- Email: [email protected]
Information and software economics
editorial Information and Software Economics R Veryard IMPORTANCE
OF
ECONOMICS
There is often a bravado among engineers, full of confidence in the following premises: • If it is possible, then it is desirable. If it is not possible yet, it will become possible. Every innovation is therefore equally desirable. • Industry is so desperate for innovation that it will pay for anything half-decent the engineers can produce. Any difficulties in raising investment are therefore due to the shortsighted and ignorant greed of City capitalists. Modern industry (and Hi-Tech in particular) is beset by conflict between accountants and engineers. 'The culture of technology comprehends at least two overlapping sets of values, the one based on rational, materialistic and economic goals, and the other concerned with the adventure of exploiting the frontiers of capability and pursuing virtuosity for its own sake q . This conflict itself may be described in conflicting ways: by engineers as a conflict between prudence and enterprise, and by accountants as a conflict between financial ends and technical means. This Journal usually concerns itself with technical adventure, and may be thought to be on the side of the engineers. In turning our attention for this Special Issue to the topic of economics, it might be thought we are turning our back on technical excellence, in favour of an accountants' view of the world of technology. But our intention is to take a view broader than either accountant or engineer, to understand and encompass the relationship between the two. We therefore adopt an economic framework, taking economics to be the science of value and the science of rational choice. The economics of information engineering and software engineering is poorly understood. Three reasons are now forcing us to pay more attention: • Software engineering becomes ever more businessdriven, with particular attention to developing user requirements specifications. • Information engineering grows more widespread, linking the business strategy to the IT strategy of an organization, in financial as well as operational terms. James Martin Associates, James Martin House, Littleton Road, Ashford, Middlesex TWl5 ITZ, UK
226
Information technologists become ever more concerned with using information for competitive advantage. Information may even be incorporated into a firm's product or service. This is now a fashionable subject for articles in Harvard Business Review and elsewhere z'3. Some of these writers are concentrating on short-term advantage, others on longer-term strategic advantage 4.
EXCHANGE Economics is the science of values and choices. Let us therefore start with questions of exchange and value. What is information worth? What is software worth? What is technology worth? 'The category of information is undoubtedly becoming vitally important as an economic factor in its own right. The phenomenon of insider trading on international stock markets is an obvious illustration. While it may not be supplanting property as a key to the social structure of modern societies, information is proving to be a crucially important element in our understanding of social relationships. '5. 'Daniel B e l l . . . forecasts the growth of a new social framework based on telecommunications which 'may be decisive for the way economic and social exchanges are conducted, the way knowledge is created and retrieved, and the character of work and occupations in which men [sic] are engaged.' The computer plays a pivotal role in this ' r e v o l u t i o n ' . . . . IT, by shortening labour time and diminishing the production worker, actually replaces labour as the source of 'added value' in the national product. Knowledge and information supplant labour and capital as the 'central variables' of the economy. He comments on the way that information is being treated as a commodity, with a price-tag on it, and how the 'possession' of information increasingly confers power on its owner. '6. Thus the word 'value' is nicely ambiguous. Valuation is informative, therefore a value is information. And at the same time, information (as Bell argues) possesses value, whether added value, surplus value, use value, exchange value, or whatever other kind of value there may be. An economic fact (such as the value of something, expressed
0950-5849/89/050226-05 $03.00 © 1989 Butterworth & Co (Publishers) Ltd
information and software technology
editorial in monetary terms) itself has a value that can be expressed in monetary terms. This makes the economics of information circular. Technology (including software) is about building connections between means and ends. The value of technology depends on the relative values of the means and the ends. (This is usually expressed as a ratio, known as 'productivity'.) Thus to evaluate software you need to evaluate the information that it produces. There are economic transactions taking place all the time. People are exchanging money for information, for software, and for technology. But it is not easy to discover the price actually paid for such commodities. Often the information or software is bundled within some other product or service, or is developed within the very company that will use it, with some artificially calculated transfer pricing between divisions of the company. The software user often has a 'make or buy' decision: to purchase software or information or related services, or to develop such products and provide such services inhouse. If the economies of scale applied, then we would expect larger organizations to develop a greater proportion of their own software. But often it seems to be the larger user organizations that make greater use of independent software companies. Since the costs of providing information and/or developing software can be established (although this is not without difficulties), we have some idea how much revenue the supplier needs to make (or to cross-charge within the same company). But what price is it rational for the supplier to ask, given that the lower he sets the price, the more copies he may sell? And what price is it rational for the purchaser to offer? Cost-benefit analysis has been widely criticized for its simplistic approach to the evaluation of software products 7.
SOFTWARE What is software? Or what is special about software? In his paper on the pricing strategies of software producers, Gareth Locksley uses the term 'software' in a way that readers of Information and Software Technologywill find unusual. Within IT, it encompasses information as well as computer programs. (The accessing by subscribers of a public database would be a good example.) He does this to draw our attention to the commercial differences between trading in physical and trading in immaterial commodities. By extending the concept of software to any immaterial product, some valuable insights are obtained. (A similar approach has been adopted by Negishi s.) The first reproducible objects were bronze casts of pagan idols and printed bibles. (Mumford 9 has argued that the problems and opportunities of technology are often anticipated by art and/or religion; technology
vol 31 no 5 june 1989
HARDWARE
SOFTWARE
'Adding'
' Multiplying'
Fakes and counterfeits Reproduction is about as difficult as production
Piracy and breach of copyright Reproduction is much easier than production
Each copy absorbs a minimum amount of resources
The cost per copy reduces to zero, as the number of copies increases
Restricted to elite (e.g., Picasso)
Available to masses (e.g., Chaplin)
aspires to the status of magic1°.) By the nineteenth century, printing by movable type had been joined by photography, film and gramophone as software media. Even data processing was originally for decoration (punched cards recorded weaving patterns for Jacquard looms) and entertainment (the piano roll, reinvented in our own time by Conlon Nancarrow). Theorists still dispute the status of software art objects, developing further the work of Walter Benjamin 1~. How does Locksley's framework support expert systems, computer-based training, interactive videos, and so on? To what extent do patents and licences fall into the general category of software? What exactly are the similarities and what the differences, between information technology and other technology? And what of the future? Can we expect further convergence between different types of software? Thus his paper raises many new research questions. We can see interesting economic parallels between computer software and the other soft commodities. Much of Locksley's discussion is from the perspective of the software producers, in terms of product strategies, pricing policies, etc. It would be interesting also to consider the perspective of the software purchasers. How much to pay, how long to wait (before the price drops). What strategies are appropriate to cope with the product life-cycle, with the inflation of expectation and the obsolesence of achievement? Software represents expertise. This statement can also be expressed in reverse. Knowledge and skills are special cases of information: they represent information carried within people, rather than within machines or formal systems. With CBT and other developments, the economics of education and software will converge. According to the more optimistic proponents of artificial intelligence (e.g. Marvin Minsky), there is no area of knowledge or skills that is not computable, either now or in the foreseeable future. If we accept this claim, then what counts as knowledge and skills is context-dependent: the terms refer to what is carried within people here and now, rather than what must always be so carried. While Minsky's hopes remain unfulfilled, there are
227
editorial socio-economic pressures to divide and wrap knowledge and skills into easily managed parcels. This is seen as making more efficient the transfer of particular knowledge and skills into a person who requires them. Schooling becomes a quest to demonstrate that you have acquired mastery of an appropriate number of such parcels, irrespective of their value or meaning. 'Learning by primary experience is restricted to selfadjustment in the midst of packaged commodities . . . . People know what they have been taught, but learn little from their own doing. People come to feel that they need 'education'. Learning thus becomes a commodity, and like any commodity that is marketed, it becomes scarce. '12 . Thus education has acquired an exchange value, so people cram information to gain qualifications, which entitle them to jobs that make no use of the information thus crammed. Both education and software therefore suffer from a form of technological inflation, where the increasing pace of change reduces the duration of exploitation and advantage. This brings us back to the business benefits of computing: if the return on investment falls as the systems get more sophisticated, how do we judge the point at which further development is (for the time being) uneconomic?
TECHNOLOGICAL PROGRESS Technological progress within computing works in two ways. First, a division of labour allows the development of very sophisticated tools, designed by specialists for use by generalists 13. Second, the expertise of people is taken from them and captured in databases or software products. In this way, knowledge becomes a commodity. What makes something a commodity? It is an output of one process that becomes an input to another process 14. The two processes are made independent from one another by technological progress 15. But knowledge drifts between public and private ownership. Thus 'while the Straffa system is a closed system, in which commodities are always produced by means of existing commodities, the economy of information production is an open system, into which non-commodities enter as inputs and whose outputs may eventually escape from the cycle of commercial exchange q6. If software is a commodity, then we should expect economists to be interested in the production of software by means of software. This means quantifying the costs and benefits of tools for enhancing the productivity of systems development (e.g., CASE tools, for computeraided software engineering). Cost-benefit analysis of packaged software is never straightforward. The implementation cost of the software is often much greater than the purchase price, as such software demands an investment in training and in projects to exploit it properly. In this issue, Kyo Kang and Leon Levy offer models to
228
quantify the benefits to an organization of enhancing its productivity. These models could presumably be extended to all aspects of an organization's computer infrastructure, including hardware, telecommunications, and software.
PRODUCTIVITY Most writers are still concerned with the productivity of systems development, expressed as lines of code or function points per programmer per day. Lehman and Boehm have both produced complex models of software costs across the whole systems life-cycle. In this issue Ali Mili and Raoudha Marouane offer a version of Boehm's C O C O M O model, calibrated for Tunisian conditions. Their paper raises many interesting questions about the international validity of such models, especially in the Third World. But such models have little to say about controlling design decisions in software engineering, e.g., cost/quality and cost/sophistication trade-offs. The business benefits of software are not addressed. One exception is Strassman, who defines productivity of information systems in terms of the productivity of management 17. But even Strassman fails to place productivity in the context of the competitive environment of the organization, and primarily makes comparisons between the operations of organizations. Bhabuta takes an much broader view; he discards the conventional interpretation of productivity--'achieving operational improvements, efficiency of management procedures, a streamlined organization, and so on'--in favour of a strategic interpretation. 'Productivity in our coverage is concerned with efforts directed at enhancing the competitive strengths of an enterprise relative to its competitors, through systematic and systemic improvements and exploitation of its assets.' He distinguishes between innovation-based strategies and productivitybased strategies and claims that the latter are more appropriate 'in markets with intense competition and near competitive parity, contracting markets and markets which do not afford ROI on significant innovation '~8. Several writers point to the economic benefits of 'learning by doing'. 'Major improvements in productivity often continue to come long after the initial innovation as the product goes through innumerable minor modifications and alternations [sic] in design to meet the needs of specialized users. '19 But as yet there seems no proper way to estimate the monetary value of individual and organizational experience in information systems. 'Inventions hardly ever function in isolation . . . . Often . . . the benefits potentially flowing from invention A (have) had to await the achievement of
information and software technology
editorial inventions B, C, or D. These relationships of complementarity therefore make it exceedingly difficult to predict the flow of benefits from any single invention and commonly lead to a postponement in the flow of such expected benefits. '2°.
SOFTWARE
REUSE
According to Grindley (although he offers no evidence for this), the competitive advantage of the independent software producer depends on 'its ability to produce software more efficiently by specialization '21. It could instead be argued that too much specialist knowledge actually hinders efficient systems development. Whereas an inhouse development team may get bogged down in accurately resolving some issue, a team of contractors is more likely to generalize itself out of trouble. And the end-result may have greater flexibility, because it is not closely tied to details of the current environment. This is an apparently controversial hypothesis, as it seems to contravene the current dogma, that systems development should be steered by the business and by the users. But this is not a true contradiction; if the systems are strategic, they will be tuned to the future rather than the present or the past. ' M a n y years ago, Sir Ronald Fisher noted that every biological system had to face the problem of present versus future, and that the future was always less certain than the present. To survive, a species had to do well today, but not so well that it didn't allow for possible change tomorrow. His Fundamental Theorem of Natural Selection said that the more adapted an organism was to present conditions, the less adaptable it tended to be to unknown future conditions. We can apply the theorem to individuals, small groups of people, large organizations, organizations of people and machines, and even complex systems of machinery, and can generalize it as follows: The better adapted you are, the less adaptable you tend to be. '22 'Fractionalization' and increased flexibility may be regarded as an indirect productivity increase. Modularity/ reusable code and packages can therefore be regarded as 'more product for your money 'z3. One way of getting double the output from a given input is by using the output twice. Thus the reuse of software is an attractive way of increasing the productivity of systems development. But some effort is required to make it work: reusable code may be more difficult to design and test, and there is always a temptation for the designer to develop something entirely new rather than take the trouble to investigate and implement something that already exists. At what point therefore does software reuse become truly cost-effective, and what can be done to increase its benefits? Two papers in this issue offer
vol 31 no 5 june 1989
quantitative models. John Gaffney and Tom Durek offer a trio of plausible theoretical models, although with little direct empirical support. There remain many open questions from this work: How are the models applicable in practice: how could they be used in project costing, estimating, resourcing? What are the wider implications of the models: how do they fit into a more general theory of software economics and productivity? Kang and Levy cover several topics besides reuse, including the important issue of transfer pricing. They address source allocation in systems development--balancing direct costs and indirect costs, how much to spend on infrastructure. They go some way towards an economic model of innovation and experiment-justifying investment in R & D by its projected increased in productivity. Readers interested in following up the concepts of ultra-high programmer productivity are referred to Levy's book 24. FROM
PIRACY
TO ADVERTISING
One form of reuse, unwelcome flattery to the software developers, is the piracy of commercial software products. This raises the question of the economics of copyright. (Similar considerations apply to patents and licences.) 'The nature of knowledge is that it is extremely difficult, if not impossible, to maintain monopolies of information indefinitely, and there is a perpetual tendency for privately owned information to 'flow back' into the public domain. '16. As software gets more widespread, it becomes more difficult for its owners to collect the revenues due. Software developers have an incentive to release frequent upgrades, and perhaps even to infect obsolete versions with viruses, to encourage users to buy new versions direct from authorized sources. In response to the development of software into a pirated commodity, and to allow software developers to recoup their investment, Sheizaf Rafaeli has a novel proposal that he claims will allow 'the software process to roll, reducing the commodization of packages'. It is not clear how the insertion of advertising material into software will fully achieve this; after all, a plastic shopping bag is no less a commodity by having the name of the shop emblazoned on it. Some people grumble at giving free advertising to the shop, but they still use the bags. Would people be prepared to use a word processor or spreadsheet if it occasionally interrupted their work 'for a message from our sponsor'? Rafaeli's preliminary experiments suggest that they would, at least within some cultures. But his paper raises some intriguing questions about the control over software (this is a global issue, since around 70% of traded software worldwide is of American origin) and extends the current debate about the legal and moral liability for software quality. Rafaeli refers to the 'Tragedy of the Commons', where something of value is eroded by many individuals taking advantage of it, although each individual's effect is
229
editorial insignificant. This is named after the destruction of grazing land that occurs when every peasant drives the maximum number of sheep and goats onto the village common. It can also be used to describe a hypothetical future in which every enterprise drives the maximum number of advertising messages into any available software crevice. The software industry may choose to welcome, ignore, or guard itself against this future.
FUTURE The subject of Information and Software Economics is broader than the papers included in this Special Issue. This introduction has mentioned other topics for future research and has included several assertions and hypotheses for which there may be insufficient evidence at present. Next year we hope to run another Special Issue on the same subject. Readers are invited to let us know which questions they would most like to be addressed. Researchers are invited to start planning their contributions now. Feedback welcomed.
REFERENCES 1 Paeey, A The culture of technology Basil Blackwell, Oxford, UK (1983) p 89 2 MeFarlane, F W 'Information technology changes the way you compete' Harvard Business Review (May-June 1984) 3 Porter, M E and Miller, V E 'How information gives you competitive advantage' Harvard Business Review (July-August 1985) 4 Bhabuta, L Sustaining productivity and competitiveness by marshalling IT in Ynen, C K and Davis, G B (eds) Information Technology Management for Productivity and Competitive Advantage (Proc. IFIP TC-8 Conf. 7-8 March 1988 Singapore) National University of Singapore (1988) 5 Lyon, D The information society: issues and illusions Basil Blackwell: The Polity Press, Oxford, UK (1986) p9 6 Lyon, D The information society." issues and illusions Basil Blackwell: The Polity Press, Oxford, UK (1986) p3
230
7 Symons, V and Walsham, G The evaluation of information systems: a critique' J. Applied Syst. Analysis Vol 15 (1988) pp 119-132 8 Negishi, H Tentative classification of global software' Behav. Inf. Tech. Vol 4 No 2 (1985) pp 163-170 9 Mumford, L The myth of the machine S e c k e r & Warburg, London, UK (1967) 10 Wiener, N God and Golem Cambridge, MA, USA (1964) 11 Benjamin, W Das Kunstwerk im Zeitalter seiner technischen Reproduzierbarkiet (first published 1936) 12 Illich, I Tools for conviviality Harper & Row, New York, NY, USA (1973) p 63 13 Veryard, R 'Demanding higher productivity' Data Process. Vol 28 No 7 (September 1986) pp 351-355 14 Straffa P Production of commodities by means of commodities Cambridge University Press, Cambridge, UK (1960) 15 Borgmann A Technology and the character of contemporary life University of Chicago Press, Chicago, IL, USA (1984) 16 Morris-Suzuki T 'Capitalism in the Computer Age' New Left Review No 160 (November/December 1986) pp 81-91 17 Strassman, P Information payoff Free Press (1985) 18 Bhabuta, L Sustaining productivity and competitiveness by marshalling IT in Yuen, C K and Davis, G B (eds) Information Technology Management for Productivity and Competitive Advantage (Proc. IFIP TC-8 Conf. 7 8 March 1988 Singapore) National University of Singapore (1988) p 18 19 Rosenberg, N Inside the black box." technology and economics Cambridge, UK (1982) p 62 20 Rosenberg, N Inside the black box: technology and economics Cambridge, UK (1982) pp 56-7 21 Grindley, P C The UK Software Industry Centre for Business Strategy, London Business School, London, UK (1988) p 5 22 Weinberg, G M The secrets of consulting Dorset House Publishing, New York, NY, USA (1985) pp 29-30 23 Rosenberg, N Inside the black box." technology and economics Cambridge, UK (1982) p 78 24 Levy, L S Taming the tiger." software engineering and software economics Springer Verlag, New York, NY, USA (1987)
information and software technology
OF
ECONOMICS
There is often a bravado among engineers, full of confidence in the following premises: • If it is possible, then it is desirable. If it is not possible yet, it will become possible. Every innovation is therefore equally desirable. • Industry is so desperate for innovation that it will pay for anything half-decent the engineers can produce. Any difficulties in raising investment are therefore due to the shortsighted and ignorant greed of City capitalists. Modern industry (and Hi-Tech in particular) is beset by conflict between accountants and engineers. 'The culture of technology comprehends at least two overlapping sets of values, the one based on rational, materialistic and economic goals, and the other concerned with the adventure of exploiting the frontiers of capability and pursuing virtuosity for its own sake q . This conflict itself may be described in conflicting ways: by engineers as a conflict between prudence and enterprise, and by accountants as a conflict between financial ends and technical means. This Journal usually concerns itself with technical adventure, and may be thought to be on the side of the engineers. In turning our attention for this Special Issue to the topic of economics, it might be thought we are turning our back on technical excellence, in favour of an accountants' view of the world of technology. But our intention is to take a view broader than either accountant or engineer, to understand and encompass the relationship between the two. We therefore adopt an economic framework, taking economics to be the science of value and the science of rational choice. The economics of information engineering and software engineering is poorly understood. Three reasons are now forcing us to pay more attention: • Software engineering becomes ever more businessdriven, with particular attention to developing user requirements specifications. • Information engineering grows more widespread, linking the business strategy to the IT strategy of an organization, in financial as well as operational terms. James Martin Associates, James Martin House, Littleton Road, Ashford, Middlesex TWl5 ITZ, UK
226
Information technologists become ever more concerned with using information for competitive advantage. Information may even be incorporated into a firm's product or service. This is now a fashionable subject for articles in Harvard Business Review and elsewhere z'3. Some of these writers are concentrating on short-term advantage, others on longer-term strategic advantage 4.
EXCHANGE Economics is the science of values and choices. Let us therefore start with questions of exchange and value. What is information worth? What is software worth? What is technology worth? 'The category of information is undoubtedly becoming vitally important as an economic factor in its own right. The phenomenon of insider trading on international stock markets is an obvious illustration. While it may not be supplanting property as a key to the social structure of modern societies, information is proving to be a crucially important element in our understanding of social relationships. '5. 'Daniel B e l l . . . forecasts the growth of a new social framework based on telecommunications which 'may be decisive for the way economic and social exchanges are conducted, the way knowledge is created and retrieved, and the character of work and occupations in which men [sic] are engaged.' The computer plays a pivotal role in this ' r e v o l u t i o n ' . . . . IT, by shortening labour time and diminishing the production worker, actually replaces labour as the source of 'added value' in the national product. Knowledge and information supplant labour and capital as the 'central variables' of the economy. He comments on the way that information is being treated as a commodity, with a price-tag on it, and how the 'possession' of information increasingly confers power on its owner. '6. Thus the word 'value' is nicely ambiguous. Valuation is informative, therefore a value is information. And at the same time, information (as Bell argues) possesses value, whether added value, surplus value, use value, exchange value, or whatever other kind of value there may be. An economic fact (such as the value of something, expressed
0950-5849/89/050226-05 $03.00 © 1989 Butterworth & Co (Publishers) Ltd
information and software technology
editorial in monetary terms) itself has a value that can be expressed in monetary terms. This makes the economics of information circular. Technology (including software) is about building connections between means and ends. The value of technology depends on the relative values of the means and the ends. (This is usually expressed as a ratio, known as 'productivity'.) Thus to evaluate software you need to evaluate the information that it produces. There are economic transactions taking place all the time. People are exchanging money for information, for software, and for technology. But it is not easy to discover the price actually paid for such commodities. Often the information or software is bundled within some other product or service, or is developed within the very company that will use it, with some artificially calculated transfer pricing between divisions of the company. The software user often has a 'make or buy' decision: to purchase software or information or related services, or to develop such products and provide such services inhouse. If the economies of scale applied, then we would expect larger organizations to develop a greater proportion of their own software. But often it seems to be the larger user organizations that make greater use of independent software companies. Since the costs of providing information and/or developing software can be established (although this is not without difficulties), we have some idea how much revenue the supplier needs to make (or to cross-charge within the same company). But what price is it rational for the supplier to ask, given that the lower he sets the price, the more copies he may sell? And what price is it rational for the purchaser to offer? Cost-benefit analysis has been widely criticized for its simplistic approach to the evaluation of software products 7.
SOFTWARE What is software? Or what is special about software? In his paper on the pricing strategies of software producers, Gareth Locksley uses the term 'software' in a way that readers of Information and Software Technologywill find unusual. Within IT, it encompasses information as well as computer programs. (The accessing by subscribers of a public database would be a good example.) He does this to draw our attention to the commercial differences between trading in physical and trading in immaterial commodities. By extending the concept of software to any immaterial product, some valuable insights are obtained. (A similar approach has been adopted by Negishi s.) The first reproducible objects were bronze casts of pagan idols and printed bibles. (Mumford 9 has argued that the problems and opportunities of technology are often anticipated by art and/or religion; technology
vol 31 no 5 june 1989
HARDWARE
SOFTWARE
'Adding'
' Multiplying'
Fakes and counterfeits Reproduction is about as difficult as production
Piracy and breach of copyright Reproduction is much easier than production
Each copy absorbs a minimum amount of resources
The cost per copy reduces to zero, as the number of copies increases
Restricted to elite (e.g., Picasso)
Available to masses (e.g., Chaplin)
aspires to the status of magic1°.) By the nineteenth century, printing by movable type had been joined by photography, film and gramophone as software media. Even data processing was originally for decoration (punched cards recorded weaving patterns for Jacquard looms) and entertainment (the piano roll, reinvented in our own time by Conlon Nancarrow). Theorists still dispute the status of software art objects, developing further the work of Walter Benjamin 1~. How does Locksley's framework support expert systems, computer-based training, interactive videos, and so on? To what extent do patents and licences fall into the general category of software? What exactly are the similarities and what the differences, between information technology and other technology? And what of the future? Can we expect further convergence between different types of software? Thus his paper raises many new research questions. We can see interesting economic parallels between computer software and the other soft commodities. Much of Locksley's discussion is from the perspective of the software producers, in terms of product strategies, pricing policies, etc. It would be interesting also to consider the perspective of the software purchasers. How much to pay, how long to wait (before the price drops). What strategies are appropriate to cope with the product life-cycle, with the inflation of expectation and the obsolesence of achievement? Software represents expertise. This statement can also be expressed in reverse. Knowledge and skills are special cases of information: they represent information carried within people, rather than within machines or formal systems. With CBT and other developments, the economics of education and software will converge. According to the more optimistic proponents of artificial intelligence (e.g. Marvin Minsky), there is no area of knowledge or skills that is not computable, either now or in the foreseeable future. If we accept this claim, then what counts as knowledge and skills is context-dependent: the terms refer to what is carried within people here and now, rather than what must always be so carried. While Minsky's hopes remain unfulfilled, there are
227
editorial socio-economic pressures to divide and wrap knowledge and skills into easily managed parcels. This is seen as making more efficient the transfer of particular knowledge and skills into a person who requires them. Schooling becomes a quest to demonstrate that you have acquired mastery of an appropriate number of such parcels, irrespective of their value or meaning. 'Learning by primary experience is restricted to selfadjustment in the midst of packaged commodities . . . . People know what they have been taught, but learn little from their own doing. People come to feel that they need 'education'. Learning thus becomes a commodity, and like any commodity that is marketed, it becomes scarce. '12 . Thus education has acquired an exchange value, so people cram information to gain qualifications, which entitle them to jobs that make no use of the information thus crammed. Both education and software therefore suffer from a form of technological inflation, where the increasing pace of change reduces the duration of exploitation and advantage. This brings us back to the business benefits of computing: if the return on investment falls as the systems get more sophisticated, how do we judge the point at which further development is (for the time being) uneconomic?
TECHNOLOGICAL PROGRESS Technological progress within computing works in two ways. First, a division of labour allows the development of very sophisticated tools, designed by specialists for use by generalists 13. Second, the expertise of people is taken from them and captured in databases or software products. In this way, knowledge becomes a commodity. What makes something a commodity? It is an output of one process that becomes an input to another process 14. The two processes are made independent from one another by technological progress 15. But knowledge drifts between public and private ownership. Thus 'while the Straffa system is a closed system, in which commodities are always produced by means of existing commodities, the economy of information production is an open system, into which non-commodities enter as inputs and whose outputs may eventually escape from the cycle of commercial exchange q6. If software is a commodity, then we should expect economists to be interested in the production of software by means of software. This means quantifying the costs and benefits of tools for enhancing the productivity of systems development (e.g., CASE tools, for computeraided software engineering). Cost-benefit analysis of packaged software is never straightforward. The implementation cost of the software is often much greater than the purchase price, as such software demands an investment in training and in projects to exploit it properly. In this issue, Kyo Kang and Leon Levy offer models to
228
quantify the benefits to an organization of enhancing its productivity. These models could presumably be extended to all aspects of an organization's computer infrastructure, including hardware, telecommunications, and software.
PRODUCTIVITY Most writers are still concerned with the productivity of systems development, expressed as lines of code or function points per programmer per day. Lehman and Boehm have both produced complex models of software costs across the whole systems life-cycle. In this issue Ali Mili and Raoudha Marouane offer a version of Boehm's C O C O M O model, calibrated for Tunisian conditions. Their paper raises many interesting questions about the international validity of such models, especially in the Third World. But such models have little to say about controlling design decisions in software engineering, e.g., cost/quality and cost/sophistication trade-offs. The business benefits of software are not addressed. One exception is Strassman, who defines productivity of information systems in terms of the productivity of management 17. But even Strassman fails to place productivity in the context of the competitive environment of the organization, and primarily makes comparisons between the operations of organizations. Bhabuta takes an much broader view; he discards the conventional interpretation of productivity--'achieving operational improvements, efficiency of management procedures, a streamlined organization, and so on'--in favour of a strategic interpretation. 'Productivity in our coverage is concerned with efforts directed at enhancing the competitive strengths of an enterprise relative to its competitors, through systematic and systemic improvements and exploitation of its assets.' He distinguishes between innovation-based strategies and productivitybased strategies and claims that the latter are more appropriate 'in markets with intense competition and near competitive parity, contracting markets and markets which do not afford ROI on significant innovation '~8. Several writers point to the economic benefits of 'learning by doing'. 'Major improvements in productivity often continue to come long after the initial innovation as the product goes through innumerable minor modifications and alternations [sic] in design to meet the needs of specialized users. '19 But as yet there seems no proper way to estimate the monetary value of individual and organizational experience in information systems. 'Inventions hardly ever function in isolation . . . . Often . . . the benefits potentially flowing from invention A (have) had to await the achievement of
information and software technology
editorial inventions B, C, or D. These relationships of complementarity therefore make it exceedingly difficult to predict the flow of benefits from any single invention and commonly lead to a postponement in the flow of such expected benefits. '2°.
SOFTWARE
REUSE
According to Grindley (although he offers no evidence for this), the competitive advantage of the independent software producer depends on 'its ability to produce software more efficiently by specialization '21. It could instead be argued that too much specialist knowledge actually hinders efficient systems development. Whereas an inhouse development team may get bogged down in accurately resolving some issue, a team of contractors is more likely to generalize itself out of trouble. And the end-result may have greater flexibility, because it is not closely tied to details of the current environment. This is an apparently controversial hypothesis, as it seems to contravene the current dogma, that systems development should be steered by the business and by the users. But this is not a true contradiction; if the systems are strategic, they will be tuned to the future rather than the present or the past. ' M a n y years ago, Sir Ronald Fisher noted that every biological system had to face the problem of present versus future, and that the future was always less certain than the present. To survive, a species had to do well today, but not so well that it didn't allow for possible change tomorrow. His Fundamental Theorem of Natural Selection said that the more adapted an organism was to present conditions, the less adaptable it tended to be to unknown future conditions. We can apply the theorem to individuals, small groups of people, large organizations, organizations of people and machines, and even complex systems of machinery, and can generalize it as follows: The better adapted you are, the less adaptable you tend to be. '22 'Fractionalization' and increased flexibility may be regarded as an indirect productivity increase. Modularity/ reusable code and packages can therefore be regarded as 'more product for your money 'z3. One way of getting double the output from a given input is by using the output twice. Thus the reuse of software is an attractive way of increasing the productivity of systems development. But some effort is required to make it work: reusable code may be more difficult to design and test, and there is always a temptation for the designer to develop something entirely new rather than take the trouble to investigate and implement something that already exists. At what point therefore does software reuse become truly cost-effective, and what can be done to increase its benefits? Two papers in this issue offer
vol 31 no 5 june 1989
quantitative models. John Gaffney and Tom Durek offer a trio of plausible theoretical models, although with little direct empirical support. There remain many open questions from this work: How are the models applicable in practice: how could they be used in project costing, estimating, resourcing? What are the wider implications of the models: how do they fit into a more general theory of software economics and productivity? Kang and Levy cover several topics besides reuse, including the important issue of transfer pricing. They address source allocation in systems development--balancing direct costs and indirect costs, how much to spend on infrastructure. They go some way towards an economic model of innovation and experiment-justifying investment in R & D by its projected increased in productivity. Readers interested in following up the concepts of ultra-high programmer productivity are referred to Levy's book 24. FROM
PIRACY
TO ADVERTISING
One form of reuse, unwelcome flattery to the software developers, is the piracy of commercial software products. This raises the question of the economics of copyright. (Similar considerations apply to patents and licences.) 'The nature of knowledge is that it is extremely difficult, if not impossible, to maintain monopolies of information indefinitely, and there is a perpetual tendency for privately owned information to 'flow back' into the public domain. '16. As software gets more widespread, it becomes more difficult for its owners to collect the revenues due. Software developers have an incentive to release frequent upgrades, and perhaps even to infect obsolete versions with viruses, to encourage users to buy new versions direct from authorized sources. In response to the development of software into a pirated commodity, and to allow software developers to recoup their investment, Sheizaf Rafaeli has a novel proposal that he claims will allow 'the software process to roll, reducing the commodization of packages'. It is not clear how the insertion of advertising material into software will fully achieve this; after all, a plastic shopping bag is no less a commodity by having the name of the shop emblazoned on it. Some people grumble at giving free advertising to the shop, but they still use the bags. Would people be prepared to use a word processor or spreadsheet if it occasionally interrupted their work 'for a message from our sponsor'? Rafaeli's preliminary experiments suggest that they would, at least within some cultures. But his paper raises some intriguing questions about the control over software (this is a global issue, since around 70% of traded software worldwide is of American origin) and extends the current debate about the legal and moral liability for software quality. Rafaeli refers to the 'Tragedy of the Commons', where something of value is eroded by many individuals taking advantage of it, although each individual's effect is
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editorial insignificant. This is named after the destruction of grazing land that occurs when every peasant drives the maximum number of sheep and goats onto the village common. It can also be used to describe a hypothetical future in which every enterprise drives the maximum number of advertising messages into any available software crevice. The software industry may choose to welcome, ignore, or guard itself against this future.
FUTURE The subject of Information and Software Economics is broader than the papers included in this Special Issue. This introduction has mentioned other topics for future research and has included several assertions and hypotheses for which there may be insufficient evidence at present. Next year we hope to run another Special Issue on the same subject. Readers are invited to let us know which questions they would most like to be addressed. Researchers are invited to start planning their contributions now. Feedback welcomed.
REFERENCES 1 Paeey, A The culture of technology Basil Blackwell, Oxford, UK (1983) p 89 2 MeFarlane, F W 'Information technology changes the way you compete' Harvard Business Review (May-June 1984) 3 Porter, M E and Miller, V E 'How information gives you competitive advantage' Harvard Business Review (July-August 1985) 4 Bhabuta, L Sustaining productivity and competitiveness by marshalling IT in Ynen, C K and Davis, G B (eds) Information Technology Management for Productivity and Competitive Advantage (Proc. IFIP TC-8 Conf. 7-8 March 1988 Singapore) National University of Singapore (1988) 5 Lyon, D The information society: issues and illusions Basil Blackwell: The Polity Press, Oxford, UK (1986) p9 6 Lyon, D The information society." issues and illusions Basil Blackwell: The Polity Press, Oxford, UK (1986) p3
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7 Symons, V and Walsham, G The evaluation of information systems: a critique' J. Applied Syst. Analysis Vol 15 (1988) pp 119-132 8 Negishi, H Tentative classification of global software' Behav. Inf. Tech. Vol 4 No 2 (1985) pp 163-170 9 Mumford, L The myth of the machine S e c k e r & Warburg, London, UK (1967) 10 Wiener, N God and Golem Cambridge, MA, USA (1964) 11 Benjamin, W Das Kunstwerk im Zeitalter seiner technischen Reproduzierbarkiet (first published 1936) 12 Illich, I Tools for conviviality Harper & Row, New York, NY, USA (1973) p 63 13 Veryard, R 'Demanding higher productivity' Data Process. Vol 28 No 7 (September 1986) pp 351-355 14 Straffa P Production of commodities by means of commodities Cambridge University Press, Cambridge, UK (1960) 15 Borgmann A Technology and the character of contemporary life University of Chicago Press, Chicago, IL, USA (1984) 16 Morris-Suzuki T 'Capitalism in the Computer Age' New Left Review No 160 (November/December 1986) pp 81-91 17 Strassman, P Information payoff Free Press (1985) 18 Bhabuta, L Sustaining productivity and competitiveness by marshalling IT in Yuen, C K and Davis, G B (eds) Information Technology Management for Productivity and Competitive Advantage (Proc. IFIP TC-8 Conf. 7 8 March 1988 Singapore) National University of Singapore (1988) p 18 19 Rosenberg, N Inside the black box." technology and economics Cambridge, UK (1982) p 62 20 Rosenberg, N Inside the black box: technology and economics Cambridge, UK (1982) pp 56-7 21 Grindley, P C The UK Software Industry Centre for Business Strategy, London Business School, London, UK (1988) p 5 22 Weinberg, G M The secrets of consulting Dorset House Publishing, New York, NY, USA (1985) pp 29-30 23 Rosenberg, N Inside the black box." technology and economics Cambridge, UK (1982) p 78 24 Levy, L S Taming the tiger." software engineering and software economics Springer Verlag, New York, NY, USA (1987)
information and software technology