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To Standardize Enterprise Data or Not? An Economic Analysis of Flexibility versus Control

MIT Sloan Research Paper No. 4566-05

CISL Working Paper No. 2005-10

36 Pages Posted: 9 Nov 2005 Last revised: 3 May 2013

Chander K. Velu

University of Cambridge - Judge Business School

Stuart Madnick

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Marshall W. Van Alstyne

Boston University – Questrom School of Business; Massachusetts Institute of Technology (MIT) - Sloan School

Date Written: August 23, 2012

Abstract

This paper addresses the tension between benefits of centralized data control against the benefits of decentralized control at the level of the business unit. Centralized data control provides the benefit of uniform standards whereas business unit data control grants flexibility to react to rapidly changing environments. Many data standardization efforts fail because they do not fully take into account the value of flexibility and ownership incentives. We use a real options based framework and the theory of incomplete contracts to derive propositions about the optimal level of data standardization across the enterprise. Applications of the propositions are illustrated with case vignettes. The paper makes two main contributions. First, the approach defines formally how incentive structures influence ownership of the option value or value of flexibility, which is an intangible information asset. Second the derived propositions would help senior management to more precisely consider aligning incentives in data standardization exercises.

Keywords: economics of IS, outsourcing, enterprise systems, real options, incomplete contracts, standardization, information asset, flexibility and information systems decentralization

Suggested Citation

Velu, Chander K. and Madnick, Stuart and Van Alstyne, Marshall W., To Standardize Enterprise Data or Not? An Economic Analysis of Flexibility versus Control (August 23, 2012). MIT Sloan Research Paper No. 4566-05; CISL Working Paper No. 2005-10. Available at SSRN: https://ssrn.com/abstract=843825 or http://dx.doi.org/10.2139/ssrn.843825

Chander K. Velu

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Stuart E. Madnick (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E53-321
Cambridge, MA 02142
United States
617-253-6671 (Phone)
617-253-3321 (Fax)

Marshall W. Van Alstyne

Boston University – Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-3571 (Phone)

HOME PAGE: http://questromapps.bu.edu/mgmt_new/Profiles/VanAlstyneMarshall.html

Massachusetts Institute of Technology (MIT) - Sloan School ( email )

Center for Digital Business
5 Cambridge Center - NE25, 7th Floor
Cambridge, MA 02142
United States
617-253-0768 (Phone)

HOME PAGE: http://web.mit.edu/marshall/www/home.html

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