I. Guah, Matthew W., 1963- II. Currie, Wendy, 1960HD30.37.I573 2006 004.6'068--dc22 2005013815 British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. All work contributed to this book is new, previously-unpublished material. Each chapter is assigned to at least 2-3 expert reviewers and is subject to a blind, peer review by these reviewers. The views expressed in this book are those of the authors, but not necessarily of the publisher.

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Internet Strategy: The Road to Web Services Solutions

Table of Contents

Preface .................................................................................................. vi Introduction ......................................................................................... viii Section I: Strategic Approaches to Internet for Organizations Chapter I. Application Service Provision ............................................. 1 Matthew W. Guah, Warwick University, UK Chapter II. Web Services ...................................................................... 8 Matthew W. Guah, Warwick University, UK Chapter III. Concerns ......................................................................... 17 Matthew W. Guah, Warwick University, UK Chapter IV. Recommendations ........................................................... 40 Matthew W. Guah, Warwick University, UK Section II: Case Studies Chapter V. Considering the Impact of Broadband on the Growth and Development of B2C Electronic Commerce ............................... 48 Jyoti Choudrie, Brunel University, UK Yogesh Kumar Dwivedi, Brunel University, UK

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Chapter VI. A Theoretical Approach to Evaluate Online and Traditional Trading on the NASDAQ Stock Exchange ..................... 67 Haroun Alryalat, Brunel University, UK Yogesh Kumar Dwivedi, Brunel University, UK Jasna Kuljis, Brunel University, UK Ray J. Paul, Brunel University, UK Chapter VII. Adaptive Collaborative Work and XML Web Services: Benefits of Application into Information Infrastructure and Human Resources ............................................................................................ 86 Mayumi Hori, Hakuoh University, Japan Masakazu Ohashi, Chuo University, Japan Chapter VIII. Helping Users, Mentally: A Lesson Learned from Hypertext and Web Navigation ........................................................ 101 Paulus Insap Santosa, National University of Singapore, Singapore Chapter IX. Reducing the Costs of Doing Business: Human Costs and Social Issues of IS/IT Strategies ........................ 135 Souad Mohammed, UK Chapter X. From ASP to Web Services: Identifying Key Performance Areas and Indicators for Healthcare .......................... 149 Matthew W. Guah, Warwick University, UK Wendy L. Currie, Warwick University, UK Section III: Thriving or Not Chapter XI. Future Trends ................................................................ 178 Matthew W. Guah, Warwick University, UK Chapter XII. A 21st-Century Tool for Intelligent Enterprises ......... 185 Mathew W. Guah, Warwick University, UK Chapter XIII. Conclusions ................................................................ 227 Matthew W. Guah, Warwick University, UK

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Glossary ............................................................................................. 259 About the Authors .............................................................................. 313 Index ................................................................................................... 318

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Preface

This book addresses the business issues and management concerns in relations to Internet strategies of organisations in the 21st century. By so doing, the editors hope this book will point medium- and large-sized businesses in the proper direction, to manage emerging technologies, such as Web services resources and strategies to their competitive advantage. With the phenomenon of Web services in its infancy, the authors have drawn from works of IS pioneers Markus, Porter, Checkland, and others. Their intellectual contributions, plus findings from research work by both new and experienced academics in Europe, USA, and Asia, provide a framework for discussion. Web services business model was borne out of the Application Service Provision (ASP) business model. ASP delivers personal productivity software and professional support systems, assisting an intelligent enterprise in processing information, solving business problems, developing new products, and creating new knowledge. The need to exploit Web services capabilities to preserve and enhance organisational knowledge is clearly defined by this book. This is not a textbook, but it encompasses all the practical areas in which an information system strategist functions, and also those of IT and business managers. The following criteria that are being used as the foundation for the best of textbooks on information systems are all explored in this book. They are Internet strategies and management concepts, the business and economic of information systems environment, opportunities and information about ASP and Web services, sociological aspects of Web services buyer behaviour, psychological aspects that influence consumption of Web services applications, strategic tools and tactics, market segmentation, Web services product life

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cycles and categories, commercialization, distribution, promotion, communications, organization, analysis, application integration, future aspirations of service providers, ethical issues and much more. The aim of this book is to disclose the motives and mechanisms of Web services as it is developing and changing as the 21st century unfolds. Internet strategies cannot be described intelligently without exploring some fundamental features and problems of society as a whole. That many IT managers in small and medium-size businesses are either directionless, like a boat without a rudder, or are drowning beneath waves of Internet strategies management theories that pass over their heads, and others that persist in spite of the fact that they remain unproven, may well be a reflection of the draft of general economic slowdown. An IT manager or Information Systems strategist or Business Operations manager will find that this book: • • •

Balances systems theory and proven Internet management frameworks which are illustrated with practical cases; Explains the strategic management of Internet policies in terms of capabilities of IT in business; and Provides a good guide to those who need to discover how to apply Internet for strategic advantage of an organization.

Matthew W. Guah & Wendy L. Currie Leamington, Warwickshire, UK June 2005

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Introduction

This book is about strategic direction of Internet strategies and the management of strategic change to emerging technologies, in general, and Web services, in particular. To deal with this complex topic we have structured this book into three parts containing six main areas. The first section looks at a comprehensive framework of the emerging technologies process upon which this book is structured. This part also includes chapters on Application Service Provision (ASP), Web services, Concerns, and Recommendations. These chapters clarify the various issues relating to this new phenomenon in Internet strategy. Section II includes chapters on case studies from different parts of the world showing how Web services are being used to benefit businesses. They show leadership in the Internet strategic direction and decision-making and on culture and values as these are forces that determine how Internet strategy can be managed within an organization. Section III considers how a situation analysis for the future of Web services business model might be carried out. The emphasis is on understanding the future of new technology strategies and the continuously changing business environment and technological resources. The functional subjects that relate to the management of organizational technological resources and that underpin a study of Internet strategy are examined. Following this Introduction is a Technology Review section that presents the central theme of the historical shifts from a mainframe to a client server, and now to Web services strategy. An observer of the client-server technology would have found the task of accurately discerning the path of that tech-

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nology during the last decade of the 20th century very difficult. Similarly, the reality of the Web services technology has not burst on the business scene full-blown, but has evolved over some 5 to 10 years from the ASP business model. Moreover, statistical evidence to define this emerging social and economic reality has lagged behind the writers and commentators who have identified the important features of this significant change. Chapter I contains ASP and discusses the rise and fall of this phenomenon in a relatively short period. This is followed by a similar discussion for the Web Services business model. This will then be followed by Concerns which discusses the engine that is driving the Web services industry. Just as the steam, electric, and gasoline engines became the driving forces behind the Industrial Revolution of the early 1900s, so the Internet and high-speed telecommunications infrastructure are making Web services a reality today. A resulting “information processing” industry is the business sector which is providing the impetus for this revolution, with its increasingly improving array of hardware, software, and information products and services. These technologies, in turn, are having and will continue to have profound impacts on business management, competitive advantage, and productivity. Having set the stage by describing the changing business environment for organizations today, Recommendations then moves to the need for each enterprise to fundamentally think its corporate strategy. The situation can be compared to the railroad industry in the late 1800s. It had to change its mindset from one of buying up large land tracts and laying railroad ties to one of moving goods and people from one place to another, so companies today must reconsider their traditional lines of business as they begin operating in the 21st century. For Web services vendors, it is not just a question of selling a product, but of selling a solution to a customer’s problem. This is where the lines between delivering the services and traditional versus emerging markets are blurring and changing. The qualitative dimension is as important in the Web services industry as the quantitative dimension. Quality control must be built into the front end of the service delivery cycle, not viewed as a last-minute check to be done just before contracts are reviewed. Here is where the human factor is introduced into our discussion. In essence, the intelligent enterprise is a distributed network of human talent. Within the individual enterprise, outmoded human resources management philosophies must be replaced by modern approaches that maximize the brain contribution to the products and services, not just the brawn contribution. The emphasis of Web services is on working smarter, not

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just harder. Web services strategy requires businesses to rethink not just the elements of their economic milieu, but also their political and social contexts. This does not suggest some kind of radical shift away from the profit motive to the quality-of-life motive. However, we do endeavor to point out that this strategy presents both risks and opportunities for every business in the 21st century. Much of this discussion implicitly recognizes that doing business in an intelligent enterprise forces suppliers, producers, and consumers into far closer proximity with one another than is the case in an industrial economy. Before the concluding statements, we invite the reader to look at more forms of Web service applications involving implementation issues from active researchers in both Europe and Asia. Haroun Alryalat and his colleagues at Brunel University, London, report on a strategy involving the Stock Exchange. Mayumi Hori and Masakazu Ohashi both at Hakuoh University, Japan, and Paulus Insap Santosa at the National University of Singapore, report on some respectable projects taking place in Asia involving Web services in the distribution of technology to that part of the world. Souad Mohammed clarifies several hidden costs relating to the implementation of information systems in the 21st century. Matthew Guah and Wendy Currie take the reader through an implementation of Web services in the UK National Health Service, summarizing parts I and III within a live project. Finally we examine the problem of redefining success in the business environment of the 21st century in Future Trends. Central to this discussion is the idea of adding value at each stage of the information systems life cycle. ASP, as a form of technological accomplishment, had little meaning for businesses and other organizations. Unless Web services can be linked to business innovation, the challenge for business professionals is to find ways to improve business processes by using Web services. This book has been written to take the reader into the 21st-century IS strategy paradigm. Utmost attention is paid to integrate the current business and management ideas with the deployment of Web services as one of the new information technologies. Yet, the book is rooted in the concepts that have emerged over the decades of development of the IS discipline. Web services in terms of its products and services has continued to evolve over its short history. As these changes have progressed, the landscape of the Internet technology has become crowded with new services, technologies, products, and transmission media. As the Internet has continued to evolve with the discovery of new technologies and the integration of “older” technologies such as mobile computers and broadband communications, new opportunities and markets within this area of business have opened up. Web services, as a form of electronic

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commerce, can be the sharing of business information, maintaining business relationships, and conducting business transactions by means of computer telecommunications networks. Similar to the development of the Internet’s World Wide Web, Web services has been changing both the ways organizations deal with one another and the way internal corporate processes are carried out with the assistance of telecommunication infrastructures. The capabilities offered by Web services present an opportunity to redesign the business processes of intelligent enterprises in order to reach new levels of performance. The researchers whose work underpins this book did not operate in isolation to the work of others in the IS and related fields. All through this book, selected examples of the existing literature will be discussed under the various headings of theory. Many examples and cases throughout the text have been drawn from international business areas. The purpose is to describe some interesting work, which was forerunner and inspiration to our research, while maintaining the role of theory and case studies within the interpretive tradition of IS research. The epistemology can be viewed as broadly interpretive, seeing the pursuit of meaning and understanding as subjective, and knowledge as a social construction.

Technology Review Change usually takes a long time, and the technology that transformed enterprises and the economy is no exception. Why should anyone be overwrought about the slow growth of Web services? It took mainframe computers a decade or two to become central to most firms. In fact, when IBM marketed its first mainframe computer, it estimated that 20 of these machines would fulfill the world’s need for computation! Minicomputers moved into companies and schools a little faster than mainframes, but they were also considerably less expensive. Even the ubiquitous PC took 5 to 10 years to become an important part of work life. The road travelled by these pioneers was rocky. Actual accomplishments seldom matched those initially envisioned. There were several reasons for this shortfall—a general lack of computer literacy among users, a general lack of business literacy, and an ignorance of the management role by information specialists, computing equipment that was both expensive and limited by today’s standards, and so on (McLeord, 1993). Some IS reviewers believe that one error in particular characterized the early systems above all others: they were too ambitious. Firms believed that they could build

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giant information systems to support all managers. With the benefits of hindsight, one can now describe systems designed then as being snowballed or the task attempted being unmanageable. However, some firms stuck it out, invested more resources, and eventually developed workable systems—although more modest in size than originally projected—while other firms decided to scrap the entire management information system idea and retreated to data processing. When the first computers were applied to business problems in the 1950s, there were so few users that they had almost total influence over their systems. That situation changed during the 1960s and 1970s as the number of users grew. It then became necessary to consider the combined needs of all users so that the systems could function in an efficient manner. During the 1980s, the situation became even tighter when a new player entered the picture—the enterprise (McLeord, 1993). A stage of organization/staff reliance on information systems started in the mid-1980s with demands that information systems increased operational efficiencies and managerial effectiveness. On the back of such evolution, strategic information systems gained importance as systems expected to help organizations compete. In the 21st century, information systems are being developed in an enterprise environment (see Figure 4.1).

21st Century: The Age of Information Society Beniger (1986) puts forth a seemingly influential argument that the origin of the information society may be found in the advancing industrialization of the late nineteenth century. As industrial plants increased their processing speed, the need for increased resources to control manufacturing and transportation resulted in a feedback loop wherein enterprises had to process information ever faster. The demand for sophisticated information processing equipment resulted in the development of computers. While the subsequent new technologies nurtured the development of an information society, the continuing cycles of demand pull and supply push account for the progress in the field. The Internet is simply a global network of networks that has become a necessity in the way people in enterprises access information, communicate with others, and do business in the 21st century. The Internet contains a distributed software facility that organizes the information on it into a network of interrelated electronic documents called the World Wide Web (WWW). WWW has

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changed the face of computing, both individual and enterprises resulting in the expansion and development of electronic commerce. The Internet is regarded in the 21st century as much more than a means of communication. It is also a source of information and entertainment that facilitates the development of electronic commerce. The initial stage of e-commerce ensured that all large enterprises have computer-to-computer connections with their suppliers via electronic data interchange (EDI), thereby facilitating orders completed by the click of a mouse. Unfortunately, most small companies still cannot afford such direct connections. Web services enable low-cost access to this service and having a standard PC is usually sufficient to enter this marketplace. The Internet has been a subject of enormous hype and speculation since its explosion in late 1980s. However, Web services can most certainly be said to be responsible for the latest debate surrounding its usage for purposes far beyond its original scope. By the late 1990s, ASP-like business models were applied by a proliferation of small businesses in the Western world, thereby creating what sometimes seemed a cult status with people from many parts of society talking about a “new breed of entrepreneurs.” Beyond the problems that may arise from the systematization of information, we suggest that there is within the discipline of Web services a model of infrastructure and context which is foundational but inadequate. This is the code model of Web services, deriving from the work of Sleeper and Robins taking a pragmatic look at the emerging Web services market (Porter & Millar, 1985). We will draw on a number of theoretical sources in search for an improved foundation. A link is also made to the environment reality theory of perception proposed by Little (1999).

Internet Strategy Our examination of Internet strategy begins with a look at the understanding of strategy in business and it’s purpose to achieving business goals. Nearly all written work in the area of strategy are based on the classic book by Alfred Chandler (1962), Strategy and Structure. The definition used in that book is: The determination of the basic long-term goals of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. (p. 13)

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Chandler considered strategy to be about setting general goals and deciding on the broad types of action and use of resources needed to achieve them. These involved the overall size and scope of the organization concerned, the mix of products or services being provided, and the organization’s core values. Such approach to strategy implies that strategies are the intended outcomes of systematic, rational decisions by top managers about clearly defined problems. The resulting strategic change or innovation would appear as a linear, sequential process in which strategic analysis and choice would follow unproblematic trend by strategy implementation. It has been recorded that Chandler’s views of strategy goes without its critiques (Mintzberg, 1979, 1990; Quinn & Hilmer, 1994; Whittington, 1993). Some of these authors have contrasted the idea of strategy as a deliberate, consciously intended plan with strategy as an emergent property, evolving incrementally and piecemeal out of the ideas and actions of people at different levels of the organization. Such strategies may be articulated consciously by top management in most successful organizations. Others consider such emergent, adaptive, or incremental view of strategy assumes that the internal and external environments of organizations are inherently ambiguous, unstable, and unpredictable. Others believe strategy does not assume that managers in organizations can only influence events at the margin, simply adapting pragmatically and opportunistically to continually changing circumstances. These authors consider the essence of a strategy and its crucial importance in any process of change or innovation is that it embodies the deliberate and conscious articulation of a direction. Successful strategies require both an overall sense of direction and a continuous adaptation to change. For a deeper understanding of strategies and strategy development, it is imperative to recognize their strong links with organization culture, the deeper level of basic assumptions and beliefs that are shared by members of an organization that operate unconsciously and define in a basic taken-for-granted fashion an organization’s view of itself and its environment. It has become even more accepted in the 21st century that strategies are both rooted in, and partly explained by, organization culture. Jon Clark in his book, Managing Innovation and Change (1995), outlined how the original founders of many of today’s large successful organizations—Ford in the USA, Marks & Spencer in the UK, Pirelli in Italy, and Siemens in Germany—played a crucial role in establishing their overall strategy and organizational culture. Clark (1995) also shows that organizational culture is one of the most important areas of strategy which can be influenced by top managers and visionary leaders within the organization.

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Mintzberg (1979, 1990) shows strategies to usually exist at a number of levels in any organization. These strategic levels can be generally distinguished into corporate, business, and operational. 1.

2.

3.

Corporate strategy is concerned with the overall size and scope of the organization. This involves the organization’s basic goals and objectives, its core values and overall profile, as well as the general allocation of resources to different operations. Business strategy can also be referred to as competitive strategy and is concerned with the choice of products or services to be developed and offered to particular markets and customers. This also involves the extent to which the choices made are consistent with the overall objectives of the organization. Operational strategy is concerned with the different functions within the organization. These functions could be production or service delivery, finance, personnel, research, or development which all influence and are integrated within the corporate and business strategies of the organization.

The interaction and consistency between the different levels of strategy and structure are crucial issues for the organizational performance. Clark (1995) raises the level of a long-standing debate about the relation between strategy and organization structure. Chandler (1962) phrased this debate with a phrase that “structure follows strategy.” This implies that organizations should first plan their strategy before embarking on the process of designing their structure to fit within such strategic plan. In contrast, Mintzberg (1990) argued that strategies are unlikely to be decided without reference to existing structures. The relationship between strategy and structure is likely to be reciprocity rather than a one-way determination. Mintzberg (1990) paraphrased Chandler’s “structure follows strategy” as the left foot follows the right. Clark (1995) points out that multinational corporations face a number of complex structural problems in developing strategies which are not faced by small businesses or professional organizations.

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References Beniger, J.R. (1986). The control revolution: Technological and economic origins of the information society. Cambridge, MA: Harvard University Press. Chandler, A.D. (1962). Pattern in organizational analysis: A critical examination. Business History Review, 36(2), 233–. Clark, J. (1995). Managing innovation and change. London: Sage. Little, G.R. (1999). Paper 1: Theory of perception. Retrieved June 2002, from www.grlphilosophy.co.nz McLeord Jr., R. (1993). Management information systems: A study of computer-based information systems (5th ed.). New York: Macmillan. Mintzberg, H. (1979). An emerging strategy of direct research. Administrative Science Quarterly, 24(4), 582–589. Mintzberg, H. (1990). The design school: Reconsidering the basic premises of strategic management. Strategic Management Journal, 11(3), 171. Porter, M.E., & Millar, V.E. (1985). How information gives you competitive advantage. Harvard Business Review, 62(4), 149–160. Quinn, J.B., & Hilmer, F.G. (1994). Strategic outsourcing. Sloan Management Review, Summer(39), 63–79. Whittington, G. (1993). Corporate governance and the regulation of financial reporting. Accounting and Business Research, 23(91), 311.

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Acknowledgments

So many people have played a role in the development of the ideas presented here that it is difficult to know where to begin in acknowledging them. The first draft of this manuscript was written while I was a PhD student at the Centre of Strategic Information Systems in the Department of Information Systems and Computing at Brunel University. All the staff at DISC, initially, established a wonderfully hospitable environment for this enterprise. I owe an inestimable debt of gratitude to Michael Livesey with whom I have discussed many of the ideas developed herein and who read and made numerous helpful comments and suggestions on several drafts that have been incorporated in the final version of this book. While I was writing this manuscript, I was reading Wendy Currie’s excellent book Value Creation from e-Business Models (Elsevier ButterworthHeinemann, 2004). Her study clarified my thinking on many issues and contributed to shaping the direction of my own work. I humbly appreciate her continuous support and encouragement as I seek my way through the ‘trapdoors’ of academic life. This book would not have been possible without the cooperation and assistance of the authors, reviewers, my colleagues and the staff at Idea Group Publishing. The editors would like to thank people at Idea Group, namely: Mehdi Khosrow-Pour for inviting us to produce this book, Jan Travers and Amanda Appicello for their contributions, Diane Huskinson and Michele Rossi for managing this project, especially for answering our questions and keeping us on schedule. A special word of thanks goes to Ms. Kristin Roth, for her diligence and determined stewardship during this laborious project.

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Last but certainly not least my family (including Evelyn Christine, Michael Appopo, Matthew Gbeyadeu and David Gbemie) who have all patiently borne with me through dejection and inspiration as this book has evolved. Evelyn has also provided a steady supply of patience, sound judgement and an indefatigable supply of good nature for which I will continue to owe her considerably.

Section I Strategic Approaches to Internet for Organizations

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Application Service Provision 1

Chapter I

Application Service Provision Matthew W. Guah, Warwick University, UK

Abstract This chapter not only defines the application service provision phenomenon, but also details the issues surrounding its emergence as an Internet strategic module. It reports on several studies that concentrated on the application service provision module impact on the day-to-day operation of a business.

What is Application Service Provision (ASP)? According to the ASP Industry Consortium, an ASP is a third-party service firm that deploys, manages, and remotely hosts software applications through centrally located services in a rental or lease agreement (ASP Consortium, Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

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2000). Such application deliveries are done to multiple entities from data centres across a wide area network (WAN) as a service rather than a product, priced according to a license fee and maintenance contract set by the vendor. ASP is considered by many to be the new form of IT outsourcing, usually referred to as application outsourcing. While the IT industry has become accustomed to selling software as a service, the ASP business model is different due to its scale and scope of potential and existing application software offerings to small, medium, and large customers. In addition, this model enables ASPs to serve their customers irrespective of geographical, cultural, organizational, and technical constraints. The apparent complexity of the ASP model led to a taxonomy including Enterprise ASP, Vertical ASP, Pure-Play ASP, Horizontal ASP, and ASP Enabler (Figure 1.1). An earlier evaluation of different ASP business models resulted into four broad categories of delivery, integration, management and operations, and enablement (Currie, Desai, & Khan, 2004). An important debate surrounding all ASP models is the extent to which application outsourcing is different from traditional outsourcing. Figure 1.2 provides a breakdown of traditional and application outsourcing. Probably the

Figure 1.1. The evolution of the ASP models Application Centric

Initiation Evaluation Implementation Integration Services Consolidation

Customer Centric 2003

2002

2001

2000

1999

1998

1997

Virtual Application Service Provider (VASP) Application Service Delivery (ASD) Full Service Providers (FSP)

Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.


Figure 1.2. Three stages of IT outsourcing (Currie & Seltsikas, 2000)

most noticeable difference between the two is within the relationship with the customer. ASP is a metamorphosis of software into a service that exists on the Web, or often referred to by practitioners as Web-native software world. In this model, a giant Internet protocol (IP) network (called the Internet) is being used to effectively turn software into a service driven function that exists as a oneto-many option. The simple explanation for ASP is that a company delivers application software from a central source, delivering it over a network connection and charging a fee for its use. ASPs can also be described as the delivery of preconfigured template software from a remote location over an IP network on a subscription-based outsourcing contract. This is usually in a one-to-many relationship and must be viewed as a preimplementation outsourcing contract that can be billed as payment for a service—in relation to the UK mobile phone market, a pay-as-you-go service.


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Emergence of ASP This section focuses on the emerging role of the ASP model. During the last five years, the ASP phenomenon has grown considerably, with many established and start-up firms developing their ASP strategies. There is a growing awareness that few activities and professions have seen such a rapid change over the past years as the activities and professions related to the field of information systems (Lee et al., 1995). Initially called “apps on tap,” this sourcing model promised to deliver best-of-breed, scalable, and flexible business applications to customer desktops (Kern, Willcocks, & Lacity, 2002). ASP was the hottest topic in 2000–2001 in what was referred to in USA as “practice management solution.” Well-established practice management software companies include Medic, Millbrook Corp., and Computer Sciences Corp. Other less-known companies are Greenway Medical, Alteer Corp., and Perfect-Practice.MD. While these companies offer remote hosting of software to their customers in the healthcare sector, they also promise the advantages of client-server applications without the expensive infrastructure or even the staff required to maintain it. Forecasts for the growth of the ASP industry vary, with Ovum (Ring, 2000) predicting it will be $25 bn and Dataquest $22.7 bn by 2003 (ASP Industry Consortium, 2000). ASPs will have a significant impact on outsourcing policies and practices if the business model successfully penetrates underexploited sectors such as health care. The early phase of the ASP model appeared to revisit the service bureau model of the 1960s and 1970s (Currie, 2000). During this period, many companies signed outsourcing contracts with a service bureau. The fashionable term “outsourcing” was rarely used, as the more narrow facilities management contracts involved mainframes data centres and bespoke software. The service bureau model was moderately successful even though there were many technical, communications, and financial problems which precluded it being a viable option for many companies. In this current era, outsourcing will continue to undergo a significant shift from the centralized computing of the 1960s and 1970s, the distributed computing of the 1980s and 1990s, through to the remote computing in the 21st century. ASPs will play a central role since they will increasingly offer a utility model to customers where the latter will purchase applications on a pay-as-you-use basis (Currie et al., 2003).



As these historical stages have evolved, the basic strategic resources and tools of economic activity have shifted, as has the nature of work and culture. In the “post-Net era,” a term coined by editors of Issues of Strategic Information Systems for its special issue in 2002, the application of knowledge and intellectual technology in response to the organized complexity of technology, organizational, and social institutions become the critical factor of production and services. The findings of many studies provide substantial evidence for the reality of the ASP industry in the USA and the transitional phase which the national economy has moved through in progressing to ASP technology (Currie, 2000). Moreover, the study also provided support for the notion that the basic sources of wealth had shifted from capital to information and knowledge resources. If ASP is a technological and economic reality, then what is its impact on business? At the outset, it is clear that the Internet’s impact on business will evolve over time and will redefine our understanding of business management, competition, and productivity. While we have been living with the consequences of the Internet for many years, our understanding of these shifts in human events has lagged behind the reality. Ironically, this delayed effect has been particularly acute in Europe in recent years, as compared to Japan and the USA. For example, in the USA, preliminary planning in moving IT outsourcing toward an ASP model emerged as a general business goal in early 1980s, and by the late l990s it had been translated into a full-scale economic development strategy. Moreover, by the late 1990s, the USA was beginning to assess its economic development strategies in the ASP industry, and the impacts such pronounced shifts in IT industry priorities would have on business. Even today, European business and political debates over IS strategic policy remain tied to traditional views of outsourcing. Many senior executives still remain sceptical or openly critical of the ASP phenomenon. These attitudes among corporate executives and senior managers betray some fundamental misunderstandings not only of the current state of the ASP industry in Europe, but also of the terms and conditions under which the advanced ASP industry in the USA will compete with European business in the future. Nearly every participant in our research with small- and medium-size companies (SME) in the UK agrees that implementing ASP solutions (which sometimes results in automating certain work flows) without first making necessary fundamental changes and improvements is the wrong way to go about business


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improvement. That is because new and better products often replace existing ones. At the same time much-needed skills may not be backed up by job descriptions and functional statements. And too often the pooling of parallel and similar operations is not considered when implementing an ASP solution. Preliminary findings of our research show some conflicting stakeholders perceptions for a successful implementation of such a model. These perceptions not only lead to a better understanding of the ethical issues involved but also of the complex relationship of these ethical issues with other technical, organizational, and social issues that need to be managed effectively.

What Does ASP Mean for Your Business? An application containing a database with all your customer information or payment due date or records of all e-mail is stored and processed by an outside provider in lieu of being on your local network. This means no one in your business needs to worry about maintaining a server full of all this information. It is painful for an organization to have to spend IT resources maintaining servers and thinking of the disasters when the system goes down or an upgrade is needed. An ASP business model allows your business the luxury of having an outside service provider, who specializes in server maintenance and support, to provide what should be an incredibly reliable and secure IT systems—something only a few businesses could afford before now. A typical ASP has to submit to government audits, provide multiple servers (redundancy), four-way (4-T3) replication, backup power systems, and 24/7 support. Most small- and medium-size companies cannot afford all that and keep up to date with necessary improvements. It also allows savings from software licensing, enabling small- and medium-size companies to be as powerful as their larger competitors. They do this by subscribing to an inexpensive monthly ASP service giving them the chance to be virtually unlimited in their capacity to store information. An ASP supplies a complete infrastructure for your business and manages the network and all the applications that you wish to run on all the computers within your company. An ASP usually charges a fixed fee to manage your network and



applications. One important factor in this business model is that the ASP is allowed to manage your network. Your business does not need to operate its own server; instead, your computers are connected to the ASP’s server through an open connection. One major problem with ASP uptake, so far, has been that the costs of such connections have not fallen significantly as anticipated. This would have provided an attractive alternative to increasingly expensive network management. Moreover, your company would know in advance what the software and management will cost because it is being charged a fixed fee.

References ASP Industry Consortium. (2000). Industry news. Retrieved December 2002, from www.Aspindustry.org Currie, W., Desai, B., Khan, N., Wang, X., & Weerakkody, V. (2003). Vendor strategies for business process and applications outsourcing: Recent findings from field research. Hawaii International Conference on Systems Sciences, Hawaii. Currie, W.L. (2000). Expanding IS outsourcing services through application service providers. Executive Publication Series. CSIS2000/002. Currie, W.L. (2004). The organizing vision of application service provision: A process-oriented analysis. Information and Organization, 14, 237– 267. Kern, T., Willcocks, L.P., & Lacity, M.C. (2002). Application service provision: Risk assessment and mitigation. MIS Quarterly Executive, 1(2), 113–126. Lee, D.M.S., Trauth, E.M., & Farwell, D. (1995). Critical skills and knowledge requirements of IS professionals: A joint academic/industry investigation. MIS Quarterly, 19(3), 313. Ring, (2000). European market research: A report to the ASP Industry Consortium. Ovum, March.


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Chapter II

Web Services Matthew W. Guah, Warwick University, UK

Abstract Organizations today are desperate to identify new opportunities in the facilities provided by the Internet. Few have attempted to link interorganizational, interfunctional and interpersonal levels of their organizational processes via Web services. They have undertaken this process in anticipation of reshaping and improving their core business processes. This chapter details how Web services could potentially make a significant different in the integration of software applications across multiple platforms, sites and departments of an organization. The chapter concludes by advising that organizations, in the process of reviewing their Internet strategies, should at least investigate the potential impact of Web services integration because this could sooner or later become a permanent business necessity and not just a competitive advantage material.


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What are Web Services? Web services are the small software components that are available over the Internet. Publishing as Web services makes the software applications more reusable and shared by many more users. Web services enable business partnering and thereby generate a great way of revenue streaming for the companies. It also helps in reducing the development, integration, and maintenance cost of the software application. Simple Object Access Protocol (SOAP) is the communication protocol that helps in transporting the Extensible Markup Language (XML) messages between the client and server. SOAP is nothing but XML over Hypertext Transfer Protocol (HTTP). When the Web service client makes a request, the SOAP client application programming interface (API) constructs a corresponding XML message containing the remote method name and value for its parameters and sends the XML message over HTTP to the server hosting the Web services. The server receives the XML message, executes the business logic (may be written in Java), and sends the response back to the client. The Web services paradigm includes a programming model for application integration that does not discriminate between applications deployed inside and outside the enterprise. Integration and development of Web services can be done in an incremental manner, using existing languages and platforms and adopting existing legacy applications (Figure 2.1). One of Web services’ anticipated benefits is that human end-user interaction in the normal data entry Web application can be replaced by direct application-to-application communication. When we talk about the benefits of Web services, we cannot overlook a few issues in using Web services as well (Sleeper & Robins, 2002). The primary issue is security. The other Web applications, such as Java Servlets, are being accessed via HTTP browser. The user-specific information can be stored in the HTTP session and used for users’ session tracking. A fine example of this is the shopping cart application. However, because Web services are being invoked by the stand-alone client applications, the server could not have any idea about the user who is actually making the request. This would pose a major problem that any unauthorized user may consume our Web services and we do not have any control on this. Another serious problem is the tampering of XML messages while they are transmitted over wire (Wilkes, 2002).


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Figure 2.1. Web services integration model


Web Services 11

Using XML, business analysts can define policies and express them as EML documents. These documents can have sections that are encrypted and the documents can be digitally signed, distributed, and then interpreted by the security mechanisms that configure the local software. This will allow various implementations to map from the XML description to a local platform-specific policy enforcement mechanism without requiring changes to the infrastructure.

Web Services Approach This new approach introduces the proxy-based lightweight framework for providing secure access to the Web services being requested by the clients. The basic idea is to deploy a proxy Web service that receives the request from the end client on behalf of the actual Web service. The proxy service authenticates the end client by validating the client’s credentials, which he/she had sent along with the Web service request. If the client is authenticated successfully, he/she will be given access to the requested service. The advantages of this approach are as follows: • • • • •

It is based on message-level security. It does not only authenticate the user, but it also verifies the message integrity. It does not disturb the actual Web service, which may be running on the production server. It acts like a plug-in; it can be removed and replaced with any other solution at any point in time. It hides the actual Web service; the process is abstracted from the client. The client would not know that his/her request has been intercepted and processed by a proxy.

Integrating new handlers, such as auditing and notification, is very easy. Whereas an auditing handler is for maintaining the service access information, a notification handler could be used for sending e-mails to the service providers in case of any problem in accessing the service. Someone might now want to raise a question about the performance of the proxy approach. Because of the introduction of a proxy in the communication


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path of end service, the invocation time will be a little longer. However, the performance figures are more acceptable. The proxy Web service uses Web services handlers to intercept XML messages used in Web services. It contains two major components, namely: • •

Authentication handler Proxy client

Needless to say, the authentication handler is realized by using a Web service handler and the proxy client is the back-end component. The two components are packaged into a single Web service. While the authentication handler authenticates the client, the proxy client invokes the actual Web service. To start with, the end client sends the request to the Web service proxy along with its credentials. The credentials could be either a clear text password or a digital certificate. In case of basic authentication, the credentials (username and password) need to be sent as HTTP header parameters. In the case of advanced authentication, the end client signs the XML message with his/her digital certificate and sends the signed XML message to the server. Now the client has done its job. On the server side, the authentication handler acts as an XML interceptor, which receives the XML message and the HTTP header parameters, if any. Depending on the type of authentication mechanism needed, the corresponding

Figure 2.2. Proxy-based approach to Web services (www.developer.com/ articles)

WS 1

WS 2


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implementation is invoked to verify the credentials. By providing many hooks, different kinds of implementations for the authentication could be integrated very easily. The Lightweight Directory Access Protocol (LDAP) server can act as an ACL repository, which stores all the clients’ profiles. In the process of authenticating the client, the credentials being sent by the clients can be verified against the credentials stored in the ACL repository. If they are found to be matching, the user is authenticated successfully. Otherwise, the authentication process is a failure and the handler will send the failure message to the end client. In the case of successful authentication, the proxy client invokes the actual Web service by constructing a new SOAP message and sending it to the server hosting the actual Web service. As far as the end client is concerned, he/she receives the response from the proxy Web service and the whole logic of authentication and actual service invocation is abstracted out. The other advantages of this new proxy approach over other products are as follows: • • • •

Lightweight framework Low cost Easy to integrate Quick to deploy

Web services are not a disruptive approach to hosted services, rather, they are an additive step forward. They will provide a standards-based way for different services and applications to interoperate, which will greatly reduce the integration hurdles ASPs have long faced. In the process, Web service will also give ASPs increased flexibility to create and deliver more personalized hosted solutions for their customers. Considering Web services are created and distributed by multiple entities, an ASP would not be able to ensure that individual Web services will be developed or run on the infrastructure of their choice. However, the ASP must develop and deploy its own services with infrastructure that complies with Web services standards. This will ensure that services can efficiently interact with, and take advantage of, other Web service components.


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Web Services’ Impact In the seemingly fast-paced world of the 21st century, change is the only constant and therefore event horizons are immediate; businesses cannot predict what they will need or how they will act in a year’s time. Web services are the current tools best suited to the ability to bridge the multiplicity and complexity of existing IT infrastructures. Such usefulness of ASP to an intelligent enterprise is as important as any other in the 21st-century collaborative business environment. Web services are self-contained, modular business process applications that Web users or Web connected programs can access over a network— usually by standardized XML-based interface—and in a platform-independent and language-neutral way. This makes it possible to build bridges between systems that otherwise would require extensive development efforts. Such services are designed to be published, discovered, and invoked dynamically in a distributed computing environment. By facilitating real-time programmatic interaction between applications over the Internet, Web services may allow companies to exchange information more easily in addition to other offerings, such as leverage information resources, and integrate business processes. Users can access some Web services through a peer-to-peer arrangement rather than by going to a central server. Through Web services systems can advertise the presence of business processes, information, or tasks to be consumed by other systems. Web services can be delivered to any customer device and can be created or transformed from existing applications. More importantly, Web services use repositories of services that can be searched to locate the desired function so as to create a dynamic value chain. The future of Web services goes beyond software components, because they can describe their own functionality as well as look for and dynamically interact with other Web services. They provide a means for different organizations to connect their applications with one another so as to conduct dynamic ASP across a network, no matter what their applications, design, or run-time environment. Web services represent a significant new phase in the evolution of software development and are unsurprisingly attractive to a great deal of media and industry hype. Like almost all new Internet-related technologies, the immediate opportunities have been overstated, although we believe the eventual impact could be huge. This can be demonstrated by the immediate and key role of Web services which is to provide a paradigm shift in the way business manages IT infrastructure (Hondo, Nagaratnam, & Nadalin, 2002). It provides intelligent


Web Services 15

enterprises with the capability of overturning the accepted norms of integration and thereby allowing all businesses to rapidly and effectively leverage the existing IT and information assets at their disposal. Intelligent enterprises currently running an outsourcing service are already seen to be one of the early gainers of the Web service revolution. However, there will be others as enterprises discover the hidden value of their intellectual assets. Considering most enterprises have until now used the Internet to improve access to existing systems, information, and services, we envisage the days when Web services promise new and innovative services that are currently impossible or prohibitively expensive to deploy. With such developments anticipated to promote the ASP business model, Web services integration is considered to be at the heart of this expectation. Through this process of connecting businesses, ASPs will be able to quickly capitalize on new opportunities by combining assets from a variety of disparate systems, creating and exposing them as Web services for the end game of fulfilling customer expectations. It is our view that any intelligent enterprise considering the ASP business model should at least investigate the potential impact of Web services integration as this will sooner or later become another permanent business necessity and not a competitive advantage material. Those intelligent enterprises that have adopted our suggested approach will not only gain advantage now in business for lower costs and better return on assets, but are also expected to develop valuable experience for the first decade of the 21st century. Considering the Internet’s history, as Web services become the standard and the expertise of ASP become more established, it should become the norm. Figure 2.3 shows that holistic approach to technology always seems to work better than piecemeal approach to information systems solution. Web Services, as it is currently is like a two-legged table. A version of Web Services Plus being practiced by a few vendors after the dot.com crash is represented by the three-legged table above. However, an even more successful model of Web Services Plus would be a properly architectured four-legged table, as presented above. The analogy here is that a two-legged table is less stable than a three-legged table while a four-legged table is even firmer (Figure 2.3).


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Figure 2.3. Evolution of Web services

•

Techno logy

•

Techno logy

•

Techno logy

•

Application

•

Application

•

Application

•

People

•

People

•

Work Flow

Conclusion This chapter has discussed Web services and the security issues involved in using Web services. It also briefed you about the various solutions available and how the proxy-based approach can be very useful for securing Web services.

References Hondo, M., Nagaratnam, N., & Nadalin, A. (2002). Securing Web services. IBM Systems Journal, 41(2). Sleeper, B., & Robins, B. (2002). The laws of evolution: A pragmatic analysis of the emerging Web services market. An analysis memo from the Stencil Group. Retrieved April 2002, from www.stencilgroup.com Wilkes, L. (2002). IBM seeks partners to drive adoption of XML Web services. Interact, February.


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Chapter III

Concerns Matthew W. Guah, Warwick University, UK

Abstract As evidence relating the reality and basic features of the application service provider (ASP) market continues to grow, there begins to be less concern about confirming that any structural economic shift has continued historically, and more concern about understanding how the ASP industry is performing, and its impacts on productivity, investment, corporate capital formation, labor force composition, and competition. The relationship between the traditional outsourcing and the “latest wave” esourcing on the one hand, and Internet investment productivity on the other, is at the centre of the IT strategic problem confronting corporate management in the 21st century.

Intelligent Enterprise Business Environment An intelligent enterprise exists within several environmental elements. These are the enterprises and individuals that exist outside the intelligent enterprise and have either a direct or indirect influence on its business activities (see Figure Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

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3.1). Considering intelligent enterprises are operating in different sectors, area of emphasis, and with different policies and strategies, the environment of one enterprise is often not exactly the same as the environment of another. The business environment for intelligent enterprises includes the enterprise itself and everything else that affects its success, such as competitors, suppliers, customers, regulatory agencies, and demographic, social, and economic conditions. A properly implemented ASP business model would provide the means of fully connecting an intelligent enterprise to its environmental elements. As a strategic resource, ASP helps the flow of various resources from the elements to the enterprise and through the enterprise and back to the elements (see Figure 3.1). Some of the more common resources that flow include information flow from customers, material flow to customers, money flow to shareholders, machine flow from suppliers, and personnel flow from competitors and workers’ union. Looking at Figure 3.1, one can see a generalized theory of enterprise’s perception (Little, 1999). The theory is sufficiently imaginatively motivated so that it is dealing with the real inner core of the ASP problem—with those basic relationships which hold in general, no matter what special form the actual case may take.

Figure 3.1. A tool for controlling influences in a complex environment Education / Researchers

Customers Suppliers

Competitors

Environmental Movements Financial Community

Intelligent Enterprise Worker’s Union

Share Holders

International Government

Charities / NGO

National Government

Local Government


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An intelligent enterprise can succeed only by adapting itself to the demands of its external environment, which is often represented by a number of groups (formally called stakeholders) that affect the organization’s ability to achieve its objectives or those affected by it. Stakeholders other than participants and customers form another important part of the context. Stakeholders are people with a personal stake in an ASP system and its outputs even if they are neither its participants nor its customers. Permanent among such groups are customers, distributors, competitors, employees, suppliers, stockholders, venture capitals, trade associations, government regulators, and professional associations. An important role for the information systems is to keep the organization informed of the activities of all these stakeholders and similarly stakeholders are kept informed about the activities of the organization. Zwass (1998) describes an organization as an artificial system. He further defines an organization as a formal social unit devoted to the attainment of specific goals. With notification that a business enterprise, as a system, has to generate profit, though it may also pursue other objectives, including employment provision, and contributing to its community generally. Zwass (1998) also restricts the value measurement of an artificial system to two major criteria: effectiveness (the extent to which a system achieves its objectives) and efficiency (the consumption of resources in producing given system outputs). Considering that intelligent enterprises compete in an information society, the requirements for successful competition depends on the environment. In the case of ASP, such environment presents several serious challenges, and the role of intelligent enterprises information systems has evolved over time as competing enterprises attempt to meet these challenges. Few enterprises have, however, identified opportunities for deploying strategic information systems that have proven success in the competition process by analyzing the forces acting in the marketplace and the chains of activities through which they deliver products and services to that marketplace.

Infrastructure Issues Infrastructure is the resources the system depends on and shares with other systems. Infrastructure is typically not under the control of the systems it serves yet it plays an essential role in those systems. For ASP the technical infrastructure typically includes computer hardware, telecommunication facilities, and appropriate software designed to run on the Internet. Examining infrastructure


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may reveal untapped opportunities to use available resources, but it may also reveal constraints limiting the changes that can occur. Evaluation of infrastructure is often difficult because the same infrastructure may support some applications excessively and others insufficiently. Drawing from Porter and Millar’s theory that information systems are strategic to the extent that they are used to support or enable different elements of an enterprise’s business strategy, this paper proposes a framework that IS in larger organizational systems may enable their effective operation or may be obstacles (Porter & Millar, 1985). In an earlier paper we use the UK’s National Health Service’s system infrastructure and context as two distinct means of determining impact on larger systems (Guah & Currie, 2002). Infrastructure affects competition between businesses, geographic regions, and even nations. Inadequate infrastructure prevents business innovation and hurts intelligent enterprise efficiency. While every international businessperson can see that things have changed vastly in most of Africa and South America, the significance of infrastructure as a competitive enabler or obstacle has clearly not changed. That is because infrastructure consists of essential resources shared by many otherwise independent applications. A local region’s physical infrastructure includes its roads, public, transportation, power lines, sewers, and snow removal equipment. Its human and service infrastructure includes police, fire, hospital, and school personnel. A region’s physical and human infrastructure can be either an enabler or an obstacle and is therefore a central concern in many business decisions. The importance of certain IS infrastructure elements serve as a key motivation for the successful implementation of ASP. The required IS infrastructure raises a broad range of economic, social, and technical issues such as who should pay for infrastructure? Who should have access to/control over them and at what cost? Which technology should it include? Where ASP is involved, the economic question often puts telephone companies against cable companies, both of which can provide similar capabilities for major parts of the telecommunications system. From certain viewpoints, it can be considered the responsibilities of government to ensure that a national IT infrastructure is available as a key motivation for the previous buzz words “information superhighway.” Just as local regions depend on the transportation and communication infrastructure, infrastructure issues are important for ASP implementation and operation. These systems are built using system development tools; their operation depends on computers and telecommunication networks and on the IS staff. Deficiencies in any element of the hardware, software, or human and


Concerns 21

service infrastructure can cripple an information system. Conversely, a wellmanaged infrastructure with sufficient power makes it much easier to maximize business benefits from ASP.

Inadequacy of Existing Infrastructure Most people would agree that motorways such as the M4, M6, and M1 together with railways up and down the country are a part of the UK’s transportation infrastructure. Transportation is vital to the economy; it makes the movement of goods and people possible. Economic infrastructure provides a foundation on which to build commerce. Is there a technology infrastructure? At the national level, there is a communications infrastructure in the form of networks that carry voice and data traffic. In recent years, the Internet has become an infrastructure that ties a wide variety of computers together. The Internet highlights the fact that an innovation which began as an experiment can mature to become part of the infrastructure. Infrastructure begins with the components of ASP, hardware, telecommunication networks, and software as the base. A human infrastructure of IS staff members work with these components to create a series of shared technology services. These services change gradually over time and address the key business processes of the intelligent enterprises. Noninfrastructure technology is represented by applications that change frequently to serve new strategies and opportunities (Weill, 1993). It sounds in practice that much of the justification for infrastructure is based on faith. Weill (1993) did find one firm with a creative approach to paying for infrastructure. The company required careful cost-benefit analysis of each project. When this showed higher-than-necessary benefits, it was loaded with infrastructure costs to take up the slack. In essence, the company added in “infrastructure tax” to projects, not unlike airline ticket taxes to pay for airports. Infrastructure is vital, but investments in it are hard to justify if you expect an immediate return. The Singapore example presents the classic case for infrastructure; a small amount of investment and guidance creates a facility on which many organizations can build. Networking in Singapore has the potential to transform the nature of commerce on the island and to help achieve the citystate’s goals for economic development.


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Telecommunications: Facilitating ASP Emancipation Telecommunications is the electronic transmission of information over distances. In recent years this has become virtually inseparable from computer with a paired value that is vital for integrating enterprises. Most enterprises in the 21st century have access to some form of telecommunications network, which is simply an arrangement of computing and telecommunications resources for communication of information between distant locations. These enterprises are usually using one of two types of telecommunications networks which can be distinguished by their geographical scope: local area network (LAN) and wide area network (WAN). LAN is a privately owned network that interconnects processors, usually microcomputers, within a building or on a compound that includes several buildings. It provides for high-speed communication within a limited area where users can share facilities connected to the network. On the other hand, WAN is a telecommunications network that covers a large geographical area which large businesses need to interconnect their distant computer systems. Computer networks differ in scope from relatively slow WAN to very fast LAN. There are several topologies and channel capacities responsible, which the objective of this chapter does not permit of a detailed exploration. ASPs use WAN as a fundamental infrastructure to employ a variety of equipment so that the expensive links may be used efficiently. The various equipments control the message transfers and make sharing the links among a number of transfers possible. An increasing number of ASP customers have user PCs that are connected to a LAN that communicates with the WAN via a gateway. In certain cases the ASP may offer common carriers and provide value-added service that can be combined with private networks to create an overall enterprise network. As an e-commerce phenomenon, a few of the essentials of an ASP infrastructure are common carriers, value-added networks, private line, and private networks. Common carriers are companies licensed, usually by a national government, to provide telecommunications services to the public, facilitating the transmission of voice and data messages. As most countries permit only one common carrier, the service can be broken down and leased as value-added networks to vendors who then provide telecommunication services to their own customers with added values that could be of various sophistications. For increased speed and security, an enterprise may not want to share with others and could take the option of leasing its own private lines or entire networks from Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

Concerns 23

a carrier. It has been proven that leasing links can result in savings from highvolume point-to-point communications. The above are the apparatus through which an ASP uses telecommunications to give its customer the capability to move information rapidly between distant locations and to provide the ability for their employees, customers, and suppliers to collaborate from anywhere, combined with the capability to bring processing power to the point of the application. As shown earlier in this chapter, all this offers an ASP customer the opportunities to restructure its business and to capture high competitive ground in the marketplace.

Issues of Security Considering the ASP industry is riding on the back of the Internet’s overnight success, the highly publicized security flaws have raised questions about ASP suitability to serve as a reliable tool for the promotion of intelligent enterprises for the 21st century. An ASP vendor could be forgiven for thinking the primary service to its customers is to provide connections between possibly millions of computers linked to thousands of computer networks. However, the prevention of unauthorized users who steal information during transmission, who sabotage computers on the network, or who even steal information stored in those computers are major parts of the vendor’s responsibilities. Exploiting this flaw might permit hackers to gain control of designated servers and then access or destroy information they contain. As long as these risks are not as far fetched as one might hope, customers would continue to be wary about the uptake of ASP business model (Currie, Desai, Khan, Wang, & Weerakkody, 2003). The many break-ins and other general security problems occurring with Internet/intranet demonstrate some of the risks of engaging in any form of business model linking to the Internet. Many ASP vendors have tried to reduce the danger using firewalls and encryptions but such maneuvers not only reduce risk, but they also reduce the effectiveness of a networked environment (see Figure 3.2). The IT community has generally accepted that effective use of encryption and firewall techniques could eliminate much of the risk related to unauthorized access and data theft. Does any mathematical encryption guarantee absolute security? No. Just as a physical lock cannot provide absolute safety, encryption cannot guarantee privacy—if a third party uses enough computers and enough time, it will be able to break the code and read the message. However, by choosing the encryption


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Figure 3.2. Comparison of forward and reverse proxy cache security

method carefully, designers can guarantee that the time required to break the code is so long that the security provided is sufficient. It is advisable that intelligent enterprises keep this principle in mind when thinking about Internet security. When someone asserts that an encryption scheme guarantees security, what they actually mean is that although the code can be broken, the effort and time required is great. Thus, an encryption scheme that requires longer time to break than another scheme is said to be “more secure.” However, a good proportion of the small- and medium-size enterprises (SMEs) surveyed did not appreciate that many ASP vendors have tried to reduce the danger using what is called firewalls—computers that intercept incoming transmissions and check them for dangerous content. Some fear that the mere process of downloading information across the Internet may entail hidden risks (see Figure 3.2). As far as performance goes, some vendors are considering arrangements with national telecommunication giants for better data access facilities over WAN. The trend toward deregulating telecommunications must continue globally for data rates to become a much less important restriction in the future.

Overcoming Obstacles to a Commercial Future The powerful trend toward a networked society has many components, starting with the fact that use of online networks is exploding. Businesses in the 21st Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

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century require tools that take advantage of the millions of people who have used computer networks for business and personal uses. These businesses rely on the fact that e-mails and e-bulletin boards are not only commonplace in leading businesses but also used for purposes ranging from answering customer service inquiries to exchanging views about personal topics and politics. Reinforcing these trends, ASP vendors are building the network capabilities into their products for intelligent enterprises to see the Web services as an important turning point for commercial opportunities because it has made the Internet so much more accessible and adaptable for nontechnical business users. Many obstacles are currently apparent, however, when one looks at the possibility that ASP will become a motivational tool for intelligent enterprises in the 21st century and a major determinant for the future of Internet influence on the world’s population. The areas of concern, mentioned in Table 3.1, relate to organization, security, online performance, freedom and control, competition, and hype versus

Table 3.1. Major obstacles and proposed solutions OBSTACLES Organization

CAUSES Earlier capacity was daunting and business strategy was unproven

Security

Too many reported server break-ins and other general Internet/intranet security problems

Performance

Telecommunications infrastructure available in the 1990s globally not sufficient to support requirements General negative press about lack of control on the Internet and risk to criminal accessing confidential data Business model does not encourage differentiation

Control Competition Hype

Although ASP model was said to save costs and is enticing to SMEs, very little evidence exist

SOLUTIONS Advent of Web services to make ASP far easier to comprehend and adapt Industry to emphasize efforts in protection machinery and firewall systems Use of broadband services and improvement to infrastructure globally Some form of regulation— of an international nature—might be needed Cooperation must be based on trust between vendors and individual customer Whether the great potential of ASP to SMEs will prevail over the sceptics’ views remains to be seen. Web services is expected to provide that killer means of bridging the gap


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substance. The issue of organization is based on the way ASP has evolved. The ASP industry lacks the type of clear organization that would make it easy to use as a reliable and profitable business model. Although ASP vendors’ former capacity was daunting and strategy was unproven, the advent of Web services will make it far easier to comprehend and even adapt. Looking back at the Internet’s history, one sees many incidents that raise issues about freedom and control. Major Western nations (USA, UK, France, etc.) have either proposed or passed legislation related to criminal penalties for transmitting, accessing, or intercepting data of the Internet illegally. Although the Internet has been unregulated in the past, serious consideration of ASP-like business models could result in more legislation.

ASP as Competitive Investment The fundamental definition of what constitutes a mission-critical application remains relatively unchanged; it is those applications where even the smallest amount of downtime will have a significant negative impact on an enterprise’s operational efficiency and bottom line. However, the nature of what intelligent enterprises now deem to be mission-critical systems has altered with a far greater range of applications. One way to interest a manager in a new innovation is to show that a competitor is planning to adopt this innovation. Intelligent enterprises do respond to competition to avoid being put at a disadvantage. Banks provide a good example of investment in technology for competitive reasons. In an early study of ATM deployment, Banker and Kauffman (1988) found that ATM adoption provided a limited advantage to certain banks. The findings suggest an early advantage from installing ATMs and joining a large network. Customers clearly like ATMs and the interconnections to the banking network it provides: there is very little reason for a bank not to join an ATM network. In fact, because competitors offer ATMs and are in networks, a new bank is almost forced to invest in this technology. In 2002 ATMs were certainly competitive necessities for banking. Some banks were closing expensive branches and installing ATMs instead. However, since all banks can follow this strategy, it was unlikely one would gain a significant advantage from it. The airline industry offers another example of IS as a competitive necessity. To start an airline in the 21st century—especially in the UK and the USA—you would have to invest in some kind of ASP service for making a reservation. The


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travelling public has become accustomed to being able to make reservations and obtain tickets easily, either paper or electronic. Investments for strategy and to meet a competitive challenge may not actually benefit the enterprise making them. An enterprise may be forced to adopt new technology to stay even with the competition, as in the two examples mentioned earlier. In this case, it is not so much return on investment in ASP, but rather what is the cost of not investing? Will an enterprise lose customers and market share because it does not have a particular technology in place? Can you enter a new line of business without investing in the technology that competitors have adopted? What kinds of services do customers expect?

ASP Implementation Strategies The strategy one chooses for implementation has a direct impact on the level of investment required for an ASP initiative. One strategy is to hire external expertise, either to develop the entire application or to work with the internal IS staff. Consultants have been available for developing ASP investments since the first systems appeared. Consultants will provide advice, and many will actually undertake the development of the IT application. Carried to an extreme, the enterprise can outsource the development and even the operation of an ASP application. There are a number of network providers who offer complete xSP services (vertical, horizontal, pure play, etc.) and an enterprise might outsource its electronic data interchange efforts to them. The major advantage of using consultants and outsourcing is the availability of external expertise. ASP is so complex and difficult to implement that most intelligent enterprises include a budget for help from a consulting enterprise that has extensive experience with this package. When the enterprise enters into a consulting or outsourcing agreement for an ASP initiative, it should be aware of the need to manage its relationship with the supplier. Enterprises that have delegated the responsibility for developing a new ASP application to an outside enterprise generally have been unhappy with the results. Managers still have to monitor the agreement and work with the supplier. There are examples of many very elaborate management committees and structures established at enterprises such as Microsoft, UNISYS, and IBM to manage outsourced IS. Evidence within the past three years have shown that situations can develop in which large numbers of insurmountable problems arise with issues that, in an


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ASP vendor’s opinion, were going to cause lasting impediments to the ultimate systems implementation. Among several vendor options were these primary four: • • • •

Implemented the IS as best as they could within these constraints; Demonstrated unpalatable objection to the problem owners and set conditions for eventual completions of work; Strove to ignore the problems and created the system as if they did not exist; and Completely refused to continue work regardless of system phase.

While each of the above courses has quite a serious implication, the first option was most taken. Intelligent enterprises should determine the uptake of ASP based on their longterm IS plan and on requests for information systems by various stakeholder, that is, the prospective users, corporate management, internal IS team, customer, and supplier accessibility. It is not sufficient to implement ASP for the competitive edge the system may give the enterprise or the high payoff the system promises. The past phase of ASP has proven that not all systems that appear promising will produce sufficient business results to justify their acquisition. However, it is no surprise that certain intelligent enterprises still find it difficult to evaluate the worth of prospective new technology. Borrowing from Checkland’s Human Activity System (HAS) concept, an ASP vendor will have problem with certain stakeholders and surrounding issues (Checkland & Scholes, 1990): • •

• •

Client: the systems beneficiary can be difficult to identify due to the outsourcing nature of ASP business arrangements. Owner: the eventual system owner may be anywhere between the negotiating party to a fourth party somewhere and in some cases not able to participate in the original negotiations. Actor: these are often individuals and groups—of various types and with various needs—who are usually involved in the system at different stages. Objective: what the project is intended to achieve is highly dependent on the process and it can often be different for various users and stakeholders.


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• •

Environment: the situation in which the system will be developed and implemented grossly affects the final outcome of the process. Expectation: there are often as many assumptions of a project as the number of times it is discussed. More important, these assumptions tend to change as one goes through various stages of the system development and implementation.

The issue here is not just one of investment; it also involves learning and time. There is a learning curve, sometimes quite steep, with new technology. If the enterprise has not developed a modern infrastructure over time, it will have to invest more for a new ASP initiative because of the need to build infrastructure. It will also have a longer development time as the IS staff learns about this infrastructure and develops the new applications that require it.

Problem, Solution, or Opportunity? One stimulus for ASP solution implementation is its intention to transform the enterprise. In this light, the investment in ASP is part of a larger change programme that is meant to enable intelligent enterprises’ virtual and multipleteam structures. The resulting contributions can be described as part of the outcome of a general change effort. Change is also an opportunity. For most of the companies involved in our research, management decided on a desired organization structure and used IT investments to help create it. Managers planned for change and welcomed it as an opportunity to make the entire organization function better. Change is always a threat, as staff members are forced to alter behavior that has probably been successful until now. However, as shown in some of the examples in this book, change is also an opportunity to reshape intelligent enterprises and make them more competitive. The push toward greater connectivity is a major factor driving ASP investments in the 21st century. The UK’s Department of Trade and Industry (DTI) has encouraged (some would say mandated) a certain level of electronic data interchange (EDI) compliance for companies that wish to do business with it. Industry associations encourage companies to communicate electronically. Efficient customer response, EDI, just-in-time, continuous replenishment programs, and the Internet are all examples of the different kinds of electronic connectivity.


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For the successful implementation of ASP in the 21st century, organizations must maintain a socio-technical perspective, thereby avoiding the purely technological approach to achieving higher productivity. Indeed, balancing this with the consideration of social and human aspects of technology brings the added value of creating a workplace that will provide job satisfaction. Such information systems must be designed to fit the needs of its users and the organization at large and be capable of evolving as these needs invariably change. Such ethical considerations of information systems have moved into the forefront as information systems have become pervasive in modern businesses. Ethics, for the most part, involve making decisions about right and wrong and not necessarily about the possible and impossible and only remotely relates to production increase or decrease. The major ethical issues that have been noticed to be affecting intelligent enterprises information systems in the 21st century can be summarized into privacy, accuracy, property, and access. In an effort to modernize, every challenging intelligent enterprise in the 21st century seems to be jumping on the ASP bandwagon. There comes a point when industry analysts should implement the critical success factor (CSF). The CSF methodology—developed by John Rockart of the Massachusetts Institute of Technology—defined as those few critical areas where things must go right for the business to flourish—derives organizational information requirements from the key info needs of individual executives or managers. CSF methodology is oriented toward supporting an enterprise’s strategic direction. By combining the CSFs of these managers, one can obtain factors critical to the success of the entire enterprise. Such an approach has been proven to be useful in controlling quality of the information system in certain vertical sectors (Bergeron & Bégin, 1989).

Effects of ASP on IS Departmental Staff Employee involvement is an employee’s active participation in performing work and improving business process (Alter, 1996). The old-fashioned view of employee involvement—employee following the employer’s instruction in return for a wage—encourages employee to be passive, take little initiative, and often view themselves as adversaries of the enterprise and its management. In contrast, truly involved employees feel a responsibility to improve their work practices with the help of managers and others in the enterprise.


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ASP can directly affect employee involvement. ASP can generally be deployed in ways that increase or decrease employee involvement in their work. An ASP business model that provides information and tools for employees increases involvement because it reinforces the employee’s authority and responsibility for work. On the other hand, an ASP business model that provides information to managers or quality inspectors but not their employees can reduce involvement by reinforcing the suspicion that the employee is not really responsible. The human and service side of the infrastructure in intelligent enterprises often gets short shrift in discussions of new systems or system enhancements. Business professionals are often surprised at the amount of effort and expense absorbed by the human infrastructure. The tendency toward organizational decentralization and outsourcing of many system-related functions makes it even more important to include human infrastructure in the analysis of new systems.

Human Factors in ASP Technologies Development The rapid rate of development of these technological miracles, as they would have been viewed from an earlier age, has created a momentum of its own, and it is not surprising that concomitant concerns have also developed about the impact and influence of ASP on human society. The shrinking of time and space enabled by ASP has benefits in terms of task efficiency and wider capability for communication, but it is less obvious that ease of management or even stress at work are improved at a deeper level (Markus, 1983). The above discussion should not be taken to imply that ASP models determine the direction of intelligent enterprise management. The development and the use of an ASP solution is within management control and there is no inevitable future path. However, it can be argued that the quantity and quality of debate about the human and societal impact of computers and related technology has not matched that rate of development of the technologies themselves (Walsham, 1993). For example, the debate concerning ASP and its Web services in intelligent enterprises largely centres on questions of strategic importance and value for money rather than deeper issues of human job satisfaction and quality of life. While the mechanistic view of enterprise formed the early foundation of an intelligent enterprise management, the image of enterprises as organisms has arguably been the most influential metaphor for management practice over the


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last few decades. The corporeal view sees intelligent enterprises as analogous to living systems, existing in a wider environment on which they depend for the satisfaction of various needs. The origins of this approach can be traced back to the work of Maslow (1943), which demonstrated the importance of social needs and human factors in work activities and enterprises effectiveness. It then emphasized that management must concern itself with personal growth and development of its employees rather than confining itself to the lower-level needs of money and security. With respect to social relations as considered in Web models, it is important to note that participants include users, system developers, the senior management of the company, and any other individuals or groups who are affected by the ASP business model. Kling (1987) notes that computing developments will be attractive to some enterprise participants because they provide leverage such as increasing control, speed, and discretion over work, or in increasing their bargaining capabilities. Fear of losing control or bargaining leverage will lead some participants to oppose particular computing arrangements, and to propose alternatives that better serve their interests. It could be said that the above comprises the analysis of what Checkland (1983) defines as the HAS. HAS can be seen as a view on the social, cultural, ethical, and technical situation of the organization. Both models deal with one old problem which continues to trouble information systems today. That is, thinking about the means by which to deal with the two aspects of any new system (human beings and technology) and how they can best communicate with each other. As it relates to ASP, the industry must bring together the right mix of social (human resources) and the technical (information technology and other technology) requirements. Here is where the key hardware and identified human alternatives, costs, availability, and constraints are married together. A synopsis of an IS problem usually appears chaotic and incomprehensible. An example is the NHS IS strategy as of December 2001 (Guah & Currie, 2002). The use of a problem framework will not only show the essence of a view of the problem context but will also demonstrate that getting the context and meaning of the problem right is more important than presentation. The primary tasks should reflect the most central elements of what is often called “problem setting.” ASP vendors should demonstrate, when reviewing a given situation, that any incoming information system is intended to support, develop, and execute primary tasks originally performed by humans. They should be aware of issues that are matters of dispute that can have a deleterious affect upon primary tasks. Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

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In terms of IS, the issues are often much more important than the tasks. Considering it is not possible to resolve all issues with any given technology, they should always be understood and recognized. That is because reality really is complex, so the ASP industry should never approach a problem situation with a conceited or inflated view of its own capacity. Not all problems can be mapped, discussed, and designed away. Often the ASP industry will be required to develop a form of amnesia toward certain problems that are either imponderable or too political in terms of the organization or business (Guah & Currie, 2002). A detailed understanding of the above will help in providing a reasonable answer to certain essential questions that are necessary for an ASP to satisfactorily produce working solutions for its customers. A few of the general questions are: Who is doing what, for whom, and to what end? In what environment is the new system to be implemented? To whom is the final system going to be answerable? What gaps will any addition to the old system fill within the new system?

Socio-Technical Issues An intelligent enterprise normally has separate objectives when looking at IS in terms of social and technical requirements. While the social objectives refer to the expectations of major stakeholders (i.e., employees), the technical objectives (Table 3.2) refer to capacity of the organization as a whole to react to key issues. Because the social objectives (Table 3.2) of an ASP solution can broadly be seen as the expectations of the system in terms of the human beings who are going to be working with it, they will vary from one project/contract to another. As they are often undervalued, management does not tend to feel that the social Table 3.2. Socio-technical benefits of ASP SOCIAL Being relatively self-sufficient Providing a quick service Providing job satisfaction Providing professional satisfaction Improving division’s professional status

TECHNICAL Informing management Improving timeliness Improving communication Increasing information-processing capacity Providing a long-term facility


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needs of a system are as critical for system development as technical issues. They may involve different ways of organizing individuals to undertake the work required for the system, simultaneously achieving the authoritative influence. The technical objectives (Table 3.2) are the primary tasks one hopes that the system will need to undertake and would therefore need to be very specific. It is important that ASP vendors indicate to their customers the depth of detail it needs to go into.

Selecting Information Systems ASP solutions come in various forms. Ideally, selecting among the alternatives should be based on clearly stated decision criteria that help resolve trade-offs and ASP uncertainties in light of practical constraints and implementation capabilities. The trade-offs for intelligent enterprises include things such as conflicting needs of different business processes, conflicts between technical purity and business requirements, and choices between performance and price. The uncertainties include uncertainty about the direction of future technology and about what is best for the enterprise. Implementation decisions are almost never made by formula because so many different considerations do not fit well into understandable formulas. Although these ideas provide some guidance and eliminate some options, there is no ideal formula for deciding which solution and capabilities to invest in. Many IS departments could double and still not have enough people to do all the work users would like. In practice, many IS departments allocate a percentage of their available time to different project categories, such as enhancements, major new systems, and user support. However, with each category, they still need to decide which systems to work on and what capabilities to provide. Cost-benefit may help with these decisions. Cost-benefit analysis is the process of evaluating proposed systems by comparing estimated benefits and costs (Alter, 1996). While the idea of comparing estimated benefits with estimated costs may sound logical, there are several limitations in terms of ASP business model. One could see the appropriateness when the solution’s purpose is to improve efficiency. But where the system is meant to provide management information, transform an enterprise or even to upgrade the IS infrastructure, it becomes terribly difficult to predict either the benefits or the costs of the solution. Considering costbenefit analyses are usually done to justify someone’s request for resources, the


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numbers in a cost-benefit study may be biased and may ignore or understate foreseeable solution risks (Alter, 1996). Key issues for cost-benefit analysis include the difference between tangible and intangible benefits, the tendency to underestimate costs, and the effect of the timing of costs and benefits.

Agent-Based Approach to ASP Most of the ASP applications mentioned in this book automate some aspect of the procurement process, thereby helping decision makers and administration staff to complete their purchasing activity. An agent-based approach to ASP is well equipped to address the challenges of multimarket package to eprocurement. This section of the paper is devoted to looking at the goal-driven autonomous agents that aim to satisfy user requirements and preferences while being flexible enough to deal with the diversity of semantics amongst markets, suppliers, service providers, and so forth. Service agents within the ASP model are the system’s gateway to external sources of goods and services. These agents are usually aware of the source’s market model and of the protocols it uses (Zhang, Lesser, Horling, Raja, & Wagner, 2000). Service agents are not only able to determine which requests they can service, but also proactively to read these requests and they try to find an acceptable solution. Agent technology has been widely adopted in the artificial intelligence and computer science communities. An agent is a computational system that operates autonomously, communicates asynchronously, and runs dynamically on different processes in different machines, which support the anonymous interoperation of agents. These qualities make agents useful for solving issues in information-intensive e-business, including speaking ontology, advertising, service exchange, knowledge discovery, and so forth. In the ASP industry, the interoperation and coordination across distributed services is very important. The desire for more cost efficiency and less suboptimal business processes also drives the employment of agent technology in the ASP business model. This has resulted in the support of agent technology; more ASP agents seem to be appearing on the Internet providing e-services as well as exchanging information and goods with other agents. The interoperation of ASP agents leads to the formation of the e-Business Mall, which is an interaction space of agent communities under various business domains.


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As indicated in this chapter and elsewhere in this book, the significant problems in the ASP business model are the information deficiency and asymmetry between the business participants. It is also difficult for each participant to exchange information products and services in an efficient manner, and to partner in an intelligent enterprise. The social nature of knowledge sharing— especially critical business knowledge—carries high complexity. The capability advertisement and knowledge discovery, upon which agent-based approach to ASP depends, can only be achieved by message interaction among dynamic processes. Knowledge or service relevance is one basis for such approach to be introduced to real-life business procedure and service contracting in the 21st century by companies.

Tangible and Intangible Benefits Benefits are often classified as either tangible or intangible. The tangible benefits of ASP solution can be measured directly to evaluate system performance. Examples include reduction in the time per phone call, improvement in response time, reduction in the amount of disk storage used, and reduction in the error rate. Notice that tangible benefits may or may not be measured in monetary terms. However, using a cost-benefit framework for ASP solution requires translating performance improvements into monetary terms so that benefits and costs can be compared. Intangible benefits affect performance but are difficult to measure because they refer to comparatively vague concepts. A few of intangible benefits of a solution are: • • • • • • •

Better coordination Better supervision Better morale Better information for decision making Ability to evaluate more alternatives Ability to respond quickly to unexpected situations Organizational learning


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Although these goals are worthwhile, it is often difficult to measure how well they have been accomplished. Even if it is possible to measure intangible benefits, it is difficult to express them in monetary terms that can be compared with costs. All too often, project costs are tangible and benefits are intangible. Although hard to quantify, intangible benefits are important and should not be ignored. Many of the benefits of IS are intangible.

The Role of Government Having articulated these basic parameters, it is now possible to focus on specific policy issues of most immediate concern to Western governments as they develop their agendas for Internet administration. Some of the issues affecting the success of the ASP business model are apparent now, but others remain on the horizons—not a problem of today but a potential one in the future: • •

•

Modernization of the machinery and process of government. This is to include the electronic delivery of services and information. Reform of intellectual property law to accommodate access to and exploitation of works via the Internet. This is to include administration of Internet domain names on an international basis. Facilitation of the development of e-commerce including national and international initiatives and measures to protect both suppliers and consumers operating within this electronic marketplace.

The Law of Confidence The law of confidence protects information. Unlike copyright and patent law, the law of confidence is not defined by statute nor derived from class law. The guiding principle is the protection of the business interest of the organization already using and benefiting from it. The scope of this branch of intellectual property is considerable and it protects trade secrets, business know-how and information such as lists of clients and contacts, information of a personal nature and even ideas which have not yet been expressed in a tangible form (Bainbridge, 2000). A typical example would be an idea for a new software program. The contents of many databases owned by intelligent enterprises will be protected by the law of confidence. However, the major limitation is that the information Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

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concerned must be of a confidential nature and the effectiveness of the law of confidence is largely or completely destroyed if the information concerned falls into the public domain; that is, if it becomes available to the public at large or becomes common knowledge to a particular group of the public such as computer software companies. Nevertheless, the law of confidence can be a useful supplement for intelligent enterprises to copyright and patent law as it can protect ideas before they are sufficiently developed to attract copyright protection or to enable an application for a patent to be made. Being rooted in equity, the law of confidence is very flexible and has proved capable of taking new technological developments in its stride.

References Alter, S. (1996). Information systems: A management perspective (2nd ed.). Benjamin/Cummings. Bainbridge, D. (2000). Introduction to computer law (4th ed.). Longman Pearson Education. Banker, R., & Kauffman, R. (1988). Strategic contributions of information technology: An empirical study of ATM networks. Proceedings of the Ninth International Conference on Information Systems, Minneapolis, MN. Bergeron, F., & Bégin, C. (1989). The use of critical success factors in evaluation of information systems: A case study. Journal of Management Information Systems, 5(4), 111–124. Checkland, P.B. (1983). Systems thinking, systems practice. Chichester, UK: Wiley. Checkland, P.B., & Scholes, J. (1990). Soft systems methodology in action. Chichester, UK: Wiley. Currie, W., Desai, B., Khan, N., Wang, X., & Weerakkody, V. (2003, January). Vendor strategies for business process and applications outsourcing: Recent findings from field research. Hawaii International Conference on Systems Sciences, Hawaii. Guah, M.W., & Currie, W.L. (2002). Evaluation of NHS information systems strategy: Exploring the ASP model. Issues of Information Systems Journal, October. Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

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Kling, R. (1987). Defining the boundaries of computing across complex organizations. In R. Boland & R. Hirschheim (Eds.), Critical issues in information systems research. New York: Wiley. Little, G. R. (1999). Paper 1: Theory of perception. Retrieved June 2002, from www.grlphilosophy.co.nz Markus, M.L. (1983). Power, politics and MIS implementation. Communications of the ACM, 26(6), 430–445. Maslow, A.H. (1943). A theory of human motivation. Psychological Review, 50, 370–396. Porter, M.E., & Millar, V.E. (1985). How information gives you competitive advantage. Harvard Business Review, 62(4), 149–160. Walsham, G. (1993). Interpreting information systems in organisations. Chichester, UK: Wiley. Weill, P. (1993). The role and value of IT infrastructure: Some empirical observations. In M. Khosrow-Pour & M. Mahmood (Eds.), Strategic information technology management: Perspectives on organizational growth and competitive advantage (pp. 547–572). Hershey, PA: Idea Group Publishing. Zhang, X., Lesser, V., Horling, B., Raja, A., & Wagner, T. (2000). Resourcebounded searches in an information marketplace. IEEE Internet Computing: Agents on the Net, 4(2), 49–57. Zwass, V. (1998). Foundations of information systems. Irwin/McGrawHill.


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Chapter IV

Recommendations Matthew W. Guah, Warwick University, UK

Abstract After looking at a few concerns we have about Web services, this chapter suggests a number of ways to approach the Web services business model. It reminds strategists to consider a more holistic approach to IT management rather than supporting their decisions with economies of scale or cost displacement alone. The chapter uses Porter’s classic theories of competitive advantage to review Web services adoption process within organizations.

Blurring In-House IT and ASP Services One impact of the ASP industry on business is the blurring of the old boundaries in IT services between in-house and ASP vendors. In the traditional view, services are merely an add-on to the in-house sector—they are by definition at least, “nonproductive.” In ASP, services either support the growth and survival Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

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of the in-house IT department, or they are perceived as socially desirable but not economically essential. Thus, IT consultancy services are important support services for short-term strategies, while “pay as you go” is perhaps nice for business but not essential to the survival of the ASP industry. At the centre of the ASP industry and critical to its wealth-producing capacity is the need for partnership, around which ancillary services revolve. What is commonly overlooked in this view is, first, the notion that the relationship between in-house and ASP is one of interdependence, not dependence. And, second, that the categories of ASP and in-house are not distinct and isolated domains, but represent two sides of a continuum. Thus, contrary to the traditional view, in ASP the growth of services helps support the growth of in-house. As the industry evolves and becomes more complex, the need for new services and specialization in the division of labor continues to increase. Inhouse migrates into strategic management and monitoring of IT standard while ASP migrates into value-added services so that “business IT becomes a service in a package form.” As the boundaries between in-house and ASP become more blurred through the use of improved communications technologies, the opportunities for entrepreneurs continue to increase.

Entrepreneurial Opportunities As the ASP industry matures, a premium is placed on ideas and the strategic use of data flow technology for new business development, rather than on economies of scale or cost displacement alone. The entrepreneur, therefore, becomes the primary user of new technology and ideas for strategic advantage. As a premium is placed on innovative ideas, small businesses acquire an advantage in being flexible enough to evolve new products and services. Moreover, as such innovation proceeds, the role of small business as source of employment continues to increase in significance, particularly in the ASP-like partnerships. Inevitably, even large corporations (such as IBM and most major players) in the ASP industry, are providing opportunities for corporate entrepreneurs to test new ideas under conditions where “normal” corporate constraints on risk-taking and new investments in internal ideas are relaxed. Corporations as large as IBM are providing opportunities for entrepreneurs to flourish internally. The term “intrapreneur” has been coined to describe this internal entrepreneur.


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When technological innovation is the main force leading to lower costs, the firm’s ability to create a competitive advantage depends on its technological skills. Technological innovations often bring costs down—sometimes significantly—thus making the cost reduction solely attributable to economies of scale seems comparatively minor. The enterprises responsible for these innovations draw a significant competitive advantage from them in terms of cost, notably when they succeed in maintaining an exclusive right upon them for a long period. Vendors can only benefit from experience through sustained effort, efficient management, and constant monitoring of costs (Dussauge, Hart, & Ramanantsoa, 1994).

Web Services and New-Game Strategy An ASP may deploy one or more of Porter’s classic theories of competitive strategies: differentiation, cost leadership, focused differentiation, or cost (Porter, 1985). The use of such competitive tactics may include internal growth or innovation, mergers or acquisitions, or strategic alliances with other enterprises or members of the same group of enterprises. However, most enterprises elect to use the new-game strategy which can be defined as a deliberate attempt to modify the forces shaping competition and the definition of the business by particular competitors (Buaron, 1981). Let us take Microsoft and Oracle, both big players in the ASP industry. The difference between spontaneous change in their competitive environments and new-game strategies has less to do with the objective characteristics of the ASP phenomenon than with their individual attitudes with respect to ASP phenomenon. In the first case, changes are seen as external to them, requiring adaptation. In the second case, however, certain initiatives by them are responsible for some changes in the industry and they have therefore deliberately based their strategy on them. Such strategies alter the pace of the change, generally making it more rapid and direct the focus of change in ways that will best benefit the innovating enterprise(s). Web services technology is one of the most important foundations for ASP new-game strategies. Thus, by accelerating the pace of Web services in the industry, a competitor with good capability in the technology reinforces its own competitive position. There are numerous papers warning that such accelerated Web service evolution increases the difficulty that other competitors have in adapting to ASP (Gottschalk, Graham, Kreger, & Snell, 2002; Honda,


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Nagaratnam, & Nadalin, 2002; The Stencil Group, 2002; Wilkes, 2002). By modifying the nature and the relative importance of the key factors for success in the ASP industry, Web service technological changes that are introduced by one or more of the vendors can lead to favorable changes in the competitive environment. In an industry built upon high volume, new technologies that are introduced by some of the competitors that nullify or minimize the impact of scale can significantly alter the nature of the competitive environment by making size a drawback rather than an advantage. Thus, referring back to the example of ASP content distribution, these innovations were driven by the actions of a few competitors, Microsoft and IBM. The changes that occurred in the competitive environment were thus the result of new-game strategies designed to change the rules of competition to their advantage: under the new rules, it was no longer a disadvantage to be a small producer. The competitive impact of such strategies is especially strong when the other competitors cannot use the same type of technology because it is not easily available, for lack of training or for financial reasons. During the period when an enterprise controls an exclusive technology, it can easily recoup its investment through high prices; but by the time this technology becomes more widely dispersed, prices tend to fall dramatically with the advent of new entrants. These investments are a significant entry barrier to competitors. However, the enterprise still manages to retain a dominant position and a good level of profitability in business, since it had recouped its initial investment many times over.

Dynamics Competitiveness Though the big vendors’ strategy depends on several factors, it is not etched in stone; rather, it will vary with the changes in the industry’s key factors for success and the relative advantage that its technology represents. Two types of competitive behavior with respect to technology can be observed: •

•

Switching from a differentiation strategy based on a technological advantage to a cost leadership strategy based on scale, accumulated experience, and a dominant market position; and Constant effort to innovate and improve technology, thereby maintaining a dynamic competitive advantage.


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Table 4.1. ASP model system life cycle (adapted from Alter, 1996) PHASES Initiation

TARGET OBJECTIVES Statement of problem IS expectations

Development

Deciding what the system should deliver Implementation IS running as part of the process to support business goals achievement Operation and Enhance system and correct bugs Maintenance

CHALLENGES Changes in expectations by time Users quite often lack a total understanding output Power and control issues within organization Diagnose/correct problems within time pressure

Oracle’s relative success so far can prove that firms displaying the first type of strategic behavior are generally those that have been able to attain a dominant position because of exclusive technology. As their technology becomes diffused over time, however, they tend to resort to competitive advantage based on their accumulated experience, good reputation, and distribution network. The second type of strategic behavior for vendors confronted with the erosion of their technology-based competitive advantage is a sustained effort to improve or even “reinvent” their technology; rather than “milking” their initial technological advantage, such firms choose to create a new competitive advantage through technological innovation. A vital difference between the ASP model and traditional system life cycle is that error in this initial phase may not proof fatal. That is because the model supports a smooth and easily controlled change method even after it goes into operation, mainly due to its third-party controlling nature. Table 4.1 describes the four general phases of any IS, which also serves as a common link for understanding and comparing different types of business processes used for building and maintaining systems within the ASP model.

ASP Becomes a Part of Strategy It is easy to focus on individual ASP investments rather than their cumulative impact. Intelligent enterprises budget for individual applications of technology and the IS staff works on a project basis. For some intelligent enterprises, the combination of all its individual investments in technology far exceeds their individual impact. A good example is SAP. Here, continued investments in ASP changed the software provision industry and SAP’s own view of its fundamental business. Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

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By becoming a necessity ASP may not create much benefit for intelligent enterprises that invest in it, except that ASP allows the enterprise to continue in a line of business. Who does benefit from investments of this type? The cynical answer might be the vendors of various kinds of ASP product and service. However, a better response is that customers benefit from better quality goods and services, and especially better customer service. Looking at our two earlier examples, customers are much better off with the presence of ATM and computerized reservation systems (CRS). An ATM is convenient and allows one to access cash without presenting a check at his or her own bank. With an ATM, you do not have to worry about a foreign bank accepting your check; from ATMs around the world you can withdraw cash. While airlines have certainly benefited from CRS, so too have customers. You can use a CRS to compare flights, times, ticket prices, and even on-time statistics for each flight. A consumer can make a reservation on a flight and complete the transaction over the telephone or the Internet. Economists talk about a concept called “consumer surplus.” How does consumer surplus relate to investments in strategic and competitive information technology? From a theoretical standpoint, consumer surplus increases as prices drop. The competitive use of ASP reduces costs and prices through applications like those in banking and airlines. The competitive use of ASP has, in many instances, reduced prices (or held down price increases), which contributes directly to consumer surplus. Technological competition may not always create an economic consumer surplus, but it does provide benefits in the form of service and convenience. An ATM can save time for the customer, something the customer may be able to value from a dollar/pound standpoint. The fact that two firms (IBM and Microsoft) had a similar Web service launched within a few months of each other means that the technology was not able to deliver a sustainable advantage from its investment. Neither was able to raise its prices directly to pay for their Web services, so the benefits from their investments in ASP all went to the customers. While the strategies of ASP vendors can thus change over time, a clear strategic direction is indispensable to success. In addition, the transition from one strategy to another is a very difficult and risky undertaking, since it requires a complete reorientation of the vendors’ efforts and radically different patterns of resource allocation. As we have seen, technology is often a major factor behind both differentiation and cost leadership strategies. It is also a critical factor in new-game strategies.


46 Guah

References Alter, S. (1996). Information systems: A management perspective (2nd ed.). Benjamin/Cummings. Buaron, R. (1981). New game strategies. McKinsey Quarterly, Spring. Dussauge, P., Hart, S., & Ramanantsoa, B. (1994). Strategic technology management: Integrating product technology into global business strategies for the 1990s. Chichester, UK: John Wiley & Sons. Gottschalk, K., Graham, S., Kreger, H., & Snell, J. (2002). Introduction to Web services architecture. IBM Systems Journal, 41(2). Hondo, M., Nagaratnam, N., & Nadalin, A. (2002). Securing Web services. IBM Systems Journal, 41(2). Porter, M.E. (1985). Competitive advantage. New York: Free Press. The Stencil Group. (2002). Understanding Web services management: An analysis memo. Retrieved May 2002, from www.stencilgroup.com Wilkes, L. (2002). IBM seeks partners to drive adoption of XML Web services. Interact, February.


Section II Case Studies

48 Choudrie and Dwivedi

Chapter V

Considering the Impact of Broadband on the Growth and Development of B2C Electronic Commerce Jyoti Choudrie, Brunel University, UK Yogesh Kumar Dwivedi, Brunel University, UK

Abstract Internet connectivity has a profound impact on almost all aspects of human lives including social interaction and individual behaviour. The impacts may further foster due to the availability and access of broadband Internet connection. This paper focuses on evaluating the impact of broadband on the growth and development of business-to-consumer (B2C) electronic commerce. The research data was collected from a total of 104 respondents and subjected to both quantitative and qualitative


Considering the Impact of Broadband on the Growth and Development of B2C 49

data analysis. The results indicate a significant impact of broadband use on transforming consumer behaviour towards adoption of B2C electronic commerce. The paper illustrates how broadband use has an influence on off-line purchase behaviour, online B2C electronic commerce and overall online experience. The conclusions drawn are that broadband adoption and use is encouraging the adoption of B2C electronic commerce.

Introduction It is an established fact that Internet connectivity has a significant impact on both the daily-life activities and electronic commerce consumer behaviour (Nie & Erbring, 2000). Internet innovation is transforming the production and delivery of various categories of products including information and entertainment. Furthermore, new Internet-based services such as e-mail, online conversation, and Web-driven information diffusion will slowly replace or supplement the traditional means of buying and selling (Nie & Erbring, 2000). Although the Internet is helping the spread and adoption of e-commerce, its narrow-width connection has been proven to be one of the major barriers against the growth and development of business-to-consumer (B2C) electronic commerce (Rose, Khoo, & Straub, 1999; Lee et al., 2001). Current research suggests that existing Internet connection—that is, narrowband—is limiting current consumption and access. Therefore, the aims of conducting this survey research are to examine the off-line purchase behaviour and the frequency of B2C ecommerce in the broadband environment. Other related issues that are examined in this article are reasons for shopping online, barriers to online shopping, reasons for subscribing to broadband, and overall online experience in the broadband environment. This exploratory study is structured into several sections. Section 2 provides a critical review of the previous surveys correlated with broadband impact on B2C e-commerce. This is followed by a discussion of the research method for data collection and analysis in section 3. The research findings are then presented in the form of graphs and charts in the section 4. These findings are compared and discussed in section 5. Finally, the limitations, research contributions, and future developments are evaluated and discussed in section 6.



Background Literature: Research Undertaken on B2C E-Commerce and Broadband Review of the literature for this research involved research method consisting of surveys of B2C e-commerce and broadband. This is to obtain similar contexts to this research. The initial theoretical review began by using the results of Rose, Khoo, and Straub (1999). The research identified six major categories of technological impediments to e-commerce including that of download delays. This is an attribute that broadband is viewed to overcome and is one that this research focussed upon (Rose, Khoo, & Straub, 1999). Broadband is described as a speedy Internet service. This is a primary factor that derives subscribers to adopt the broadband (Bouvard & Kurtzman, 2001). A McKinsey & Company (Carriere et al., 2000) study also reveals that high-speed and an always-on connection was the major reason for subscribing to broadband. However, increasing numbers of people are being motivated to obtain broadband by their desire to use specific Web services applications (Carriere et al., 2000). The most attractive features of broadband that UK consumers found desirable were increased speed and the ability to make voice calls whilst connected (Oftel, 2002). The unmetered access and the always-on nature of broadband are less-significant features. The reason for this may be the wide availability and use of narrowband unmetered packages. According to the study (Oftel, 2002), consumers claimed that the features of faster speeds and always-on access offered by broadband increased Internet usage and enhanced enjoyment. Furthermore, the majority of narrowband users (55%) expressed an interest in upgrading to broadband (Oftel, 2002). Additionally it has been found that broadband technologies are facilitating new Web services applications to meet consumer demands in transforming many aspects of everyday life (Carriere et al., 2000). Consequently, broadband consumers behave differently as they are online four times more than narrowband customers, use more online services, and their online experience is compelling (Figure 5.1) (Carriere et al., 2000). According to another study conducted by Nie and Erbring (2000), the majority of Internet users engage in at least five distinct types of activities on the Web; however, the most widespread use is the information search utility for products, travel, hobbies, and general information (Nie & Erbring, 2000).



Figure 5.1. Internet activities performed by U.S. consumers (Source: Adapted from McKinsey & Company, 2000) Broadband users are different

Exhibit 2

Percentage of users in the Unites States who use the Internet for ... Narrowband E-mail

Broadband

75.6

Downloading software Browsing

94 42

67

47

66

Chat

23

Buying consumer products Researching purchases made off line Using online financial services Playing games Buying software Time spent on line Hours per week

41

23

40

31

38 18

36

16 10 5.7

31 24 20.7

e-marketer: e-land inc., Ziff Davis; Time Warner; McKinsey analysis

Nie and Erbring (2000) have found that B2C online e-commerce is still conducted by a minority of Internet users. In contrast, the McKinsey & Company study (Carriere et al., 2000) found that broadband subscribers shopped online almost twice as much as narrowband subscribers (Figure 5.1). The reason for this shift is the consumers’ broadband access overcoming the problem of slow page loading. This has been viewed as a major cause for abandoning online shopping in a narrowband environment (Carriere et al., 2000). Similarly, another research study revealed that approximately half (46%) of the population using broadband at home state that more items are being bought online since they can connect more easily to the Internet using broadband (Bouvard & Kurtzman, 2001). B2C e-commerce is also being promoted via other applications utilised within the broadband domain. These include applications such as multimedia in research as explained in the following descriptions. Costa (2001) found that broadband networks allow access to other facilities such as multimedia (image, sound, and text) in a real-time context. This, in turn, has a positive influence on the selection and booking of holidays and travel tickets (Costa, 2001). Other studies that have also found the emergence of other applications via broadband are detailed in Bouvard and Kurtzman (2001). They found that multimedia,



which is enabled by broadband, is creating a new form of consumers. These consumers are focussed upon using electronic media and entertainment. Compared to narrowband users, broadband users spend 22% more total time on electronic media and are nearly twice as likely to watch or listen to downloaded or streamed content from the Internet. However, the amount of time per day that broadband users spent on downloaded or streamed content is still relatively small (Bouvard & Kurtzman, 2001). The aforementioned findings are based on surveys conducted in the United States and represent a significant—yet small—fraction of broadband users. This is because the impact of broadband uses remains unclear, as the penetration of broadband has not been achieved widely. Therefore, the truth of sociobehavioural change may or may not be consistent with these survey findings and the early predictions made across the globe. To examine this in different social, cultural, and economic environment, researchers from different countries must move from ideological claims to empirical evidence. This is necessary to sustain broadband technology, to improve the online consumer services, and to create a favourable environment for development and growth of B2C e-commerce. This chapter is an early attempt to provide initial and empirical evidence for this topical and emerging phenomenon.

Research Method As a recent phenomenon, broadband is still in the emergent stages of the development cycle. As a result, any research that is meant to emphasise its current position could not be a longitudinal one. Therefore, this study was designed to obtain a snapshot of the B2C e-commerce frequency and other related issues in a broadband environment. For such purposes, the researchers considered survey as a suitable research method. A number of techniques are available to capture data about B2C e-commerce in the broadband environment. However, to maintain information reliability (Cornford & Smithson, 1996) and to collect sufficient data within a limited time and budget (Hall & Hall, 1996), a self-administered questionnaire was considered to be the primary survey instrument for data collection in this investigation. Fowler (1993) has suggested that “if one is going to have a self-administered questionnaire, one must reconcile oneself to closed questions, which can be



answered by simply checking a box or circling the proper response from a set provided by the researcher.” Therefore, mainly multiple and closed questions were included in the questionnaire except two open-ended questions. Initially, the literature review provided an understanding of the broadband impact phenomenon and the basis for the development of a draft questionnaire. A pilot study validated the questionnaire. This was administered to 10 known respondents familiar with the topic. The majority of the respondents validated the content of the questionnaire and suggested a number of useful improvements that were adopted in the final design. The final questionnaire consisted of a total of 41 questions that included 39 close-ended, multiple and two open-ended questions. However, many categories of this survey questionnaire are not discussed here, including consumers’ online habits and activities performed online in the broadband environment. The aforementioned categories of the survey will be presented in a separate chapter (Dwivedi & Choudrie, 2003). This is due to the focus of this chapter being an examination of the reasons for shopping online, barriers to online shopping, reasons for subscribing to broadband, off-line purchase behaviour, frequency of B2C e-commerce, and the overall online experience in the broadband environment. Due to the uncertainty regarding personnel using the broadband facility, the researchers adopted the snowball or chain sampling (Fridah, n.d.) method when selecting the respondents for the survey. Initially, respondents with broadband connections were contacted to complete the questionnaire via email. Respondents were also requested to recommend friends and family contacts who had broadband connections at home. This strategy led to the questionnaire being administered to a total of 110 broadband users during the periods of July to August 2002. The questionnaires were administered to respondents mainly using e-mail. A small number of questionnaires were distributed personally. Of the 110 questionnaires administered, 104 respondents submitted completed questionnaires via e-mail. The initial stage of data analysis involved checking the responses and providing a unique identification number to each. Using SPSS (version 10.1) and Excel applications, the research mainly generated the descriptive statistics (i.e., frequencies, percentage, cross tables, and charts) to present the research data obtained from the questionnaire. The qualitative data obtained from the openended questions were summarised and discussed in light of the quantitative data.



Findings Using the literature, we identified several issues that needed to be investigated. In the following subsections they are identified and related to our research.

Demographic Details The respondents’ demographic details indicated that the majority of broadband users of this survey sample belonged to the age group of 20–35, had obtained higher education (undergraduate to postgraduate degree) qualifications, and had a high social and economic status. The results indicated that only 10.6% of the respondents had broadband access at home, whilst educational institutions served as a major point of broadband Internet access.

Reasons for Shopping Online According to the results of this investigation, the major reason for shopping online is convenience. The majority of the respondents (70.2%) stated that their most compelling reason for undertaking online purchasing was the convenience of shopping. The second most compelling reason was that online shopping saves time (Figure 5.2). Figure 5.2. Reasons for purchasing online Why Respondents Shop On-line?

29.80% 29.80% 49.00% 49%

60%

95.20% 95.20%

80.80% 80.80%

78.80% 78.80%

70.20% 70.20%

19.20% 19.20%

35.60% 35.60%

No Yes

21.20% 21.20%

Wider Brand Choices

Convenience

0%

4.80%

More Awareness

28.80% 28.80%

20%

Shopping Anytime

51.00% 51.00%

Lower Search Cost

40%

64.40% 64.40%

71.20% 71.20%

Save Time

Respondents

80%

Shopping from Anywhere

100%

Reasons



Barriers to Online Shopping Figure 5.3 depicts the three major impediments to online shopping. They are slow page loading, lack of trust, and difficult navigation sites. A little less than half of the respondents (42.3%) stated that they abandoned their online shopping due to slow page loading at some point of time. Whilst 27.9% respondents said that the major reasons for leaving the site without shopping is due to the difficult navigation of products/catalogues on the site. A similar percentage (28.8%) of people left the site without a purchase as they worried about trust.

Reasons for Subscribing to Broadband This research found that the most compelling reason for subscribing to broadband is faster access, rather than unmetered access or free home-phone line. Slightly over half of the respondents (58%) said that the most important reason for subscribing to broadband is the need for the high rate of data/file transfer. Statistics show that the always-on connection is the second most important reason (25%) for broadband subscription (Figure 5.4). Figure 5.3. Reasons for abandoning online shopping

No Yes

Others

Lack of Feel and Touch

Reasons

Lack of Trust

Security Problem

Technical

Difficult Navigation

100% 90% 80% 57.70% 57.70% 70% 71.20% 72.10% 72.10% 71.20% 79.80% 79.80% 81.70% 81.70% 60% 96.20% 96.20% 99% 99.00% 50% 40% 30% 42.30% 42.30% 20% 27.90% 28.80% 27.90% 28.80% 20.20% 20.20% 18.30% 18.30% 10% 3.80% 3.80% 1.00% 1% 0%

Slow Page Loading

Respondents

Reasons for abandoned online shopping



Figure 5.4. Reasons for subscribing to broadband connections 70% 58%

Respondents

60% 50% 40%

25%

30%

17.30%

20%

7.70%

10% 0%

Faster Access

Alw ays-onConnection

Un-metered Access Free Home Phone Line Reasons

Consumers’ Off-Line Purchase Behaviour in the Broadband Environment Figure 5.5 illustrates that 66% of the respondents search a site for a product before they buy it instead of the traditional channels of shopping. However, consumers still do not search the site using the Internet on a daily basis. Only 4.8% of respondents undertook this activity on a daily basis.

Figure 5.5. Frequency of using the Internet for off-line purchase research How often respondents research before purchase off-line?

36.50% 40% 35% Respondents

30%

24%

21.50%

25% 20% 15%

5.80%

6.70%

4.80%

10% 5% 0%

Never

O ffline purchase research

Rarely

Monthly

Weekly

A few times in a week

Daily



B2C Online Purchase The results illustrated that an estimated 66% of the respondents conducted online shopping in a broadband environment (Figure 5.6). However, the numbers of respondents who undertake online shopping on a daily basis are still minimal. Figure 5.6 depicts the respondents who purchase products online on a weekly or daily basis and this still falls below the 15% parameter. Furthermore, the frequency of online purchasing patterns differs in line with the offered products. Figure 5.7 demonstrates that books and music (55%) and travelrelated products (54%) are the most widely purchased products online. Following this, computing/hardware, entertainment, electronic goods, and software are the most frequently purchased goods online. In contrast, jewelery, food and beverages, and sporting goods are the least purchased products online.

Overall Online Satisfaction in the Broadband Environment Figure 5.8 illustrates that the majority of people (79%) who use broadband connections are satisfied with their online experiences. Ten percent of the Figure 5.6. Online purchase frequency How often respondents purchase on-line? 39.40% 40% 35%

Respondents

30%

23.10%

23.10%

25% 20% 9.60%

15% 10%

2.90%

1.90%

5% 0%

Never

O n-line Purchase

Rarely

Monthly

Weekly

A few times in a week

Daily



respondents said that they are very satisfied, whilst 5 % are not satisfied with past online experiences.

Discussions: Major Findings and Interpretations Broadband Internet Connection Oftel (2002) has reported that only 2% of UK homes are connected to the Internet using broadband. In contrast, this research found that 10% of the respondents of this survey sample have broadband at home excluding those who have broadband both at home and work. This indicates an increase in the surveyed population utilising a broadband connection. Contributing reasons include the increasing competition amongst broadband service providers and a decline in broadband connection prices. However, the research is cautious in making any claims on this particular issue.

How Can Broadband Promote the Adoption and Diffusion of B2C E-Commerce? The findings of this survey clearly indicate that convenience and time saving (see Figure 5.2) are major drivers leading to the adoption of e-commerce. Slow Internet connections were considered to be major barriers distracting consumers from making online purchases. The findings of this research support this. Forty-three percent of the consumers stated the major reason for abandoning online shopping was slow page loading. The second most important reason is difficult navigation of the site since 28% of the respondents abandoned online shopping due to this (Figure 5.3). These findings are further supported by the McKinsey & Company (Carriere et al., 2000) investigations, which mentioned slow page loading as a reason for abandoning online shopping. Difficult navigation of the site may occur due to several reasons, but one of the most important factors is the slow Internet connection from both the client side and server side (Rose, Khoo, & Straub, 1999). High traffic at peak times makes it even more difficult to navigate the site (Windham & Orton, 2000). Hence, the research concludes that slow page loading causes a major obstruction to online Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.


purchase. However, this may also trigger changes in the consumers’ attitude towards subscribing to broadband, but only if consumers are really interested in online purchasing.

Why do Consumers Subscribe to Broadband Internet? According to this investigation the primary reason for subscribing to broadband is a need for faster speed. Fifty-eight percent of the total respondents quoted this reason. Twenty-five percent of the respondents said that a second major reason to subscribe to broadband is an always-on connection. A free homephone line is the least preferred reason for the respondents (Figure 5.4). The findings of this research validate the previous finding by Carriere et al. (2000), Bouvard and Kurtzman (2001), and Oftel (2002). That is, whether faster access is a major reason for subscribing to broadband. However, the second most important factor that drives consumers to subscribing to broadband differs from that of previous studies. This investigation supports the McKinsey & Company (Carriere et al., 2000) findings that an always-on connection is the second most important factor for subscribing to broadband. However, it contradicts the findings of Oftel (2002), which found that a free home-phone line is the second most important reason for subscribing to broadband. Consumers who use broadband connections do not like to log on repeatedly and waste time. Therefore, the second most important reason is the always-on connection. The Oftel (2002) report mentioned that consumers claimed that the faster speed and always-on access offered by broadband increased usage and enhanced enjoyment. This further supports the findings and the researchers’ views. On the basis of the above discussions, this research study concludes that although faster access is a key factor for driving consumers to subscribe to broadband, there are many other secondary factors, such as convenience and saving time for online shopping, slow page loadings, unmetered access, free home-phone line, and so forth, act as secondary triggers to stimulate consumers.

How Consumers’ Off-Line Purchasing Behaviour Differs from That in the Broadband Environment? This research also found a significant shift towards higher levels of research before purchase in a broadband environment is undertaken. Sixty-six percent Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.


of the respondents accepted that they search products and prices online regardless of the channel of actual purchase (Figure 5.5). This is a higher value than reported by Carriere et al. (2000). According to this research, 31% of the respondents undertake this in a narrowband environment and 38% in the broadband environment (Figure 5.1) (Carriere et al., 2000). The results of the qualitative data also support this finding. When respondents were asked, “What do you think is the most important change that has occurred in your shopping attitude and behaviour since having connected to the Internet?”, the majority of the respondents said that their shopping attitudes and behaviours have been changed as they undertake more research before they purchase any products. Due to broadband, consumers are much more aware of the market, products, and prices as they have better connections to the Internet. According to one of the respondents, the following change in behaviour and attitude has occurred: More selective in choice of product, with full understanding of the product by utilising several review sources being most important followed by comparison of price being second. I will now search for a specific product in advance to when I’ll need it, as I’m aware of the time lag in receipt due to post. This means I do not buy for the immediate satisfaction; however, this is replaced by the new pleasurable shopping experience of a parcel arriving at your door! My other traditional shopping behaviour has changed, as I do not make so many compulsory purchases in the products I buy online. However, this has not changed the shopping habits of products I do not buy online. Furthermore, when respondents were asked, “What do you think is the most important change that has occurred in your online shopping attitude and behaviour since having broadband?”, the majority of the respondents said that their researching behaviour changed incredibly in an online environment. With a broadband connection, respondents researched much more than they did with a narrowband connection. With broadband, consumers also enjoyed accessing more graphical pages, which significantly enhanced their research experience. The respondents also accepted that in a broadband environment their overall online experience is more compelling and enjoyable. Findings from both the close- and open-ended questions indicated that broadband has a direct impact on consumer behaviour related to online products and prices research. Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.


How B2C Consumer Online Purchase Activity Differs in the Broadband Environment The McKinsey & Company research (Carriere et al., 2000) found that only 23% of respondents purchase products using narrowband connections. On the other hand, 40% of broadband subscribers undertook online shopping (Carriere et al., 2000). This research found that 67% of the respondents had undertaken online shopping. This is a major impact of broadband connections on online shopping behaviour (Figure 5.6). This is further supported by the data obtained from the open-ended questions. When respondents were asked about the most important change that has occurred in their online shopping attitudes and behaviours since having connected with broadband, the majority of respondents said that their shopping behaviour changed incredibly in a broadband environment. They accepted that they purchased more online in the broadband environment since high-speed connections facilitate them to compare the products and prices rapidly, which results in a purchase. This issue is illustrated below: Due to the speed of broadband I can compare products faster and arrive at a decision quicker, usually resulting in a buy. Slow connections result Figure 5.7. Products purchased online What Respondents Purchase Online? 120%

80%

45.20% 45.20% 54.80% 54.80%

40%

80.80% 80.80% 75% 96.20% 75% 96.20% 83.70% 98.10% 83.70% 98.10% 90.40% 90.40% 91.30% 91.30%

No Yes

53.80% 53.80%

Other

DIY/Gardening

Sporting Goods

Food & Beverage

21.20% 21.20% 19.20% 19.20% 16.30% 16.30% 9.60% 10.60% 9.60%8.70% 10.60% 3.90% 3.80% 8.70%1.90% 1.90% 3.80% 3.90%

Gifts & Flowers

25% 25%

21.20% 21.20%

Books & Music

0%

78.80% 78.80% 89.40% 89.40%

46.20% 46.20%

60%

20%

96.20% 96.20%

78.80% 78.80%

PC/Hardware

Respondents

100%

Products



in no purchase. For example, I do not shop online when I visit home as they have a “slow” 56k connection. Compulsive buys can occur in my home as I realise that I need a certain product that may not necessarily be on my mind when high-street shopping. Due to speed (again) I can find the product whilst the impetus is on me to purchase it. This may mean I am more inclined to be persuaded by TV adverts! Although broadband has an impact on online shopping, the frequency of online purchases is not similar for all products. Figure 5.7 illustrates that books, music, travel and holiday reservations, electronic goods, personal computing, hardware, and entertainment are products that are purchased by the majority of the respondents more frequently. According to a framework proposed by Asch (2001), one can argue that although broadband triggers consumers to undertake more online purchases, it may or may not stimulate consumers to purchase products with a high purchase value and high-risk involvement.

How Does Consumer Satisfaction Level Differ in a Broadband Environment? With regards to the satisfaction levels obtained in a broadband environment, the McKinsey & Company study (Carriere et al., 2000) found that 71% of the broadband users’ online experience was compelling (Carriere et al., 2000). The investigation results showed that 89% of the respondents were satisfied with their online experiences (Figure 5.8). This value is even higher than that of Figure 5.8. Level of satisfaction in broadband environment for online services Respondents Overall On-line Experience Very Satisfactory 10% Other 6% Not Satisfactory 5%

Satisfactory 79%



Figure 5.9. Impact of broadband on users online habits, activities performed and B-2-C consumer behaviour (see reference 11) Secondary Factors

Primary Factors

Broadband

Saving Time

Convenience

Always-on Connection

Broadband use triggers changes in individuals online behaviour

Slow Page Loading

External triggers that stimulate consumers to subscribe to broadband

Consumer

Faster Access

Video Streaming

Changes in Online Habit More Positive Attitude

Video Conferencing

Use Internet Many Times a Day

Broadband Applications

Increase in Total Time Spent Online Download of Graphical Pages, Software, Music, and Video

These Trigger Too Many New Behaviours

Online B2C E-commerce (Thrice than before)

Online Activities

Search More Often (Product & Price)

Purchase More Number of Products

Difficult Navigation

E-commerce (B2C)

Use More Often

Purchase More Often

Use More Activities

Use More Broadband-Specific Content & Applications

Consumer Overall On-line Experience is Compelling



previous studies. This illustrates that broadband has a significant impact on consumer online satisfaction level.

Concluding Remarks The results and discussions of this chapter indicate that broadband acted as a catalyst to changing consumer behaviour towards adoption of B2C e-commerce. On the basis of discussion made in section 5, overall impact of broadband is illustrated in Figure 5.9. Most of the findings of this research are consistent with previous results, except certain exclusions. This study suggests that most of the respondents subscribe to broadband to obtain faster access to the Internet. The percentages of B2C online shopping numbers have increased and consumers are often satisfied with their online experiences. The findings and analysis of this study also suggests that the frequency of online purchasing differs within products. The most frequently purchased online products include books, music, travel and holiday reservation, entertainment, personal computing, and consumer electronics. Further, the findings of this research demonstrate that broadband will play a major role in improving the B2C e-commerce market. Therefore, wide adoption of broadband by consumers will produce a significant impact on various components of the e-commerce ecology. As our results indicate, broadband accelerates the growth of B2C e-commerce, which has encouraging implications for the development of the B2C e-commerce market. However, further in-depth studies are required before any business strategies are formed.

Limitations and Future Directions The first limitation of this research is the scarcity of academic research and data as references in order to discuss the findings and to generalise the results. Therefore, the research was forced to use the findings and data from industry research. The other limitation of this research is the generalisation of findings that are highlighted.



The generalisations of this study required collecting the data randomly from a wide geographical area. Furthermore, this research was also required to supplement the questionnaire data with interviews. However, these were not possible to undertake due to the shortage of time and resources. The data for this research have been collected within a short period of time. This could, however, have been expanded over a longer period to eliminate any variables that may have produced anomalies in the results found. For forming any strategy, it is essential to collect longitudinal data from various segments of consumers. However, since broadband is still a novel area, empirical evidence is difficult to obtain. Future directions for this research includes examining consumer behaviour and the applications and services that broadband can offer. Studying the impact of broadband on consumer behaviour is a very broad area. There is a need to research specific areas such as music and software download, entertainment, retail, travel and tourism, and so forth, on an individual basis in order to determine the real impact.

References Asch, D. (2001). Competing in the new economy. European Business Journal, 13(3), 119. Bouvard, P., & Kurtzman, W. (2001). The broadband revolution: How superfast Internet access changes media habits in American households. Arbitron & Coleman. Carriere, R. et al. (2000). Broadband changes everything. McKinsey & Company. Cornford, T., & Smithson, S. (1996). Project research in information systems: A student’s guide. London: Macmillan. Costa, L. (2001). Managing impact and use of “information & communication technologies based services” in tourism sector, Final report on working group E, June 2001. Retrieved July 20, 2002, from http://europa.eu.int/ comm/enterprise/services/tourism/workinggroups/ finalreportejune2001en.pdf Dwivedi, Y.K., & Choudrie, J. (2003, June 22–24). Investigating the impact of broadband upon the users’ online habits and the usage of Internet Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.


services. Paper presented at the International Telecommunication Society’s Asia-Indian Ocean Regional (ITS) Conference, Curtin University of Technology, Perth, Australia. Fowler, F.J. (1993). Survey research methods (2nd ed.). London: Sage. Fridah M.W. (n.d.). Sampling in research. Retrieved April 29, 2002, from http://trochim.human.Cornell.edu/tutorial/mugo/tutorial.htm Hall, D., & Hall, I. (1996). Practical social research: Project work in the community. London: Macmillan. Lee, H. et al. (2001). The growth of broadband Internet connections in South Korea: Contributing Factors. Paper presented at the 14th Bled Electronic Commerce Conference, Bled, Slovenia. Nie, N.H., & Erbring, L. (2000, February 17). Internet and society: A preliminary report. Stanford, CA: Stanford Institute for the Quantitative Study of Society (SIQSS). Oftel. (2002). Consumer research programme: Internet & residential consumers. Retrieved June 17, 2002, from http://www.oftel.gov.uk/publications/news/on55/res0202.htm Rose, G., Khoo, H., & Straub, D.W. (1999). Current technological impediments to B2C electronic commerce. CAIS Articles, 1(16). Retrieved from http://cais.isworld.org/articles/1-16/article.htm Windham, L., & Orton, K. (2000). The soul of the new consumer: The attitudes, behaviour, and preferences of e-customers. Oxford: Windsor Books.


Online and Traditional Trading on the NASDAQ 67

Chapter VI

A Theoretical Approach to Evaluate Online and Traditional Trading on the NASDAQ Stock Exchange Haroun Alryalat, Brunel University, UK Yogesh Kumar Dwivedi, Brunel University, UK Jasna Kuljis, Brunel University, UK Ray J. Paul, Brunel University, UK

Abstract The aim of this chapter is to discuss current online and traditional trading on the NASDAQ stock exchange using theoretical approach. The paper aims to derive future trends for the online stock trading. The following are objectives of this paper: (1) To describe the current state of online trading; (2) To compare the execution of quality trades between market makers and electronic communications networks (ECNs). By achieving Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

68 Alryalat, Dwivedi, Kuljis and Paul

set objectives, this paper will provide insight into how ECNs are used and what impact they have on the overall NASDAQ market performance.

Introduction The trading of stock involves three primary functions: the gathering of trading orders, the execution of these orders, and the settlement of the trades. The cost structures and the social externalities of these three functions differ. Furthermore, each has different regulatory issues. The ultimate goal of a wellfunctioning stock market is to bring together all possible buyers and sellers, so that the market price reflects the combined preferences of all participants. The advent of online stock trading represents a unique opportunity to study the effect of changes in the mix of naïve and sophisticated traders on market behavior. This setting allows us to investigate the descriptive validity of recent models of trade with asymmetrically informed investors. Most of the models of trading behavior group traders into one of two categories: informed traders (who know something about the true price of the security) or liquidity traders (who need to trade for reasons of liquidity) (Barclay, Hendershott, & McCormick, 2001; Barber et al., 2001). Technology that allows services traditionally provided by people in buildings to be replaced by services provided by the software industry and computers is challenging traditional practices in the brokerage industry and stock exchange. Traditionally, stockbrokers have been known for their “full service,” as the friendly “financial consultant” whom you knew for over 10 years, and who knew your risk appetite. They would provide news about stocks and markets. They would also provide liberal financial advice. But they would also offer advice, service, and preference in initial public offerings (IPOs) and blame it on the broker. For these “services” they charge a commission that would sometimes amount to a percentage of the value that you had traded. The key issue in full-service brokerages is that the brokers are compensated on trading volume, and not on the performance of your portfolio. Discount brokers—known as such for their “discounting” of the commission— began the practice of flat fees for trading. The Internet helped the onset of online discount brokerages (Web broker). Online brokerages replace people and telephones with computers and code, they offer cost-efficient trades, 24-hour



service, fast trade execution, banking facilities, access to IPOs online, access to market information, and no one to blame. Because of online services, the fee percentage declined dramatically. The start-up fixed costs of setting up an online firm are far lower than setting up a traditional full-service brokerage (Barber et al., 2001). Traders tend to have very different preferences for trading with market makers and trading on an ECN (which automatically matches, buys, and sells orders at specified prices) because of their different trading motives. These developments are commonly attributed to the efficiency of “friction-free” electronic markets that lower transaction and information processing costs by reducing human intermediation (Konana, Menon, & Balasubramanian, 2000). The Internet serves as an excellent tool for investors, allowing them an easy and inexpensive way to research investment opportunities. On the other hand, the Internet is also an excellent tool for fraudsters. For this reason, investors should always think twice before investing in any opportunity for trading through the Internet. Online trading investors need to understand the risks of online trading or in securities trading in general. The aim of this chapter is to evaluate current online and traditional trading on the NASDAQ stock exchange using theoretical approach. The chapter aims to derive future trends for the online stock trading. The following are objectives of this chapter: (1) To describe the current state of online trading; (2) To compare the execution of quality trades between market makers and ECNs. By achieving set objectives, this chapter will provide insight into how ECNs are used and what impact they have on the overall NASDAQ market performance. Section 1 briefly introduces online stock trading and defines aims and objectives of this paper. Section 2 presents a background of the structure of U.S. stock market and online stock trading in the NASDAQ stock exchange. The section includes the different trading mechanisms to match, buy, and sell orders resulting in diverse market outcomes in terms of execution price and speed. Section 3 then goes into more detail about how online investors affect markets. The section provides background of investor’s behavior on financial market to understand the investor’s performance. Section 4 presents the existing regulation relative online trading with respect to a number of important factors. Finally, section 5 presents the conclusion.



The Structure of U.S. Stock Markets Equity markets worldwide are in a state of change. Technology and the Internet have and will continue to have a profound impact on the structure of the equity markets (Blume, 2000). A U.S. investor will be able to trade with just a click on any market that provides advantages over the markets in the United States. Investors in the U.S. stock are desperate; there are institutional investors, households with substantial assets, a large number of households with limited assets, day traders, less active traders, foreign investors, after-hour traders, and so on. The different ways of trading will evolve to satisfy their varying needs. An essential concept of national market system (NMS) was to make information on price, volume, and quotes for securities in all markets available to all investors, so that buyers and sellers of securities, wherever located, can make informed investment decisions and not pay more than the lowest price at which someone is willing to sell, or not sell for less than the highest price a buyer is prepared to offer (SEC, 2000). The Securities ad Exchange Commission (SEC) believes full disclosure will ultimately produce informed investors and will eventually put increase competitive pressure on brokerage firms (Fan, Stallaert, & Whinston, 2000; Yue, Chaturvedi, & Mehta, 2000). A trading system is crucial to an exchange market and plays a critical role in determining the overall efficiency of the market. Market efficiency is largely affected by the way trading is organised (Fan et al., 2000). Despite proposed changes in the securities trading process and the introduction of electronic trading systems, other processes determining market efficiency, including order flow, price discovery, and order execution, remain largely unchanged (Figure 6.1). Konana et al. (2000) find that for efficiency to move beyond the user interface into the actual trading process, investors need a transparent window to observe the actual flow of orders, the time of execution, and the commission structure of various points in the trading process. Figure 6.1. The market process of securities trading information search

order routing

negotiation and agreement

clearing and settlement



Some researchers have argued that institutional rules, regulations, and monitoring functions would play a significant role in promoting efficiency and transparency along the value chain in electronic markets. Transparency across market centers help to mitigate the effects of the fragmentation. Last trade and quote reporting provide a great deal of transparency across U.S. market centers, but market centers are not fully transparent. For greater transparency of price and quote information, the SEC in 1997 instituted new order handling rules (Schwartz, 2000). Current trends in the market structure for trading stocks will be worldwide. The physical location of the market center where the trade happens will not matter. Technology will make the location of the market center, the currency, and the time of trade a matter of choice. Today, a major hindrance to the development of a global market is settlement and the clearing mechanism (Blume, 2000).

The Current Scene at NASDAQ Most dramatic in the United States was the National Association of Securities Dealers’ (NASD’s) acquisition of the American stock exchange in June 1998 (Blume, 2000; Schwartz, 2000). The NASDAQ is not a physical entity. It is an over-the-counter market (OTC) and it relies on market makers to facilitate trading and liquidity in stock (ensure that there are always buyers and sellers for NASDAQ-tested securities, and enable trades to be filled quickly and efficiently). For each stock, there is at least one market maker; NASDAQ is mainly a dealership market with an average of approximately 12.3 market makers per NASDAQ stock. But the emergence of ECNs has added an auction element in the NASDAQ market (Fan et al., 2000). Rather than being an auction market, NASDAQ is a communication network between thousands of computers, which transmits real-time quote and trade data to more than 1.3 million users in 83 countries (www.nasdaq.com, 2002). Instead of brokers calling out orders, market makers place their name on a list of buyers and sellers, which is then distributed by the NASDAQ in a split second to thousands of other computers. If an investor wishes to buy a stock that trades on the NASDAQ, the broker will either call up a market maker with the information of the trade or enter an order into a NASDAQ-sponsored online execution system. NASDAQ market makers that trade listed stocks are currently linked to the exchanges through NASDAQ’s CAES system’s interface with the Intermarket Copyright © 2006, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.


Table 6.1. Market share of trade and daily share volumes of ECNs (SEC, 2000) Vendor

Market Share of

Exchange/Broker

Daily Share Volume

ECN Trades

Archipelago

Filed as Exchange

1%

25 million

Attain

Filed as Exchange

?

?

B-Trade

Broker

7%

35 million

BRUT

Broker

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