Nolan Stages Theory

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Nolan, Norton & Co.Business and IT Strategy

Nolan Stages Theory TodayA framework for senior and IT management

to manage information technology

KPMG Management Consul t;n g NVlid van de ANd van O,ganisatie-Adviesbureaus Kamer van Koophandel Amsterdam nr. 33263681

prof. dr R.L. Nolaning. W.J.D. Koot


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... Nolan, Norton & CoBusiness and IT Strategy

Nolan Stages Theory TodayA framework fo r se nio r a nd 1 f T managemen t tomanage in fo rma tion te chno logy

Prof. Dr. Richard L. Nolan and William J.D. Koot

Nolan's Stages Theory is probably the most well-known and most widespreadframework of the development of information technology in organisations'. Thetheory provides an insight in the way information technology evolves. Moreover, itoffers senior management and 1 fT management the possibili ty of directing thiscomplex phenomenon, without immediately going into technical details.

The first version of the Stages Theory appeared in 1973. Since then, a number ofassociated articles have been published by Nolan and others. The theory hascontinues to be adapted to the current VT environment and used by various largeconcerns throughout the world. This article deals with the Stages Theory as it isused at present, including a historical overview and a insight to the most up-to-date version.


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1. PHILOSOPHY OF THE STAGES THEORY

1 1 The development of information technology Is anorganizational learning process that can be divided intoStages.

It may be clear that information technology undergoes dynamic and continuousdevelopment. This also means that the organisation around informationtechnology cannot be uniformly regulated. A lot depends on an organization'sexperiences with information technology. With this in mind, we have developed amodel that describes the growth and development process of informationtechnology (Iff) in an organization. The basis of the theory is that the progress ofinformation technology in an organization may be divided into a number of stages.Each stage has its own specifIC problems in the areas concerning informationsystems, users, technology, lIT personnel and management instruments. As aresult of this, the managment approach that has to be used must be different foreach stage.The most well-known and widely applied version of the Stages Theory is based onsix stages. symbolised by two S curves. In addition to the learning process. th e Scurves also indicate the development of the lIT cost (see figure 1). However.Nolan originally used the lI T cost growth, he now describes the S-curve mainly fororganizationalleaming.

1 i iooS

technologicaldiscontinuity lITEra

DPEra

Stage IInitiation

Stage"Contagion

Stage IV Stage VIntegration Architecture

Stage VIDemassing

Stage IIIControl

e

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- Nolan, Norton & CoBusiness and IT Strategy

figure 1. Nolan Stages of the development of information technology.

1 .2 A Nolan Stage Is characterised by the Growth ProcessesThe use of infonnation technology means more than having eorrpoters availableor the development of information systems. Therefore, in addition to the stages,four lIT Growth Processes are described that determine the development ofinformation technology in an organization. This Growth Process model makes adistinction between the supply and demand sides.

The demand side concerns the support of the organization with informationsystems and the quality of those systems, as well as the skills of the users inapplying information technology. The supply side concerns the lIT organization,the procedures, the skills of the lIT experts and the infrastructure. Fina"y, theseGrowth Processes determine how much is spent on lIT. Wrth this, the lIT costsbecome a derivative (see figure 2).

SupplyFactors

. .

DemandFactors

figure 2. Iff Growth Processes

The recognised Growth Processes are:1. Application Portfolio:

This is the portfolio of automated information systems that an organization hasat its disposal. This refers to the (functional and technicaQ quality of these

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systems and the degree to which these systems support the current workprocesses.

2. Users:This concerns the degree to which user management can indicate thecontribution that VT has to provide in the realisation of the objectives.Moreover, this Growth Process concerns the degree to which the userorganization is capable of implementing changes and the extent to which usersare satisfied with the present information supply.

3. Resources:This concerns the amount, quality, experience and relevant knowledge of theavailable V T personnel as well as the effectiveness and effICiency of theavailable technology.

4. Management:This concerns the VT organization and the procedures and directives that arerequired to control the information supply.

1 .3 The growth processes ought to be balancedThe m ost important conclusion of the Stages Theory is that the stage anorganization is in is not so inlX>rtant as long as the growth processes are balanced.The situation is balanced when all the Growth Processes are in the same stage.The latest technological possibilities can be used to build a highly- advancedintegrated system (stage 4) but, if the users have never helped to develop asystem (stage 2) and their way of thinking and acting makes them totaDy incapableof using such a system, failure is unavoidable. This therefore calls for correctiveaction to be taken, such as steps to increase the users' awareness of thetechnological possibilities by, for instance, the deployment of personalcomputers, which enables the users to experiment. Corrective actions may haveeither a stimulating or a restraining effect. If an organization has ambitious plansand limited user experience, a certain degree of unhampered growth isrecommended. But for an organization with a great DIVersity of PC applications,where information exchange presents diffICulties, it is advisable to bring in controlprocedures. In short, the actions that an organization has to take with regard to it sinformation technology are determined by the situation, with the balance of thegrowth processes being of essential importance.

1 .4 In prinCiple all stages have to be passed throughFundamental to the Stages Theory is that each stage has to be passed through.The necessary organizational learning processes take time. This concept is also

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im p ortant for senior m anagem ent w hen it has to m anage inform ation technology.In ex cep tion al situ ations of c risis (heav y loss es , m erg ers , tak eov ers an dres tru ctu ring) th e o rgan ization m ay de cide to tem p orarily introdu ce a n im balanc e inthe G rowth P rocesses and even to skip a few stages of a growth p rocess. Suchs itu ation s are extre me ly da ngerou s b ut no t c om p letely im p os sib le. H ow ev er, itdoes requ ire a lot of v is ion, attention and p atience from the senior m anagem entbecause, by definition, ine fficien cies w ill o cc ur that m anageme nt w ill hav e toaccept .

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2. THE DEVELOPMENT OF THE STAGES THEORY

The m ost w ell-know n article on the S tages Theory was p ub lished in 1979. Theartic le p rovided a fram ew ork for senio r m anage rn enton the fa cets that p laya role inp la nn in g, co ntro llin g a nd d ire ctin g in fo nn atio n te ch no lo gy . T his c ha pte r d ea ls w iththe m anner in wh ich the theory cam e into exis tence and develop ed into a oontro lin strumen t fo r s en io r ma na gemen t.

2. 1 How it b eg an

In 1973:DP budgets follow an S curveThe orig inal concep t behind the S tage Theory dates back to 1973 and has beendescrib ed in an article in C omm unicatio ns of A CM 2. T he firs t concep t w asp resented as an hyp othesis, based on observations and discussions w ith them an ag ers o f th re e la rg e Am erica n co nc ern s.In ord er to b e ab le to u nde rstand th e characteristics of chan ges resu lting from theuse of V T , th e p oin t of de partu re w as th e hyp othesis that the co sts of lIT oou ld beu se d a s a n in dica tio n of the to ta l le v el of e vo lu tio n in a n o rg an iz atio n3. In s ho rt, th ecosts are a rep ercussion of p rogress in the a re as c on ce rn ed w ith th einfrastructure, the co ntro l p os sib ilitie s, th e s kills o f th e a utoma tio n p erso nn el, th eaw areness of the u sers and the appl ication of in fo rma tio n s ys tem s. T heau tom ation bu dgets of the ooncerns exam ined ap peared to grow and to describ ean S curve. This led to the second hyp othesis: the transition p oin ts in the S curveof the budgets indicate the transition p oint betw een stages (see figure 3).From this p oin t on, a third hyp othesis w as p roduced: the stages indicated them ost im po rtant tende ncie s rega rd ing the p lan ning, org aniz ation an d control ofa utom ated data p roce ssing. F or ex am ple, in the C on tagio n S tage (s tage 2 ), them anagem ent is exp ected to stim ulate the develop ment o f new system s and theacq uisition o f u ser exp erience, w hereas in th e C ontro l S tage ", a ttention is p aid tosta bilis atio n a nd m ore fo rm al in stru ctio ns . O r, e ve ry sta ge ha s its own o on tro lm echa nism s an d req uire s a specifIC a pp ro ach from man ag em en t.

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.- Nolan, Norton & CoBusiness and IT Strategy

. .Den'C: : : J.cQ.CW

Stage IInitiation

Stage II IControl

S tage IVIntegration

Stage IIContagion

figure 3. automation-budget curve and the first Nolan Stages.

In 1974: From a des cr ip tiv e t o a p re sc rip tiv e th eo ryIn th e con ce pts d ating from 1973, the S tag es T he ory w as de scrip tiv e. In 1974 itw as tra nsfo rm ed in to a th eo ry w ith a m ore p re sc rip tiv e ch ara cte r, in te nd ed a s anaid for sen io r m an ag em en t in m an aging (th e gro wth o f) au tom ated da tap rocessin g4 . T he S ta ges T heo ry h as since b een used to ex pla in the g row thp atte rn a nd to m ake s ta teme nts a bo ut th e o rg an iz atio na l a nd te ch nic alconsequences of automat ion. It is a lso slow ly becom ing dear tha t the growth ofa utoma tio n in th e first th re e s ta ges is d riv en by the te chn ic al p o s sib ilitie s.M oreo ve r, a t the tim e, w e p red ic ted that, fo llo wing th ese stag es, the g row th will bed riv en b y th e s oftw are a nd o rg an iz atio na l a dv an ta ge s.

In 1977: T he S curve as an o rgan iz atio na l le arn in g p ro ce ssO rg an iz ations m ake increa sing u se o f a uto ma ted data p ro ce ssin g. O ur con ce ptsa lso dev elop fu rther on the b asis o f fu rth er resea rch . F or ex am p le, in 19n, asu ccee din g v ers io n of the the ory ap p ea red5. T his sta te d th at th e su cc ess fu lap p lica tion of au tom ation dep ends am ongst other th ings on the degree to w hichco ntro l p ro ce du res are e mp lo ye d, su ch as p ro ject m an ag em en t. T his inv olv esh av in g s uffIC ie nt p ro ce du re s to co un te ra ct in effIC ie ncie s b ut, o n th e o th er h an d,th e p ro ce du re s m u st a llo w s uffIC ie nt ro om fo r in no va tio n. T his c re ate s a c ha lle ng efo r m an ag em en t. T he re fo re , in c erta in c ase s, stro ng c on tro l p ro ce du re s p re se ntan ob stac le to develop ments. M anagem ent w ill have to find a p ath betw een chaosa nd s tro ng c on tro ls, to wa rd s a situ atio n o f co ntro lle d (u nh am p ere d) g ro wth .A noth er im p orta nt d ev elo pm en t in the th eory a t that p oint w as the re alisation th atthe S cu rve not on ly rep resents the grow th of the DP budgets but a lso ano rg an iz atio n's Ie am in g e xp erie nc e in its se arc h fo r a n e ffe ctiv e w ay o f co ntro llin g

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its automated data processing. This produces an learning curve for both the V Torganization and the user organization. This implies that a organization has to passthrough all the stages and that, in principle, no stage may be missed. This isanalogous with the development of the adult from the baby. Here too, if there is tobe proper personal development, .stage such as puberty cannot be missed.

2 .2 The theory as it is quotedIn 1979: S ix stages th at depend on fo u r g row th p ro ce ssesFinally, the m ost well-known article appears in 1979, in the Harvard BusinessReview, in which six stages are described6. A breaking point is defined betweenstages 3 and 4, in the learning curve and the growth of the costs. This leads to twoS curves, one followed by the other. In addition, it is stated that the directionsenior management must give to automated data processing is dependent on thestage in which the organization finds itself. In 1979, we define two points ofmeasurement (benchmarks) for this. The first benchmark relates to the growth ofthe costs of information technology. Organizations in stages 2 or 5 must take intoaccount an average growth in the automation budget of between 15% and 40%per year. We based a second collection of benchmarks on the so-called growthprocesses (see figure 2). These four growth processes finally determine howmuch money an organization spends on information technology and anorganization's position in the Nolan Stages.

2.3 Further developments

Followin g th is : m a kin g th e s ta ge s meas ura bleOnly limited further developments were published in the literature after this. This isnot to say that the development of the theory stagnated at that time, on thecontrary. Senior management presented increasingly more questions regardingwhere their organizations stood in the Nolan Curve. In order to be able to providesatisfactory answers, an extensive method was developed for measuring the v rsituation precisely and comparing it with other organizations. The results of thesemeasurements are used to position an organization on the Nolan Curve and helpmanagement to manage their lIT. This method has become known as lITassessment and is used by many hundreds of organizations worldwide, includinga large number of Dutch organizations. For a description of the quantitative andqualitative measuring instruments used for lIT assessment, see the previousarticle by Koot and Van der Zee7.

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F inally : th e th ird SCUNeThe most recent developments concern the definition of a third S curve (see alsochapter 5). The changes that an organization went through in the DP E ra (the firstS curve) were mainly detennined by technical changes. In the InformationTechnology Era (the second S curve). the organizational changes are muchgreater, even if often incremental. The work processes are based on paperstreams that are supported with the aid of technology. The effICiency ofinformation technology lies in the order of percentages. To increase theefficiency. major changes are required in an organization's method of working(transformation). During this third S curve, a task-oriented and functionalhierarchical organization is replaced by a more network-like organization. Theoperating processes are thereby adapted to the technological possibilities. A feworganizations have already booked the first impressive results with this, includinglarge Dutch organizations.

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3. THE DP ERA

The characteristic of the first S curve descnbed. the Data Processing (DP) Era. isparticularly that the automation organization takes the lead in giving form to therequired information supply. The systems that are developed are mainly based onthe technical possibilities. It is only halfway along this S curve that management ofthe organization begins to pay attention to the phenomenon of automation.

Stages I : I nit ia tionIn this "Initiation Stage". an organization becomes acquainted with automation.The object of the efforts concerned with automation is to achieve cost savings inlabour-intensive operations. In this initial era the computer specialists provides theservices. They determine exactly which support an organization needs. The userscannot and donot want to have any involvement in automation at this stage.In the beginning the computer was mainly a means of performing calculationsrapidly. The required input data were supplied by the user in the form of apunching document which w as processed by a data-entry network to produce apunched card that the computer was able to read. The computing speed.combined with the aloofness of the user's contribution. led to systems mainlybeing developed in areas where the automation specialist possessed aknowledge of the material.

The systems developed in the first stage are concerned with salaries. debtors andcreditors. At this point these systems donot constitute information systems as weknow them in most organizations today. They are more like a collection ofprograms that carry out calculations on one automated card file. Links between. forexample. the ledger and the debtor accounts are still made manually in this stage.

S tage II: Contagio nA s the organization becomes more familiar with the possibilities of automation.there is an increase in the need for other sorts of systems apart from exclusivelyregistrational and often financial systems. A certain enthusiasm exists amongstusers. which leads to a start being made on the automation of other tasks.Systems for stock control. order handling and invoicing are developed in thisstage.

However. a new problem arises in this stage. Whereas in the "Initiation Stage" theVT expert. who usually came from the Accounts Department. possessed aknowledge of the material. tasks about which the specialist ha s only limited if anyknowledge now have to be automated. The automation expert is therefore nolonger able to decide everything alone. There has to be contact with users w ho

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can explain how the organization operates. After some preliminary problems, mostorganizations introduce a formal system-development method in this stage, inwhich the construction of systems is divided into a number of steps. Thediscussions about system-development methods that took place in the earlynineteen eighties are the result of this. Eventually, these system-developmentmethods have to take into account a new technical phenomenon, the fact that theexpansion of the automated systems provides an extra stimulus, namely in theform of the display screen. From this point on, the data-entry departments aregradually run down and replaced by display screens on the desks of theemployees.

Because there is no on-charging of costs, the automation budget growsconsiderably. In this stage, annual growth percentages of between 15% and 40%are the rule rather than the exception. In this stage, decisions as to which systemsought to be built and the order in which they ought to be built are also mainly in thehands of the automation organization. However, there is some attunementbetween management and the various departments. It turns out that thesubstantial increase in the budget has not helped avoid large backlogs in therealisation of the user requirements (referred to as the backlog). The v rorganization therefore sees itself as being required to achieve some form ofattunement with the management of the user department with regard to priorities.At the end of the Contagion Stage, links begin to be formed between thevarious information systems. However, these links are mainly concerned withsystems that are used by the same department (such as finance, sales,production). These links between systems concern for example automated datatransfer between the financial systems and the budget-monitoring system.Integration throughout the departments only begins to take on proportions of anysignificance in stage 4.

Stage III: ControlOwing to the spread of automation throughout the organization and the fanuresencountered in this, there exists a need for control of the automation activities andcosts emerge. In particular, it is middle management that demands more influenceon development, because the backlog has increased dramatically and theautomation costs have begun to form a considerable part of the organization'scosts. This often leads to the setting up an DP Steering Committee, in whichpractically all the organization's disciplines are represented. It is at this stage thatthere is a large increase in the use of methods (standards/check lists) in the area ofautomation. The user's role becomes increasingly important. The user begins toparticipate in project groups to develop systems, because systems are developedthat concern material of which the automation specialist has only limitedknowledge. Halfway through the nineteen eighties a new control instrumentappeared for getting a better grip on automation developments - the informat ionplan.

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B y the end of the second stage, organizations have achieved a considerab leex pan sio n o f th eir in fo rm atio n s ystem s. T he de bto r a nd c re dito r s ystem s a re fu llylinked to the ledger. M oreover, there is a link to the bu dget-m onitoring system . W ecan now send an invoice au tom atically. H ow ever, ow ing to the lack of a contro linstru ment and the intense p ressu re to i"l> lem ent new system s, the w riting o ffunctional docu mentation has gone by the board. This has its corne back l ater i nthe ma in tenance o f the system s. S ystem s are m ain ly m anaged duringdevelop ment and are consequently seen as costs instead of investm ents andth ere fo re a sse ts . C on se qu en tly , a fter a n um be r of years the system s also tum outto b e n eg le cte d. As a result o f this, the in form ation p lans in the th ird stage areconcerned w ith rectify ing the p oor condition of a large num ber of system s byrep lacem ent and are only concerned w ith exp anding the p ortfo lio to a lim iteddegree. T his is w here the second-generation system s enter (ledger, deb tors,creditors, etc.) T he rem ain ing cap acity for develop m ent is u sed for p erfecting theautom ated su pp ort of the tasks w ith in an organization. F or the record, it is p ointedout that, at the end of th ird stage, betw een 34% and 46% of the organization'sa utom ata ble ac tiv ities h ave b een s up p orte d e ffe ctiv ely : R es ea rc h c arried o ut inthe N eth erlan ds b y N olan , N orto n & Co., indicates that an average of 34% o f th ea utomatab le a ctiv itie s a re s up p orted a t p re se nt.In the develop m ent of the second-generation system s, m anagem ent no longera llow s system s to b ecom e neglected. S ystem m aintenance b ecom es an essentia lto pic . In orde r to in corp ora te it in th e o rg an iz ation p rop erly , a pp lic atio n m an age rsare ap p ointed on the user's side. Fu rtherm ore, the inform ation m anager m akes anentry. An in form atio n m an ag er is ap p ointed to e ac h o rg an iz ation d iv is ion an d p la ysan interm ed ia ry ro le b etw een th e te chn ic al 1 f T p ersonnel and the u sers.

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4. INFORMATION TECHNOLOGY ERAFrom the initial concept of the Stages Theory, a breaking point was anticipated inthe third stage, in which the DP budget stabilises. We predicted that this breakingpoint would not simply occur but that it would be preceded by a technologicaldiscontinuity. In 1979, i t was expected that this breaking point would be theintroduction of the database-management systems. However, at the beginning ofthe nineteen eighties, far more important discontinuities were introduced, in theform of the personal computer, the new types of personal software (spreadsheets,graphical-user interfaces) and the expansion of chip technology in Cash/PayTerminals, data-communication networks, robots, work stations, etc.

Stage IV: Integration

In the DP Era, the information supply is grafted onto virtually separate systems andforms of technology. There are some links between systems in the same businessarea but the links (interfaces) have grown almost organically. The links betweenthe systems are so extensive and complex that the whole begins to look like aspaghetti chart.Senior management begins to discover that the combination of computers withdata communication and other forms of technology (from here on calledinformation technology) offer more possibilities that just labour savings.Information technology makes it possible to achieve strategic advantages or,conversely, it leads to threats. The strategic requirements that the managementsets for the organization and thereby implicitly for information technology, areoften formulated simply, such as:- transition from a product to market-oriented organization;- knowledge of all products that the customer purchases;- having a continuous insight into the progress of the work.However, the logical conclusions of.these requirements are less easy to realise.The various factors mean that automated information exchange between systemshas to be expanded to provide integration that spans departmental limits (cross-functio.naO. However, the existing interfaces have the appearance of a spaghettichart. A good reason, therefore, to clear up the chaos, with a view to achieving theflexibility in the information supply that senior management demands. Thisintegration between systems is undertaken in the fourth stage.

In order to take the right approach to integrating the systems across departmentsand organization divisions, the majority of the information systems have to bereconstructed. During the development of these new systems, it is necessary tohave a well-defined model of the relationships between the various databases.This generally leads to a more data-oriented approach. It is usually combined with

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the introduction of automated aids for system development, such as case toolsand 4th generation software.

For lIT management, the fourth stage is an essential transition (discontinuity),ahhough this is not so obvious at first. The reconstruction of the systems, withoutmaking any appreciable addition to functionality, is a risky business. Owing to theincreased involvement of senior management, the requirements set forinformation technology grow rapidly within a short time. This happens while the lITorganization is busy making preparations for this. All this leads to a temporarysituation of selling no to the senior management which does not take it kindly.The result is often a personnel change in VT managements. The previously madesplit in stage 3, between the technical and functional VT responsibilities is nextapplied in this stage to arrange for the functional part, with the informationmanager, to report hierarchically to the user organization. The VT budget is herebyalso divided over the organization. The technical part is then incorporated into afacility-providing organization that accommodates the computer centre and theprogramming.

Stage V: ArchitectureIn the Information Technology Era, the senior management increasingly sees thepossibilities for using lIT to achieve strategic objectives. Information technologyshifts from an internally-oriented activity to an extemally-oriented activity, in whichthe automated support of suppliers and customers becomes more central. In orderto make this possible, large-scale new techniques are introduced such as imaging,mobile communications and expert systems. Furthermore, the lIT support ofcustomers and suppliers demands a knowledge of and experience in datacommunications and requires that a distance be taken from the central computer-processing philosophy. I t becomes necessary to process data at several places(distributed processing). In addition to a data-oriented approach, blue prints9(architectures) of the information organization are essential, to enable theinformation streams and information processes to be properly mapped out, whilsttaking into account the distnbutedcharacter. In this fifth stage, the necessaryattention is paid to this "architecture" in order to achieve the external automationand the associated distributed processing.The linking of the management strategy to the deployment of informationtechnology automatically means that the decisions are no longer taken by an 'OPSteering Committee but that the senior management takes on responsibilities.The user has slowly built up so much experience in specifying systems that theuser's role changes from that of participant to developer. The V T experts are givena much more supportive role.

O f course, not all the systems have the same strategic importance and character.Therefore, the control instruments for directing infonnation technology differ. It is

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necessary to develop four different types of control instruments in the-Architecture Stage-: asse t-based utility

A number of facilities will be provided that span the organization and have ageneral character. Generally applicable control instruments (procedures,development methods and guidelines) will be used. Consider here, forinstance, processing at the main computer centre, data-communicationfacilities, financial systems and personnel systems. The characteristics ofthese control instruments are:- organization spread approach;- fonnal standards;- focus on efficiency;- for systems with high development costs.

custom applica tionIn addition to the standard faci lities, each division of the organization willrequire specifIC systems and facilities. Rnancial systems are usually the samefor all the divisions of the organization but sales and production systems aswell as logistical systems are usually different in each cflVision of theorganization. The product system used in a bank for loans works differentlyfrom the product systems used for securities in the same bank. Materialdifferences and, in some cases, the personal preferences of particularinformation managers, may make differences in control instruments desirable.The following are typical of these customised control instruments:- functional and material-specific orientation;- high user involvement;- attention to costslbenefits.

re ta il applianceA few forms of technology are relatively so inexpensive that extensive andthereby expensive forms of control are undesirable. PC's and the relatedstandard software may be included in this. Some specific characteristics ofretail-appliance control instruments are:- focus on efficiency;- central support;- inexpensive technologies; .- can be supplied off the shelf;- justification by the user;- expenditure planning.

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experimental (niche venture)When a bank has developed a new product, the information systems ought toprovide support for this product as soon as possible, so that the product canbe put on the market before the competitors launch a similar product.Therefore, acting quickly is essential in development. The existing controlinstruments usually focus on large-scale participation, maintainability and fittingin with the existing environment. In short, other control instruments arenecessary in cases where there is a major strategic interest. The characteristicsare:- innovatory and unconventional;- balance between users and lIT experts;- planning through budgeting and defining turnaround times;- focus on a breakthrough.Particular1y because the realisation of the strategic objectives spansorganization divisions, one thing and another leads to some degree ofrecentralisation.

Stage VI: OemassingAt the end of the Information Technology Era, there is increasing pressure fromthe organization to organise lIT per organization division or business unit.Eventually, the entire information technology will be dernassed, including thedismantling of the facility-providing organization (through down-sizing of theequipment). This is not only because it is desirable for lIT but also in connectionwith linking up to the total organization philosophy. Senior management will setsome conditions for the demassing of information technology. Businessmanagement will take the final decisions about the management strategy and therelevant deployment of lIT. This slowly leads to a shift in the use of the automatedinformation supply, from a technology-driven phenomenon of automation expertsto a strategy-driven management resource.

ResumeThe importance of the Stages Theory lies in the maintenance of the balancebetween the various growth processes, so that lIT is deployed efficiently andeffectively. A knowledge of these Growth Processes helps management to makethe right choices regarding information technology. Figure 4 summarises thedevelopments of the growth processes for each stage.

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elq)l lncing r eb u il di ng a p p li ca ti on s d ew Io pmenla p p li ca ti on p o rt fo li o lo r c ro a-llR :tio na l 0 1 ep p lic atlo n5Integrated within In tegration offerirG1unct Ion5 generation III ex lem lll

ap p ficatlon5 sup p ollio &yS Iell15 wHhiIsuppl iers B us in es s UnIt

combination of 0IHinI ck Mn slz kG o fbatch and on-line data centersuser-or ienled VTstaIIlnBusiness UnI tcentral recentral lzat ion centr idecerVII'

l ITorganiut ion& lop management lop managementmanagement decide decides taditalH; BU mgt.together cIecIdesstrategic plaming

~ user dewlops use r o r gan i zat ionparticipation In ~wlh responslblelorsyaem& s up p ort 0 1 l I T " staff _ntabilltydevelopment

Stag41IInitiation

Stag. IIContagion

Stag41IIIControl

Stag41IVIntegration

Stag. VArchitectur.

Stage VIDemasslng

figure 4. Nolan Stages with growth processes

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5. THE NETWORK ERA

5.1 The changing market conditions demand new managementprinciples

Many well-known authors in the field of organizational development, such asToffler, Naisbett, Drucker and Peters, have written about the phenomenon oftransformation. Transformation changes organizations and the principles ofmanaging drastically. The markets of many organizations are becomingincreasingly dominated by local trends and fashions. An example is the beermarket. For a long time, the major brewers have dominated the market with a singleproduct. Forced by changing consumer preferences, as expressed, for instance,in the success o f popular Belgian beers, the major brewers have switched todifferentiating a number of products, where each has its own target group. Theseniche products now largely determine the success of an enterprise. Discoveringand producing these niche products requires a decisive organization. However,mo st organizations appear to be held back by large bureaucracies that prevent thenecessary modemisation from occurring.Up to now, scale has been an important factor for success. This has led to manymiddle-management levels, intended to coordinate and eliminate errors. The latterwas a more or less perfect success, however, owing to a fear of failure, pradicallyall the necessary innovations and experiments were stopped in organizations.Moreover, it becomes ever more clear that centrally planned economies for largecountries such as the Soviet Union do not work. The same also seems to apply tocentrally managed companies.

Everything indicates that organizations are in need of a major change for them tobecome more decisive. A few large organizations have taken drastic measures inthis area. Just consider the changes that organizations like Asea Brown Boveri andIBM have gone through. The transformation to the new form of organizationmeans a fundamental change in values and standards, and bears no resemblancewhatsoever to our experiences up to now, which are grafted onto the task ofmanaging organizations in the 8industrial econorny". Today's skills are based on anumber of formal principles, such as:a. line and staff functions separation of core activities, such as production

and distribution on one side and supportingactivities such as finances, on the otherevery employee has one bossa production unit contains no more than tenpeople and is managed by one personcost plans for one yearexpenditure plans for a number of years

b. decision-makingc. span of controld. budgetse. investment plans

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Workers

Organization

Management

f. c en tra Vd ec en tra l s p ec ifr ca tio n o f c en tra l o r c on ce rn a ctiv itie ssepa ra te f rom lin e a ct iv itie s.

These m anagem ent p rincip les are com p letely w orked out and detennine ou r w ayof th inking ab ou t how an effIC ient organization has to function. H ow ever, acom p lete range of new p rincip les is needed for the transition to the in form ationeconomy".

OPEra VTEra Network Era(c ) 1992, R ic ha rd L . N o la n

figure 5. transformation principles .One im p ortant lesson can be leam ed from the p ast - w hen the agrarian econom ytransfonned into an indu stria l econom y. In 1865,48% of the p op ulation in Americaworked in the agrarian sector. A rou nd 1 945, w hen the transform ation from ana gra ria n to a n in du strial e co nomy w as m ore o r le ss c om p le te , th is p erce ntag ehad fa llen to 4% . This change had only been m ade p ossib le by the enonnousincrease in agrarian p rodu ctiv ity. W hile the num ber of p eop le w orking in th is sectorfe ll to 4% , the tota l q uantity of agrarian p roducts neverthe less increased. A tp resent, exp ressed in m oney tenns, the agrarian sector is th e mo st im p o rta nts ec to r in America, although it only em ploys 2% of the p op ulation. This w as onlymade po ss ib le by the in troduction of new technology. in the form of the steame ng in e a nd b io tec hn olo gy . T he c on tin uo us a dap ta tio n o f th e te chn olog ic alp ossib ilities a lso led to the adap tation of the m ethods of w orking in the agrarian

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industry. The technological changes eventually went further than themechanisation of manual tasks. The earlier farm, on which a whole family worked,has now been transformed into an extremely advanced business that errploysonly one or two people. In short, technology combined with changes in theworking processes leads to considerable improvements in productivity.

5.2 The role of information technology is shifting

The DP Era (the first S curve) was mainly driven by computer technology. Duringthat era, new technology was bought to make existing organizational structuresmore effICient. The VT department became a phenomenon in practically everycompany in that era. In order to achieve the necessary information supply, mo stsystems had to be developed from scratch. Certainly in the larger companies themost irTl>Ortanttasks are automated nowadays. This has laid the foundation for theInformation Technology Era. In this next era, information technology will play anincreasingly important role in the realisation of a company's strategic objectives.Information technology is no longer only an aid for the accounting factory at the(head) office, it is also shifting towards the customer. Partly thanks to technologicalinnovations such as the PC and data communication, customers are coming intocontact more often with the supplier's information technology. Consider the salesperson who takes along a PC and calculates price quotations on the spot, withdirect links to your supplier's ordering systems. Information technology istherefore shifting from an internal orientation to an extemal orientation. In short,information technology brings about not only improvements in effICiency andeffectiveness but it is also the basis for an actual change in the way workingprocesses are put into practice.

5.3 Process redesign using information technology as a enabler

Owing to increasing automation, the classical organizational pyramid of 5% seniormanagement, 35% middle management and 60% workforce has beentransformed into a diamond in which the middle management includesapproximately 55% of the employees. The shop floor is supported effectively inthis by technology, while middle management has remained the same. In order toachieve the desired decisiveness in organizations that the market now demands,middle management will not be able to avoid changes. Responsibilities willcontinue to be delegated to the shop floor, without the intervention of all kinds ofmoney and turnaround-time consuming management layers. Organizations will nolonger do everything themselves but will enter into strategic alliances with otherorganizations. In this way, the functional hierarchy wil l slowly be replaced bynetwork-like organizational forms.Along with other eminent rnanagement gurus, the third S curve predicts theNetwork Era. A start was rnade in the Information Technology Era on the externalorientation of information technology. In the Network Era, these developments will

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go further and, moreover, industrial processes will be revised. However, this will beimpossible without adapting our management principles. The new organization willincrease its productivity in such a way that the same activities will be possible withonly half the personnel. Moreover,

the product or production orientation will change into market orientation;remuneration waJchange from being based on loyalty and seniority toremuneration based on performance;the competition will change from multinational to global;in addition to financial efficiency being the gauge of success, indicators suchas quality, image and product innovation will also be determining factors.

The credo "don't adapt the organization to the computer but the computer to theorganization will change to organise and automate at the same time".

but

new technology + old o~ganizational structures =reduced benefits (10%)

new technology + new organizational structures =substantial benefits (1Ox)

All these changes demand new measuring instruments, management principlesand organizational structures. But this is all impossible without informationtechnology. Organizations will have to be redesigned in the Network Era.Processes will be set up on the basis of the possibilities made available byinformation technology today. Information technology is therefore no longer an aidbut a lever for making changes possible 10.The organization where the flow offorms determined the administrative organization will be replaced by anorganization that is based on internal and external electronic communication.

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6. CONCLUSION

As V T begins to playa more important role in organizations, it will become essentialto have sufficient knowledge within the organization about the practicalities andimpracticalities of information technology. This demands a wide and deepknowledge of the functioning of the organization and the possibilities oftechnology. In order to realise and to organise this, senior management has to playa stimulating but also a controlling role. The Stages Theory helps management tounderstandthe developments that information technology goes through andoffers possibilities for playing the stimulating and controll ing role adequately.In the original concepts on the theory, the final stage was referred to as maturity.This stage no longer occurs. The word maturity suggests an end to growth in thedevelopments. Just as continuous developments take place in fields such asfinancial management or personnel management, information technology will alsodevelop further. It is therefore not surprising that a third S curve - the Network Era -has been indicated. Perhaps this will be the final S curve to be recognised. Notbecause there are no more developments but because, at the end of the third Scurve, the use of information technology will be as normal as reading and writing.After all, the classical function of the writer (clerk) has also disappeared from everyorganization.Research by Nolan, Norton & Co. in the Netherlands has shown that mostorganizations find themselves around stages 3 and 4, where they use informationtechnology to support approximately one third of the activities that it is possible toautomate. In the Stages Theory, stages 3 and 4 constitute an era of limited growthin V T costs. Within this framework, it is understandable that, from the macro-economic point of view, the 1 f T costs will virtually stabilise in 1992. This is incontrast to 1988 when growth was still 15%. In short, from the macro-economicpoint of view too, it seems that the Control Stage is dominant to its full extent. Afew organizations are of course further ahead in their application of informationtechnology (stages 5 or 6). On the other hand, there are also many information-intensive organizations that are still in stage 2.

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AUTHORS

Richard L. Nolan is the co-founder and chairman of Norton & Co. In addition. he is aprofessor attached to the Harvard Business School in Boston (MA). in the UnitedStates. William J.D. Koot works for Nolan. Norton & Co. as a senior managementconsultant in Utrecht. and is the author of many articles in the field of informationmanagement. the strategic use of information technology and lIT assessment.Nolan. Norton & Co. is a wor1dwide consultancy in the area management and thestrategic application of information technology. and forms part of KPMG K1ynveldManagement Consultants in the Netherlands.

Literature

Davis. G. Review of information systems research theoriesIn: Information Systems Research (edited by F. Warren McFarlan). HarvardBusiness School Press. 1986.

2 Nolan. RL. Managing the computer resource: A stage hypothesis.In: Communications of ACM. 16 (1973). nr 7.

3 King. J.l. and Kraemer. K.L. Evoluation and organizational informationsystems: An assessment of Nolan's stage model.In: Communications of ACM, 27 (1984). nr 5.

4 Nolan. R.L. and Gibson. F.G . Managing the four stages of EDP growth.In Harvard Business Review. 1974, Jan-Feb.

5 Nolan. RL.. Management accounting and control of data processing.National Association of Accountants, New York. 19n.

6 Nolan. RL., Managing the crisis in data processing.In Harvard Business Review, 57-3/4, 1979.

7 Koot, W.J.D. Van der Zee, J.T.M., VT AssessmentIn: Informatie. year 31 (1989), nr 11.

8 Toward 2001: Surviving instability - The IS scenarioGartner Group. Industry Service. January 1992.

9 Klein Klouwenberg. M. Koot, W.J.D . Van Schaik. J.A.M., Business and IIT-Architecture.

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S am son, H an db oek A utom atiserin g va n de in form atie verz orging, A ug 19 90.10 B atela an, M .V . a nd V rolijk , R .F .M ., P rocess R edesign w ith V T as enabler.

In : H ollan d M ana gem ent R ev iew , no 2 9, w inte r 19 92.

Documents

Nolan Stages Theory