Institutional Push of Technology Innovation: The Case of CRM[*]
Jessica H.F. Chen [**] Eric T.G. Wang
Department of Information Management, School of Management, National Central University, Chung-Li, Taiwan 32054, R. O. C.
Abstract
This paper examines issues concerning the application of institutions in technology use and innovation, with particular reference to a case of Customer Relationship Management (CRM) adoption. CRM is an example of complex enterprise system, built up to operate and analyze customer information. It is argued that organizational institutions, formal or informal, drive technology use and innovation during the process of implementation. More important, institutional exercise should be contingent on technology characteristics and implementation stages. Some policy implications are outlined in conclusions: the need to establish ideology-inheriting channels within the organization, and the need to institutionalize the innovation for enhancing organizational productivity.
Keywords: Institutions, Customer relationship management, Technology innovation
1. Introduction
With increasing global competition, companies are now operating in rapidly changing fields. In order to manage global-wide businesses, companies adopt advanced information systems to integrate organizational resources and improve their competitive position. However, the full advantages of such systems cannot simply be purchased off shelf; they won by using, learning, and reconfiguring the technologies. Although numerous insights have been generated into the process of technology use, technology innovation and organizational learning (Fleck 1994; Orlikowski 1996), the forces that steer people using, trying and learning technologies have been largely ignored. Moreover, opportunities for innovation during implementation are sometimes missed and total failures resulted, because people do not appreciate the premises and purposes of technology and use it in less effective ways (Orlikowski 1993). Firms thus need some devices to enhance required creative user inputs, providing innovative momentum for learning the system. As North (1981: 17) points out: “the stock of knowledge and the stock of technology set upper bounds to human well being, but do not themselves determine how successful human beings are within those bounds.” Instead, “the forms of cooperation and competition that human beings develop and the systems of enforcement of these rules of organizing human activity are at the very heart of economic history” (North 1981: 17). Institutions, which spell out the system of incentives and disincentives to guide human activity, determine how valuable a technology will be. From the new institutional perspective, this paper explores how institutions, explicit or tacit, affect people behaviors in technology innovation by using a case of Customer Relationship Management (CRM) adoption as illustration.
2. Institutions
Institutions, analogous to the rules of game, are the humanly devised constraints that shape political, economic, and social interactions (North 1991). The purpose of institutions is to guide individual behavior in a particular direction and provide structure to everyday activities to reduce the uncertainties involved in human interaction (North 1990). These uncertainties arise as a consequence of both the complexity of the problems to be solved and bounded rationality of human beings. Due to the computational limitations of individuals, rules and procedures evolves to simplify the process, and, as the same time, to limit the choice set of the individuals (North 1990). Institutions are not only a necessary extension of the way people process information, but also predict the complex mix of motivations that shape choices. In light of institutional view, organizational institutions are
“the sets of working rules that used to determine who is eligible to make decisions in some arena, what actions are allowed or constrained, what aggregation rules will be used, what procedures must be followed, what information must or must not be provided, and what payoffs will be assigned to individuals dependent on their actions. … All rules contain prescriptions that forbid, permit, or require some action or outcome. … All rules contain prescriptions that forbid, permit, or require some action or outcome. Working rules are those actually used, monitored, and enforced when individuals make choices about the actions they will take…” (Ostrom 1990: 51).
There are two categories of institutions—formal and informal, their combination forms the way firms operate and determines how successful firms achieve their goals (North 2000). In the same vein, Valdivieso (2002: 9) notes: “the institutional matrix determines the set of feasible opportunities in a given moment, which, at the same time, determine the type of ‘organizations’ that can exist in that moment.” In sum, the existing rules of the game shape the incentives of the players (individuals/group/organization) as to how to transact and what to innovate (Aoki 2000).
2.1 Formal institution
Formal institution comprises a set of constraints on employee behavior in the form of explicit rules and regulations—constitutions, laws, and property rights (North 1984). Formal institution plays a significant role in economic development because “the only thing we have direct control over is formal rules” (North 2000: 8). In order to understand formal institution in technology innovation, several issues around it will be discussed. First, enforcing formal rules in terms of control mechanisms is varied by work types, for example, monitoring factory and operational works is relatively easy due to their tangible and measurable output (Perin 1991). Such kinds of work involve physical transformations of material artifacts, and thus, it is observable if workers are shirking. Managerial and professional works, for example, marketing planning, are primarily mental and interpersonal, and thus may not be so easily monitored and governed by formal principles (Perin 1991). Due to measurement problems, formal institution can only imperfectly control the quality and quantity of professional workers. Piece-rate wage, a formal compensation, is a solution only when individual contributions can be measured at low cost and quality is constant. As a result, even with a constant set of rules, detection procedures, and penalties, there is immense variation in the degree to which individual behavior is constrained (North 1981). Performance ambiguity creates additional problems in applying analytic information systems because central decision makers cannot become or stay adequately informed about the peculiarities of the technologies. Designing proper rules for staff to use new technology become more difficult than operational-based technology.
The second issue is whether there are clear, enforceable property rights that can be transferred easily. If there are not, formal institution efficiency may not be realized. As above, institutions provide incentives to individuals in shaping their decision-making. However, untradable, insecure, or unassigned property rights will induce the common-resource problem. When a valuable asset belongs to nobody, then no one has an incentive to guard its value properly. Similarly, owners will not invest great amounts in assets that they may lose with no compensation, or they may sink valuable resources into protecting their claims (Milgrom and Roberts 1992). Further, if property rights are not tradable, we cannot expect that assets will end up with those people who can make the best use of them and so value them most. In sum, when many people share a single resource, there is an incentive for the resource to be overused. Correspondingly, when many people share the obligation to provide some resource, it will be undersupplied. When the residual returns to an asset are widely shared, nobody has a sufficient interest to bear the costs of maintaining and increasing its values (Milgrom and Roberts 1992).
Advanced IT usually embodies enterprise-wide functions and employees. Its users are a complex mixture in operation, data collection, and information analysis, all of which share the resulted advantages and implementation responsibility. Take the KM (knowledge management) system as an example, its potential benefits depend on how many people share their knowledge and provide information. Once the knowledge is provided it becomes common resource and by so doing, the knowledge provider gains little. In face of the common resource problem, concentrating the ownership rights can lead to increased efficiency (Milgrom and Roberts 1992).
Third, the size of compensation subjects is another concern in institution theory. Compensating employees for improvements in joint output leads to employees sharing the rewards from greater effort (Prendergast 1999). As the size of subjects increases, resulting incentives are diluted and additional efforts are mitigated. In other words, if the additional likelihood of receiving the bonus is insufficient to compensate individuals for working harder, incentives to exert effort is not workable. Kandel and Lazear (1992) have provided a formal expression to explain this.
An individual employee deciding whether or not to work hard will do so if and only if bg c, where b describes the value of the bonus, g denotes the incremental likelihood that the bonus is paid when the employee works hard, and c represents the amount required to compensate an employee for additional effort. Because a single employee has a negligible influence on overall performance, we expect g to be very small. In general, we expect g to be a decreasing function of firm size (n) because overall firm performance is less sensitive to the actions of individual employees in large firms (Kandel and Lazear 1992:763-764).
Due to the firm-wide nature of advanced enterprise system, companies usually pay all users a bonus based on the satisfaction of corporate-level goals, such as customer retention rate increasing 10% after CRM adoption. Such incentive scheme introduces externalities between the efforts of system users and the welfare of other numerous users. Individuals makes low effort not only reduces the probability that he or she will receive the bonus, but also affects the likelihood that others will receive the bonus.
Group incentive schemes may encourage monitoring and sanctioning because each member’s actions affect payments to other group members. Under peer pressure, an incentive scheme is expected to raise efforts only in the situation that all employees collusively agree to exert high effort and then monitor their colleagues and sanction shirking ones to enforce the group decision. Unfortunately, as the compensation subjects grow, effective mutual monitoring becomes infeasible. In small teams, members share their rewards with fewer colleagues, while mutual monitoring may also help to resolve free-riding actions. Comparatively, individuals in large groups are often unable to observe each other’s efforts and are less willing to incur the costs of monitoring and sanctioning their colleagues (Coleman 1990). The presence of autonomous work groups mitigates the free-rider problem in some degree by reducing group size. This makes monitoring more feasible and limits the opportunity to free riding on the monitoring and sanctioning efforts of colleagues (Coleman 1990). As a result, they are well placed to observe the performance of fellow team members. Group size, monitoring costs, and tasks observablility, all of which together determine the likelihood of effective mutual monitoring.
The final issue resembles the signal-extraction problem popularized in agency theory: how much of the observable output is due to the agent’s effort, and how much is due to factors beyond the agent’s control (Lucas 1972)? The optimal incentive arrangement balances the principal’s desire to give the agent incentives to increase effort with the agent’s desire to be insured from the fluctuations in compensation stemming from uncontrolled variables (Klein 2000). For example, market and technology turbulences to some degree are beyond control of implementer when perform a marketed-based system.
2.2 Informal Institution
Formal rules just make up a small part of the total constraints that structure organizational conduct. The codes of conduct, behavioral norms, taboos, customs, and conventions overwhelmingly determine an important part of governing structure (North 1990), forming the informal tacit institution. Informal institution is developed for solving coordination problems through ‘collective penalty’ for the authorities’ coercive action, which is recognized by all people (Valdivieso 2002). In the same vein, Schotter (1981: 11) uses the words “social institution” and describes it as “a regularity in social behavior that is agreed to by all members of society, specifies behavior in specific recurrent situations, and is either self-policed or policed by some external authority.” Instead of intentional enactment, tacit regularities are “the product of long term experiences of a society of boundedly rational and retrospective individuals” (Kreps 1990: 183). Therefore, they are usually taken-for-granted and self-imposed—everyone simply knows and does it.
The development of social regularities is similar to noncooperative repeated game theory. In a noncooperative game theory, each player is assumed to be perfectly capable of deductive reasoning regarding a feedback mechanism between their own and else’s choices. In this situation, the best-response of action choices is called Nash-equilibrium—no single player can benefit from unilaterally changing his or her move. As the game repeats, players rely on cultural information outside the game structure and they come to perceive some substantive characteristics of rules that the other relevant players are believed to use in making their action choices (Aoki 2000). The final Nash-equilibrium is an solution developed over time for agents to solve coordination problems, and is what Schelling (1960) called a “focal point.” From such a perspective, an informal institution is a socially constructed state (Nash-equilibrium) from which individuals are not motivated to depart as long as others do not do so (Aoki 2000). Over time, these tacit regularities are internalized and shape human’s ideology. Ideology helps people come to term with their environment and provides a worldview to simplify decision-making process (North 1981).
As we discussed above, formal institution is the only element we can direct control over, but unfortunately, changing the formal rules is a very blunt instrument for trying to change the way an entity works (North 2000). Since formal institution is imperfect in directing employees’ behaviors, the resulting outputs—hard working, conscientious, lazy, and soldiers on the job—are determined by successfully ideological conviction that reduces shirking (North 1981). The desire of social recognition may provide individual strong compensation than explicit criteria or deterministic decisions do. Then, the central thesis to institution is: how ideology competes with rational system in action choices? Why can ideology lead man to restrain their behavior so that they will not behavior like free rider? An important part of an ideology is an individual’s perception about the fairness of the world. As the extent of perceived legitimacy of existing rules increases, the premium necessary to induce people to become free riders is enhances (North 1981). Ideology, inevitability, competes with rationalizations.
Even though the evolution of informal rules complement formal system, in many situations, they impede the innovation of legal institution. First of all, informal norms come from socially transmitted information, constituting a part of cultural heritage, which means their formation and erosion process are slow and complex (Aoki 2000). Because of their strong capability in resolving basic exchange problems among the participants, be they social, political, or economic, many informal constraints have great survival tenacity even when the wholesale change in the formal rules have taken place (North 1990). On the one hand tacit rules consolidate organization stability and persistence that make an economic system viable, but on the other hand they induce organization inertia (Zucker 1997). As North (1990: 91) clearly notes “perhaps most important of all, the formal rules change, but the informal constraints do not. In consequence, there develops an ongoing tension between informal constraints and the new formal rules, as many are inconsistent with each other.” In the digital era, many of the formal rules have been changed and intangible information becomes valuable and tradable (e.g., intellectual property right), but the ideology evolved over time appear inconsistent with the formal rules, producing the chaos and results that are apparent today—music pirate, information abuse etc. The tension between politically determined formal rules and persistent informal constraints, thus, may have important implications for the way economies change (Aoki 2000).