Interorganizational Systems

 Written by: Emilia Dosseva, N:7068

Electronic commerce is as old as the telegraph, and businesses have relied on computers for decades. The sharp drop in the price of computing power in recent years has accelerated the process of substituting information processing by people with automated information processing. The development of personal computers began to change the business/computer interface. Individuals with no knowledge of computer programming could use computers to accomplish a wide variety of tasks. In response to these changes, the number of employees charged with maintaining information systems equipment and accessing or inputting data increased. Information technology personnel no longer needed to be isolated by the demands of the computer system. Instead, they could work in a variety of environments throughout the organization. Professional programmers or information systems managers retained responsibility for maintaining mainframe systems, but t! hose systems were increasingly connected to networks of personal computers.

The use of networked computers in a business environment is not simply a consequence of the widespread use of personal computers. Financial industries were early pioneers in the use of networked computers for funds transfer systems. Also, electronic contracting conducted over electronic data interchange systems generally relied on "value-added networks" (VANs) that provided secure connections between trading partners.

A VAN is a particular type of public data network that in addition to offering transmission facilities, contains intelligence that makes the basic facilities better suited for satisfying the communications needs of a particular type of user. The intelligence might provide code or speed translation, or it could store messages and deliver them at a later time. This intelligence provides the "added value" from which the generic name of this type of network is derived.

Actually VAN is a variety of "wide-area network" (WAN). WANs span broad geographical distances, ranging from several miles to across entire continents. They are used to connect the different offices of multinational companies. In most cases the building of the network starts as a "local-area network" (LAN) in offices situated in different countries and continents, but the need of instantaneous information about the everyday transactions has resulted in the establishment of broader interorganizational networks. Different LANs are connected with each other and thus form an entire corporate network situated in several continents, namely a WAN.

The technical standards that permitted the interoperability of these networks were public standards, such as those developed by the American National Standards Institute (ANSI) or the International Standards Organization (ISO), standards set by trade associations or industry consortia, or private, proprietary standards.

The change from segregated mainframe systems to distributed networks of personal computers resulted in both costs and benefits. The cost associated with distributing access to information systems is not limited to the expense of purchasing and maintaining the hardware and software involved, although that may be very substantial. In order for employees to make use of equipment, obviously they must be adequately trained in its use. Furthermore, in order to safeguard financial and physical assets, computers must be integrated into the existing administrative and control systems. The benefits include the increased flexibility in distributing information within organizations and the ability to collect and process information about products and markets more rapidly. In addition, the rapidly falling price of information processing power has permitted many businesses to collect and manage information as an asset of the organization that was previously undervalued an! d underexploited. One of the great benefits of linking enterprise information systems with an open network such as the Internet has been the ability to provide marketing and customer service online without the expense of engineering around proprietary or incompatible computer system standards.

The Internet is an international network of computers based on open, public technical standards. The architecture of the Internet reflects its Cold War origins. The Department of Defense wanted a network that could withstand partial outages (whether from bomb attacks or a backhoe cutting network cables) and still function. The technical solution to this problem was a decentralized network of computers that could communicate with every other computer on the network as a peer. This required a minimum of information to be transmitted and received effectively, assigning the responsibility for completing the communication to the communicating computers, rather than a centralized control system. This system is known as a "packet switching" paradigm for communication. The messages are broken into packets and each packet is routed to the destination without any previously established communicati! on path before the message packets are reassembled and checked for integrity by the receiving computer.

From a technical perspective, the Internet is a network of networks based on TCP/IP protocols, a community of people who use and develop those protocols, and a collection of resources that can be reached from those networks. TCP/IP refers to the networking protocols that establish the Internet: the Transmission Control Protocol and Internet Protocol. While the Internet is a computer network based on these protocols, it also has gateways to other networks and services that are based on other protocols. Each computer connected to the Internet has software that manages the connection to the network. This software can translate data to and from a format that can be transmitted over the Internet and a format that can be used locally.

The IP is implemented in each computer and each gateway to another network. Blocks of data are sent out through as many computers or gateways as needed until they reach their intended destination. The IP software must have information that allows it to know where to route a block of data. The TCP ensures that data is delivered error free, in sequence, and with no loss or duplication. Whereas the IP only handles blocks of data and is not concerned with errors or sequences, the TCP has the responsibility, on the user's behalf, to achieve reliable data transfer. In addition, the TCP allows users to indicate the urgency or priority of their transmission and to assign a security classification to it.

The Internet is composed of many different systems, some that merely support the exchange of e-mail messages between different computer systems and some that support the storage and retrieval of information in a wide variety of formats. The World Wide Web (the "Web") became a mass media phenomenon with the development of "web browser" programs that permit personal computers to access a wide variety of files from web sites. Web browsers permitted users to view graphics, hear sound files, or watch digital video clips, as well as to read text.

The National Research Council has noted that the Internet is now "open" in at least the following four senses. (1) It is open to users because it does not force users into closed groups or deny access to any sectors of society but instead permits universal connectivity, like the telephone system. (2) It is open to service providers because it provides an open and accessible environment for competing commercial and intellectual interests. For example, competitive access for information providers is permitted. (3) It is open to network providers because any network provider can meet the necessary requirements to attach and become a part of the aggregate of interconnected networks. (4) It is open to change because it continually permits the introduction of new applications and services. It is not limited to only one application, as in television. It also permits the introduc! tion of new technologies as they became available.

The notion of electronic cooperation between organizations has been in vogue for some time. Interorganizational systems were discussed as early as 1966. In a Harvard Business Review article that year, Felix Kaufman implored general managers to think beyond their own organizational boundaries to the possibilities of extracorporate systems. His was a visionary argument about newly introduced computer time-sharing and networking capabilities.

Today many of the most dramatic and potentially powerful uses of IT involve networks that transcend company boundaries. These interorganizational systems (IOS's) - defined as networked information systems used by two or more separate organizations to perform a joint business function - will significantly contribute to enhanced productivity, flexibility, and competitiveness of many companies. An IOS often involves electronically linking a production company to its suppliers or to its customers in such a way that raw materials are ordered, production takes place, and finished goods sent to the customer to meet demands with little or no paper changing hands.

However, there are two important factors that can retard the adoption of IOS. First, the cost of establishing a connection to the supplier may be prohibitive for some small businesses. Second, the buyer wants to avoid incurring switching costs that make it expensive to change. Fortunately, the Internet overcomes these problems.

The growth of interorganizational systems is due to various technological, economic, and organizational changes:

The Need for Fast, Reliable Information Exchange in Response to Rapidly Changing Markets, Products, and Services. This trend is mainly based on increasing international competition, shrinking geographic separation, and deregulation with more open competition.

The Evolution of Guidelines, Standards, and Protocols. As a response to the need for better and faster information exchange, interest has grown in developing standard definitions, protocols, and product encoding.

Penetration of Information Technology into Internal Business Processes. The combination of decreasing IT costs and increasing capability has resulted in a broader range of internal computer applications. As more and more data are stored in computers, the natural next step is to transmit these data in machine-readable form to wherever they are needed. This prevents redundant encoding of data and makes information readily accessible. Both the money and the time saved easily justify such data and resourse sharing. The combination of more internal company data on computers, standards for intercompany exchange of information, and clear economic justification makes participation in interorganizational systems very attractive.

Technical Quality and Capability of Information Technology. As IT has become increasingly reliable, companies can use IOS's in business-sensitive areas, such as in dealing with customers. For example, with automatic teller machines (ATMs) the customer's perception of a bank's service is tested at each use of the machine. Too frequent problems may cause users to change banks.

In the broadest terms, an IOS consists of a computer and communication infrastructure that permits the sharing of an application, such as programs for making reservations or for ordering supplies. The players in a system are either participants or facilitators. An IOS participant is an organization that develops, operates, or utilizes an IOS to exchange information that supports a primary business process. Participants can be competitors, organizations in the buyer-supplier chain, or a combination of these. An IOS facilitator is an organization that aids in the development, operation, or use of such a network for exchange of information among participants. The supporting products or services are a part of the primary business of the facilitator.

It is possible to distinguish an IOS from distributed data processing (DDP) in four important ways:

1. Whereas DDP is under the control of a single company, an IOS crosses company boundaries. Thus an employee in one company can directly allocate resourses and initiate business processes in another company.
2. With an IOS, in contrast to DDP, the question of government regulation arises as a result of the information exchange across the boundaries of separate organizations and hence across separate legal entities.
3. The IOS facilitator is a player that doesn't exist in DDP. An example of an IOS facilitator is the CIRRUS nationwide network of ATMs. CIRRUS, which is not a bank, permits subscribing banks to give their customers 24-hour, coast-to-coast access to their ATM system. The home banking system network offered by CompuServe is another example of an IOS facilitator.
4. An IOS frequently has a broader and more significant potential competitive impact than the traditional internal uses of IT. For example, a major bank has developed an application it calls the treasury decision support system (TDSS). TDSS is a microcomputer-based system that the bank makes available to its largest corporate customers for use by their company treasurers. The system communicates with the bank's host computer and will accept input from a range of other systems. TDSS permits a treasurer to track, report, analyze, and perform simple manipulation of data concerning the company's funds.

The variety and use of existing IOS's are as broad and complex as the industries in which they have evolved. To facilitate planning, analyzing, and deciding whether to develop or participate in an IOS, companies need a comprehensive framework. The framework must show use of computer and communications technology from a strategic rather than a tactical perspective.

Michael Porter's industry and competitive analysis framework can be used in this manner. Porter argues that many strategic planning frameworks view competition too narrowly and pessimistically because they are primarily based on projections of market share and market growth. He asserts that the economy and competitive forces in an industry segment result from a broader range of factors than the established combatants in a particular industry. According to him, the state of competition in an industry depends on five forces: (1) bargaining power of suppliers, (2) bargaining power of buyers, (3) threat of new entrants into the industry segment, (4) threat of substitute products or services, and (5) positioning of traditional industry rivals.

Companies that have a strategic planning process formulate their competitive strategy in two steps. The first step involves using some kind of framework to describe their competitive environment. In the next step, managers consider the resources available to derive and implement company strategy. Following are examples of how a company can use an IOS to implement competitive strategy:

1. Overall Cost Leadership.

Interorganizational systems can improve efficiency and scale in production and distribution. A number of these systems have reduced costs through electronic purchasing and ordering. The fashionable just-in-time delivery systems are examples of such electronic links among organizations.

2. Differentiation.

In support of a different strategy, an IOS can be used to add value to products and services. It may be coupled with a special service that differentiates the product or company.

3. Focus.

This strategy usually combines low cost and differentiation. In addition, the business entity chooses to address a particular niche of on industry.

Interorganizational systems can have a range of impacts on participants. The order of internal change triggered by an IOS appears to vary depending on whether an organization is reacting to an IOS implemented by another company or whether it is the initiator or implementer of the IOS.

If a company joins in an IOS proposed by another organization, general management frequently does not participate in the decision-making process, and it neither explicitly plans nor considers the implications of the system. Thus changes will occur in business process (first-order impact), skills and staff requirements (second-order impact), and then organization structure and business strategy (third-order impacts).

When an organization is the initiator or implementer of an IOS, the order of these impacts changes, due primarily to more effective planning in the system. The IOS is the enabling vehicle for changes in organization structure and strategy. Skill and staff level changes are next with changes in the business process occurring last because of the planning for the introduction.

Managers reacting to or contemplating the implementation of an IOS should also understand the range of involvement alternatives. They must first consider the extent of investment and management of information technology in which they want to be involved. A second consideration is how much influence they want over access to and design of the IOS. Technologically, participation in IOS's falls into three levels:

1. Information entry and receipt.
2. Software development and maintenance.
3. Network and processing management.

As the level of involvement increases, responsibility, cost commitment, and organizational and technical complexity also increase.

At the first level, the IOS participant performs no application processing and merely acts as an information entry-receipt node. The user generally has access only through restricted protocols. The IOS simply provides standard messages, as when an independent travel agency uses one of the major airline reservation systems with no additional in-house processing capability. The majority of current IOS participants are operating at this entry level. Employees using these systems include shipping clerks, order clerks, salespersons, and fund and credit managers - all of whom are involved in information retrieval, authorization, and validations activities.

At this first level of participation, higher-level participants determine the standards and procedures and retain control of the application. For example, in the airline reservation system just mentioned, the travel agent must follow the policies and procedures embedded in the computer programs written and maintained by the major carrier.

Companies participating at Level 2 develop and maintain software used by other IOS participants. Usually, the developer of the IOS has absorbed the cost of this development and of maintenance to gain exclusive control over decisions on access, price, and design of the application and the network. Administrative overhead increases for Level 2 participants as coordination across organizational boundaries becomes necessary.

The Level 3 participant serves as a utility and usually owns or manages all the network facilities as well as the computer processing resources. In addition to network development and maintenance costs, the Level 3 participant accepts considerable internal control responsibility for the integrity of information exchanged. For example, consider the CIRRUS network that permits ATM transactions nationwide. CIRRUS must accept a great deal of responsibility for the reliability, availability, integrity, security, and privacy of its system.

The chief control lies in access and participation - that is, in determining who can or cannot participate in the IOS and under what conditions.

Owners of major airline reservation systems were able to exclude schedules of regional carriers and other airlines from their systems until forced by legal and regulatory pressures to include them. Likewise, some airlines have established guidelines that require travel agents to execute minimum numbers of transactions on their systems to remain "qualified" to use them. Companies also determine entrance and exit guidelines that include timing and characteristics of use.

Pricing and cost decisions are also a critical part of exploiting the system. In many instances companies have used pricing to erect access barriers. The specification of transaction pricing to achieve cost recovery is also an important consideration of an IOS participant, the cost of using an IOS should be directly related to the amount of use.

The final category of control involves the mechanism for establishing, maintaining, and changing the application, standards, protocols, and internal control procedures. Some companies at Levels 2 and 3 have found that although higher investments in technology can result in great expense, they also bring greater control.

2. Rowe, Stanford H., Business Telecommunications, Second edition
3. http://web.cis.smu.edu/~jwinn/esig.htm
4. http://www.cba.uga.edu/management/rwatson/man941/interchain.html