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

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  • Velu, Chander K.
  • Madnick, Stuart E.
  • Van Alstyne, Marshall W.

Abstract

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

Suggested Citation

  • Velu, Chander K. & Madnick, Stuart E. & Van Alstyne, Marshall W., 2006. "To Standardize Enterprise Data or Not? An Economic Analysis of Flexibility versus Control," Working papers 30607, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    • Handle: RePEc:mit:sloanp:30607
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    File URL: http://hdl.handle.net/1721.1/30607
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    References listed on IDEAS

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    3. Claude Henry, 1974. "Investment decisions under uncertainty: The "irreversibility effect"," ULB Institutional Repository 2013/327343, ULB -- Universite Libre de Bruxelles.
    4. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-1012, December.
    5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
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