Research commentary: introducing a third dimension in information systems design--the case for incentive alignment.

Prior research has generated considerable knowledge on information systems design from software engineering and user-acceptance perspectives. As organizational processes are increasingly embedded within information systems, one of the key considerations of many business processes--organizational incentives--should become an important dimension of any information systems design and evaluation, which we categorize as the third dimension: incentive alignment. Incentive issues have become important in many IS areas, including distributed decision support systems (DSS), knowledge management, and e-business supply chain coordination. In this paper we outline why incentives are important in each of these areas and specify requirements for designing incentive-aligned information systems. We identify and define important unresolved problems along the incentive-alignment dimension of information systems and present a research agenda to address them.

(Information Systems Design; Incentive Alignment; Distributed Decision Support Systems; Knowledge Management; Supply Chain Coordination)

1. Introduction

Organizations in the new digital economy face unprecedented challenges with the rapidity of change in both the competitive environment and the technology. To operate effectively, real-time decision making requires inputs from multiple participants with differing knowledge, skills, and objectives. To better leverage an organization's intellectual asset for value generation, knowledge management has become the center of many companies' core competency. And increasingly, the shift towards e-business demands that organizations restructure their business models and processes so that information and products can move smoothly across the value chain. Critical to the success of all these business activities and initiatives are information systems designed to meet the challenges of today's business.

Given the increasingly important role of information systems (IS) in organizations, IS-design issues have been the focus of a substantial amount of IS literature. Previous research dealt with at least two dimensions in the design and implementation of information systems to support organizational processes. The software engineering dimension addresses the challenges of creating a cost-effective implementation of a system that is reliable, is easy to modify when users need change, and can be upgraded to new hardware platforms. The user-acceptance dimension is based on the evaluation by system users in terms of its relevance, usefulness, ease of use, satisfaction with the outcomes, the ability to exchange information with other participants, etc.

However, a system that takes into account only principles from the above two dimensions will not necessarily lead to a successful organizational outcome. A personal anecdote illustrates this phenomenon. As part of its knowledge-management initiative, a big consulting firm created a new knowledge repository where consultants could record their knowledge gained from past experience, so that the knowledge could be used by their associates facing similar situations. The organizational objective was to leverage the consultants' collective knowledge for value generation. In marketing this knowledge repository, a consultant from this company boasted that by hiring his firm, a client was hiring not just one consultant, but rather a network consisting of thousands of consultants who had made their knowledge available in this knowledge repository. When asked whether he had contributed his knowledge to the system, the consultant answered that he would have liked to, but that he had not yet done so because he had been too busy. So, while the knowledge-repository software may have qualified as a well-built system from a software engineering perspective, and the users may have perceived the system to be useful, the system did not lead to a satisfactory organizational outcome because there was no incentive for consultants to make the effort to input their individual knowledge into the system's knowledge repository.

We believe that as organizational processes are increasingly embedded in information systems, one of the key considerations of many business processes--organizational incentives--should become the third dimension of any information systems design and evaluation. We call this third dimension incentive alignment. It addresses the high-level design issues that recognize the interests and incentives of the users participating in the process (e.g., users' own objectives may differ from the corporate objectives), the differences in the distribution of information across the users, and the desirability of the eventual collective choice from the organization's standpoint. There are two fundamental, interrelated issues in this dimension. First, given the organizational process embedded in the information system, are organizational incentives in place for users to use the system as intended? That is, will the users make the effort to produce correct information? Will they input the true and accurate information they have? Or can they gain from distorting information? Second, will the use of the information system for a business process yield outcomes that contribute to reaching the organization's objectives? Is it robust against information misrepresentation from its users? Systems can be fault tolerant and easy to use but may fail to contribute to the organizational goal. A design methodology is needed that ensures that the new system and the embedded organizational process will be aligned with the organizational goals. Consequently, an information system should be evaluated along this dimension as well.