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Information systems project management: an agency theory interpretation
Robert C. Mahaney
, Albert L. Lederer
Information Systems Department, 451 BEP Center, 1 Nunn Drive, College of Business, Northern Kentucky University, Highland Heights, KY 41099, USA Decision Science and Information Systems, 425C Business and Economics Building, Gatton College of Business and Economics, University of Kentucky, Lexington, KY 40506-0034, USA Received 5 January 2002; received in revised form 25 January 2002; accepted 1 March 2002
Abstract The failure rate of information systems development projects is high. Agency theory oﬀers a potential explanation for it. Structured interviews with 12 IS project managers about their experiences managing IS development projects show how it can be used to understand IS development project outcomes. Managers can use the results of the interviews to improve their own IS project management. Researchers can use them to examine agency theory with a larger number of project managers. Ó 2002 Elsevier Inc. All rights reserved.
Keywords: Project management; Information systems; Agency theory; Monitoring; Incentives
1. Introduction Despite recent improvements, the failure rate of information systems development projects seems high (BusinessWeek, 1998; Controllers Update, 1996). One study found that 50% of ﬁnished projects exceeded budget by 60–190% while only 25% were completed on time, within budget, and to the clientÕs satisfaction (LaPlante, 1995). According to another study, only 16% were completed on time and within budget (Cafasso, 1994). A more recent study found some improvement (Johnson, 1999), but room for more exists (Deutsch, 1991; Jiang et al., 2000; Shenhar, 1998). Agency theory has been used to understand failures in projects other than IS development and to suggest improvements to practices in those areas. It explains problems that occur when one party (a principal) hires another party (an agent) to perform work on the principalÕs behalf (Baiman, 1982; Baiman, 1990; Eisenhardt,
1989a). A model based on agency theory has been proposed to explain the eﬀects of deadlines on quality decisions (Austin, 2001). However, a complete agency theory model has not yet been applied to the study of IS development projects. This paper has three main purposes. First, it elucidates agency theory. Second, it shows how the theory can be applied to understand the outcome of IS projects. Third, it demonstrates how agency theory might be used to suggest improvements to IS project management.
2. Overview of agency theory An agency relationship governs all employment settings. A manager is a principal and an employee is an agent (Bergen et al., 1992). A problem––referred to as the agency problem––arises when the agent does not work entirely on the principalÕs behalf. As a result, the work of the agent may conclude less successfully than it otherwise would. In functional organizations, the principal is a traditional manager. In matrix organizations, the principal is represented by two people, the functional manager and the project manager. Several recent articles discuss the impact of a matrix organization structure on
Corresponding author. Tel.: +859-572-5185; fax: +859-572-6627. E-mail addresses: email@example.com (R.C. Mahaney), lederer@ uky.edu (A.L. Lederer). 1 Tel.: +859-257-2536; fax: +859-257-8031. 0164-1212/$ - see front matter Ó 2002 Elsevier Inc. All rights reserved. doi:10.1016/S0164-1212(02)00132-2
L. the authors conducted structured interviews of IS project managers. They were also asked how they monitored IS projects. 1. Twelve of the ﬁrms agreed to participate. the more the principal rewards the agent for a successful project. the others were in charge of out-sourced projects. the more successful the project. regardless of the schedule. Laslo and Goldberg. 13 years in project management. Project success is the desired outcome. 1999). about 16 team members reported directly or indirectly to the managers. Ten of the subjects managed inhouse development projects. Agency theory model. They were also asked how their organizations made the tasks of developers more routine. (From the perspective of the project team members. shirking of responsibility by an agent. Moreover. 1989b). Fig. goal conﬂict. 1985). and the presence of information privately held by an agent all motivate the principal to employ more outcome-oriented contracts. They were asked to describe the activities of developers when shirking. and thus ensure a broad view of IS project management. a project may be successful if the developers were able to overcome some technical limitation or if they learned from the experience. 1 summarizes agency theory.000 to $12 million in cost. the less successful it is (Pinto and Mantel. and 11 years with their current employers. although it may be common. thought of as less successful (Ford and McLaughlin. it focuses more on the narrow interests of the developers rather than the broader ones of the organization. before further elucidation of agency theory research. the more that a principal rewards the agent for the results of his or her work. The employers ranged in size from 120 to 18. The project managers averaged 21 years of experience in IS.C. that view was not incorporated in the current research because. Except for one manager who was responsible for several hundred developers. The interviews lasted about an hour.) Fig. 1992). Pinto and Slevin. The managersÕ job titles and industries appear in Table 1. Lederer / The Journal of Systems and Software 68 (2003) 1–9 projects (Dunn. Interviews with project managers To understand the application of agency theory to IS development projects. the more the principal monitors the status of the project. The subjects were asked to discuss how developers were compensated and how incentives were used to motivate. probing ones. Fifteen ﬁrms were initially chosen to represent a crosssection of industries and ﬁrm sizes. 2001. IS development projects are considered to have concluded successfully when they are completed on time. 3. We selected the managers from ﬁrms in a regional directory of businesses in a large mid-western US city. The structured interviews consisted of a series of welldeﬁned. Likewise. and task programmability all aﬀect project success. The durations of these projects was from six months to four years. greater task programmability inspires a principal to employ less outcome-oriented contracts. 1988).000 employees. .3 million. Thus. Greater monitoring is further presumed to produce greater project success (Might and Fischer. or level of system quality (Linberg. according to the theory. Each of these questions was followed by extemporaneous. The explanation of the methodology now will facilitate the discussion of that research and the interview ﬁndings together for each construct in the next section of the paper. They were asked how developers were able to withhold project status information. A. On the other hand. 1992.2 R. That is. Goal conﬂict between a principal and agent. with the desired functionality. shirking. The managers currently were responsible for projects from $50. 2001. Little and Little. In both situations. Projects that do not meet one or more of these criteria are. however. Mahaney. with an average of one and a half years. with an average of $2. of course. Contract type inﬂuences project success and the monitoring of project progress. They were asked for their impressions of the goals of developers and for their own goals for the project. the more a project fails to meet an individual criterion. an agency problem exists when an agent works in his or her own selfinterests instead of the best interests of the principal or the ﬁrm. 1999). 1990). privately held information. open-ended questions (Eisenhardt. within budget. We discuss the interview methodology now. with an average of 7300. and are high in quality (DeLone and McLean. budget.
MBA BS BS MBA MA BS AS AS BS 4. or it may be implicit. The second explains it in terms of IS development projects from the interviews. Thus. 2000). 4. according to agency theory such salaries are entitlements. one described organizational bonus plans for . The ﬁrst explains the construct in terms of the general theory. 1 illustrates this relationship. An outcome-based contract compensates agents for achieving certain goals or outcomes. The monitoring of agents is theoretically unnecessary with an outcome-based contract because agents are paid only when they achieve the desired outcome. Mahaney. contract type aﬀects monitoring. This is because outcome-based contracts ensure the agent works in the best interest of the principal. Compensation with this type of contract typically takes the form of a commission (i. regardless of the outcome.e. For example. A behavior-based contract compensates agents for performing certain tasks or behaving in a certain way. Agency theory predicts that the more outcome-based (and thus less behavior-based) the contract..1. This type of contract is more common with in-house employees than it is with outside contractors. the principal may create a feedback system to provide information about the actions of the agent to allow observation of them. That is. The subjects discussed these incentives at length. It may be an explicit signed contract with an outside consultant or contract programmer. Contract type in agency theory The contract is the core idea in agency theory. The contract type to monitoring arrow in Fig. the interviewees then identiﬁed several speciﬁc incentives by which they motivate their developers for successful project completion. (Parks and Conlon. Agency theory in information systems projects The purpose of the interviews was not to test the validity of agency theory. The purpose of the questions was to understand better the agency theory constructs (i.R. the less monitoring of agentsÕ work.. In either case. the greater the project success (Balkin et al. the tying of performance evaluations and merit bonus payments to meeting project deadlines and staying within budget illustrates an outcome-based contract (Lederer and Prasad. as with in-house employees. Contract type in IS development projects All twelve interviewees viewed straight exempt salaries as the primary means of rewarding developers. Table 2 summarizes them and shows the number of subjects who mentioned each. (The contract type to project success arrow in Fig.. Research has examined a link between monitoring and contract type and suggested that more monitoring is related to outcome-based contracts under certain conditions. Lab experiments with students as subjects have conﬁrmed this relationship.).) 4. Each construct is now elucidated in two subsections. A. However. it can compensate based on behaviors or on outcomes. Thus. 1 illustrates the relationship. more behavior than outcome-based.2. Lederer / The Journal of Systems and Software 68 (2003) 1–9 Table 1 Subjects Title Industry Years in IS Years in project management 15 15 10 10 23 10 15 12 11 9 12 20 Developers managed 80 0 24 6 3 12 420 6 12 27 1 3 Projects managed Education level 3 Systems Development Manager Senior Project Manager Director of Technical Services Manager of Information Security and Administration Director of Computer Services Manager of World Wide IT Business Controls Executive Project Manager Systems Manager Group Project Manager Manager of Manufacturing Division Information Systems Manager Director of Information Systems Health Insurance Financial Services Education Utilities Government Manufacturing Consulting Health Care and Medical Research Consumer Products Manufacturing Manufacturing Health Care 20 17 26 25 27 17 17 21 19 13 25 28 9 0 25 3 4 15 1 8 12 35 6 50 Some college BS Ph. Such a contracts are commonly used with both in-house employees and with outside contractors. stock options. etc.) In addition to inﬂuencing project success. 2000). bonuses.D. the ovals in Fig. Agency theory has been validated in many other contexts. 1) and in particular how they relate to one another in the speciﬁc context of IS development projects. agency theory predicts the more outcome-based the contract. The agent is paid a salary or hourly rate for performing the tasks.e. 1995.C. When probed.L.
Research has shown that increased monitoring deters agents from pursuing risky investment strategies (Kirby and Davis. (The monitoring to project success arrow in Fig. Table 3 summarizes the monitoring tools and techniques. This conﬂict can be minimized by adopting an outcome-based contract.3. elucidation is omitted. a behavior-based contract does not provide motivation for the agent to act in the best interest of the principal. agents may seek to achieve their own goals instead of working in the best interests of the principal. Lederer / The Journal of Systems and Software 68 (2003) 1–9 Table 3 Monitoring Number of subjects 7 6 6 5 4 3 3 3 2 2 2 2 1 1 1 Description Project management software Project progress reports periodically produced by project team Periodic project team meetings Periodic comparison of actual results to planned results Periodic comparison of project progress to schedule A project plan Gantt charts Periodic comparison of actual costs to estimated costs Critical path analysis Internal posting of project progress for all developersÕ review Periodic audit by external auditors Periodic project review sessions Project status reports periodically produced by developers Testing of modules by project manager for completeness Time reports periodically produced by developers Periodic computation of the percentage completed Post-completion audit of the project Software change management User sign-oﬀ on deliverables as completed Project manager sign-oﬀ on deliverables as completed Number of subjects 8 8 7 6 4 3 3 3 2 2 2 2 2 2 2 1 1 1 1 1 Technical training Flexible work schedule Sense of contribution to organization Public praise Favorable annual performance appraisals Private oﬃce space Time oﬀ Pride Financial bonus Newer technology (i. Monitoring in agency theory Agency theory suggests that monitoring increases project success because problems are identiﬁed more quickly and corrective action can be taken. according to agency theory such outcomebased incentives motivate more successful project outcomes. He said ‘‘The entire organization has an incentive plan. A. It has also indicated that more monitoring encourages agents to act in the interests of the principal (Tosi et al. Agents may have private goals that conﬂict with the overall objectives of the ﬁrm (Baugh and Roberts. (The goal conﬂict to contract type arrow in Fig. there is extra pay for the team members. the team is a division or a department. The project managers illustrated their use of these tools and techniques with many anecdotes.. 4.’’ In eﬀect. Agency theory thus suggests that greater goal conﬂict predicts the use of more outcome-based contracts. However. 1 illustrates this relationship. They most often named two techniques.) Research has shown that ﬁrms experiencing goal conﬂict respond by implementing outcome-based con- . Also. Typically. where the agent is compensated for successfully achieving the goals of the ﬁrm. 1989a).4 Table 2 Rewards for outcomes Description R. namely periodic progress reports and periodic team meetings. and Microsoft Project as the most popular software. an outcomebased contract would provide the desired motivation..e. In such situations.C. That is. In the presence of goal conﬂict. if the team meets its goals.5. 1997) and that monitoring in the presence of an outcome-based contract is particularly eﬀective (Tosi et al. 1997).) 4. 1 illustrates this relationship. then everyone gets extra pay.4. the agents will engage in self-promoting actions (Eisenhardt. 1994). Goal conﬂict in agency theory According to agency theory. Mahaney. They mentioned project management software as the most commonly used tool. We are moving toward having individual projects deﬁned as a team.. in situations where the goals of the principal diﬀer from those of the agents. Monitoring in IS development The project managers revealed that monitoring was performed to track project progress as well as to observe the work of the developers. If the company meets its goals. 4.L. 1998). They named many tools and techniques for doing so. They also motivate more project monitoring. PC or laptop) Opportunity to work at home Project completion celebration Choice of future assignments Job promotion Job security division and company-wide performance. because these tools and techniques are so widely known.
professional advancement was a goal of developers.. ‘‘They want to keep their skills current. A. The other is to deliver the project within budget.) 4. (The shirking to contract type arrow in Fig. Also. Interpreting these responses is somewhat complex and thus requires greater explanation. Goal conﬂict in IS development Project managers ﬁrst described their understanding of developersÕ goals. As one put it. This is the only purpose of the project manager. As one project manager stated. developers appear to have two predominant goals: to remain marketable and to create a high quality system. agency theory suggests shirking will increase the use of outcome-based contracts. ‘‘The better developers have a lot of pride in their work. Seven project managers said that developers want technical training. The diﬀerent goals can produce the scenario where developers spend too much time making themselves marketable and crafting a high quality product. Project managers have two predominant goals: to deliver a project on time and within budget. Research has shown that ﬁrms negatively impacted by shirking respond by implementing outcome-based contracts.) The managersÕ comments illustrate sources of goal conﬂict. and then their own. They feel pride in their work and they want to see it used. Table 4 summarizes the project managersÕ responses. According to agency theory. developersÕ activities when not working on their assigned tasks.’’ The subjects were then asked about their own project goals.7.’’ Another explained. developers are interested in personal development and career advancement. ‘‘Not only do they want to write quality code.’’ (Note: This comment was not representative of the group. 1982). tract types. Five of them stated that Table 5 Shirking Description Socializing Surﬁng the Internet Working on the wrong tasks Playing computer games Spending time on tasks other than their assigned duties Taking excessive breaks Working on enjoyable.8. No developer wants to write code for the sake of writing it.’’ Another said. Lederer / The Journal of Systems and Software 68 (2003) 1–9 Table 4 Goal conﬂict Description Goals of developers Production of a high quality system Professional advancement Satisfaction of clientsÕ needs Favorable impact of the project on proﬁts Production of an error-free system Support overall corporate goals Project completion on time Programs that meet performance targets Goals of Project Managers Project completion on time Project completion within budget Satisfaction of clientsÕ needs Favorable impact of the project on proﬁts Production of an error-free system Number of subjects 7 7 3 2 2 2 1 1 6 5 4 3 1 5 another goal is project completion within budget. i. They merit some commentary.6. They know that their job is to use technology to solve business problems. As one subject expressed. ‘‘Training is usually important to developers. Seven also stated that performing good work and creating a useful product were goals of developers. Table 5 summarizes these activities. 1 illustrates this relationship. 4. ‘‘Of course. Shirking in IS development The project managers described shirking activities.’’ Still another project manager stated. a direct link between goal conﬂict and failure has been found (Harrell and Harrison. 1994).’’ Personal development enhances the developersÕ marketability. thus resulting in a time and budget overrun. They want to see the programs go into production and be used by the company. Goal conﬂict exists when the two sets of responses disagree. Their foremost goal is to see their hard work put to good use. Thus. According to them. ‘‘I only have two goals as a project manager. One is to deliver the project on time. less important tasks Talking on the phone Being poorly organized Calling in sick when healthy Claiming not to understand the requirements Sending e-mail jokes Taking long lunches Number of subjects 8 7 6 4 4 4 4 3 2 1 1 1 1 .L.e.’’ Thus. such conﬂict warrants an outcome-based contract. Mahaney. They want to do a good job for themselves. 4. ‘‘Developers have a craftsman pride in their work. Six responded that one of their goals is project completion on time. Shirking in agency theory Primarily because of agentsÕ self-interests.R. They are not typically concerned with timely delivery of the project. they may not spend eﬀort working toward the goals of the principal (Baiman.C. they want to get in into production. They want to develop their skills. One stated. They may shirk their responsibilities.
A programmable task is one whose requisite behaviors can be precisely deﬁned (Stroh et al. organizations do not eﬀectively employ task programmability techniques. That is. Task programmability in agency theory Programmability is deﬁned as the degree to which appropriate behavior by the agent can be speciﬁed in advance (Eisenhardt. and time oﬀ as rewards for their high-achievers? Oﬀering them not only motivates recipients but also may inspire others to become high-achievers so they too can receive these beneﬁts. as programmability decreased. Agency theory suggests that outcome-based contracts are an effective way to address situations characterized by low task programmability. the use of outcome-based contracts increased. Contract type Is the organization using the rewards in Table 2 to motivate IS developers to produce the desired outcome? Do IS developers actually anticipate and work for the rewards? Or is the organization simply rewarding them for hours worked? Could the organization improve its reward systems to motivate them better? What rewards not in the table are possible? Do project managers oﬀer suﬃcient technical training. This study suggests that project managers perhaps should consider oﬀering them even more extensively than they currently do. Task programmability in IS development The project managers described how the tasks of the developers are made more routine in their organizations. contracts are not suﬃciently outcome-based.. 1996). . or perhaps organizations simply do not use them well enough. Table 7 Task programmability Description A systems development life cycle methodology Standardized coding style CASE tools Less customization of packages Standardized tools Reusable code Structured programming techniques Number of subjects 4 2 2 2 2 2 2 6. For example.1. Lederer / The Journal of Systems and Software 68 (2003) 1–9 Table 6 Privately held information Description Over-report percent completed Careful wording in reports Truth buried in status reports Hide problems Skip doing weekly status reports Under-report actual hours worked Reluctant to report percent completed Under-report percent completed (to allow buﬀer) Withhold knowledge for power Pad estimates ‘‘Take the easy way out’’ but not report it Skipping tasks but not reporting it Number of subjects 6 2 2 2 1 1 1 1 1 1 1 1 7 The project managersÕ responses are summarized in Table 7.C. little elucidation is necessary here.’’ Table 6 summarizes the activities of developers when concealing project information. or IS developers do not anticipate and work for them to achieve the desired outcomes. Perhaps contemporary techniques are ineﬀective. A. In one study. In other words.12.) Researchers found a signiﬁcant correlation between task programmability and the use of outcome-based contracts. and the problems produce delays and overruns. IS project managers should ask the questions below about the constructs and relationships between them in their organization. 6.. IS development projects fail for four major reasons. 1 illustrates this relationship. Because so much has been written about such task programmability practices in IS development. Low task programmability can increase the agency problem (Eisenhardt. shirking. 5. Fourth. Why information systems development projects fail According to agency theory. ﬂex-time. (The task programmability to contract type arrow in Fig. 4.R. First. Improving information systems development project management Agency theory provides a framework for project managers to help them improve IS development projects in their own organization. 1998). Guinan et al. and take constructive actions. organizations do not adequately provide the incentives in Table 2. 1988.L. Second. 4. 1989a). monitoring is ineﬀective.11. Tables 2–7 can serve as checklists. a problem when we use the history information of previous projects to create estimates for future projects. whereas the activities of a research scientist would be less programmable. new technology. organizations fail to manage goal conﬂict. and privately-held information well enough. Third. Mahaney. Incentives systems do not ameliorate these problems. organizations do not suﬃciently employ the tools and techniques in Table 3. or the tools and techniques in the table do not facilitate the identiﬁcation of project problems early enough to solve them. the activities of a retail cashier would be highly programmable.
but instead provides a framework for understanding it. Implications for research The validity of agency theory and its applicability to IS development projects were predicated on research from various other disciplines. References Austin. Baiman. and task programmability. shirking.. This study conﬁrms the expectation that such praise would motivate developers. Baiman. The paper also suggested improvements to IS project management. change in the business environment. When users are not involved from the very beginning. Research has shown that all of these risk factors may impact the level of success. Researchers should investigate these risk factors and their impact on project success. 7. 2001.C. A. Agency research in managerial accounting: a second look. Most importantly. S. Researchers should still test agency theory in the context of IS projects. Information Systems Research 12 (2). S. changing technology. Goal conﬂict To what extent is goal conﬂict a problem in the organization? Are the goals in Table 4 the source of any conﬂict? What are other sources of any goal conﬂict? How can goal conﬂict be reduced? 6.. how can it be reduced? 6. although agency theory helps explain some possible causes of IT project failure. In fact. how can it be increased? What activities might the organization employ that do not appear in the table? This paper elucidated agency theory.L. Perhaps through increased awareness of the role of incentives. 154–213. Agency research in management accounting: a survey.2.3. Privately-held information researchers can use the items in Tables 2–7 to operationalize the agency theory constructs. Accounting. Mahaney. Lederer / The Journal of Systems and Software 68 (2003) 1–9 Project managers presumably already understand the beneﬁts of praising developers in public. Would even more public praise increase their sense of contribution to the organization.. Many articles have suggested that a lack of user involvement is one such factor for development projects. This can allow a better assessment of the theoryÕs applicability to IS development projects. project managers can reduce the failure rate of IS development projects. it can show the predictive strength of both the constructs and the individual items in the tables. Once the constructs are measured with a large number of IS projects. 341– 371. Additional risk factors include turnover of key personnel. Organizations and Society 15 (4). 195–207. and a lack of a champion or project sponsor. privately-held information. and instill greater pride in their work? Should project managers increase such praise to good workers? 6. Future researchers should attempt to ascertain the optimal level of user involvement. Shirking To what extent are the shirking activities of Table 5 present and problematic? Are other shirking activities present and problematic? Should attempts be made to reduce shirking. By doing so. It can thus provide more speciﬁc suggestions for improving the management of such projects. Monitoring Is the organization using the monitoring tools and techniques in Table 3 to identify and correct impediments to project success? Is it doing so early enough? Are there additional potentially eﬀective tools and techniques to employ for that purpose? 6. R.5. . monitoring. 1982. 8. These are often identiﬁed as risk factors. It showed how it can be applied to understand the failure of IS projects. and if so.8 R. goal conﬂict. Journal of Accounting Literature 1. the relationships can be statistically tested. such projects have a higher likelihood of failing. 1990. poorly deﬁned or misunderstood requirements. Conclusion To what extent are the privately-held information activities of Table 6 present and problematic in the organization? Should eﬀorts be undertaken to reduce privately-held information.D. The eﬀects of time pressure on quality in software development: an agency model. it does not contradict other IS project management research.6. other possible causes exist. Moreover. and if so. and if so. how can it be reduced? 6. The current study focuses on agency theory and does not attempt to provide an exhaustive coverage of IS project risk factors. Task programmability To what extent is lack of task programmability a problem in the organization? To what extent are the task programmability activities of Table 7 employed successfully in the organization? Should eﬀorts be made to increase task programmability.4.
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