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ECIS 2014 Proceedings
ON THE EMERGENCE OF SHADOW IT - A
TNSACTION COST-BASED APPROACH
Stephan Zimmermann
HTWG Konstanz - University of Applied Sciences, Konstanz, Germany, stephan.zimmermann@htwg-konstanz.de
Christopher Rentrop
HTWG Konstanz - University of Applied Sciences, Konstanz, Germany, christopher.rentrop@htwg-konstanz.de
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Stephan Zimmermann and Christopher Rentrop, 2014, "ON THE EMERGENCE OF SHADOW IT - A TNSACTION COST-
BASED APPROACH", Proceedings of the European Conference on Information Systems (ECIS) 2014, Tel Aviv, Israel, June 9-11,
2014, ISBN 978-0-9915567-0-0
hp://aisel.aisnet.org/ecis2014/proceedings/track15/11
Twenty Second European Conference on Information Systems, Tel Aviv 2014 1
ON THE EMERGENCE OF SHADOW IT –
A TRANSACTION COST-BASED APPROACH
Complete Research
Zimmermann, Stephan, HTWG Konstanz - University of Applied Sciences, Konstanz,
Germany, stephan.zimmermann@htwg-konstanz.de
Rentrop, Christopher, HTWG Konstanz - University of Applied Sciences, Konstanz,
Germany, christopher.rentrop@htwg-konstanz.de
Abstract
Information Technology (IT) used for business processes is not only provided by the organization’s IT
department. Business departments and users autonomously implement IT solutions, which are not
embedded in the organizational IT service management. This increasingly occurring phenomenon is
called Shadow IT. The various opportunities and risks of Shadow IT challenge organizations and call
for approaches to manage the phenomenon. An initial point to achieve measurable indications for the
management is to explain why Shadow IT emerges. Therefore, this paper explores the business
decision to implement Shadow IT. Based on existing research we derive that Shadow IT is created
after a make-or-buy decision, which is substantiated in the Transaction Cost Theory. We deploy a
triangulation approach using the methods expert interviews and multiple-case study to investigate
Shadow IT emergence. Our findings identify prohibitive transaction costs in the exchange relation
between business and IT departments, influenced by misalignment, as the main explanation. We
conclude that the principles of Transaction Cost Theory may be applied to develop governance
structures for managing Shadow IT. This strengthens the link between IT Governance and Business IT
Alignment and expands the understanding of business integration within the IT domains of an
organization.
Keywords: Shadow IT, Transaction Cost Theory, IT Governance, Business IT Alignment.
1 Introduction
Practitioner studies show that two-thirds of IT managers acknowledge "Shadow IT" as an existing
phenomenon in their organization (Smyth and Freeman, 2007; Chejfec, 2012). A reason is that IT used
for business processes is not only provided by the organization’s IT department. Besides formal
solutions, business departments and users implement IT autonomously. End user computing tools
(Brancheau and Brown, 1993) and knowledge workers (Drucker, 1999) have facilitated a development
of individual solutions for many years. Different factors drive this evolution and increase the
relevance. The attitude of employees has changed towards an emancipated handling of IT. Digital
natives and immigrants (Prensky, 2001) are tech-savvy and transfer IT expectations from their private
life into their workplace. New web-based technologies provide easy access to solutions. The resulting
Shadow IT causes various effects (Behrens, 2009). The shadow solutions promise flexibility for the
business and may leverage innovations. However, several risks, e.g. in security and compliance, or
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 2
inefficiencies may occur. Information Systems (IS) research has begun to address the phenomenon in
the domains of IT Governance and Business IT Alignment (BITA) (Györy et al., 2012). To realize
opportunities and to minimize risks, research and practice processes aim to control Shadow IT.
Therefore, the development of measurable indications for its management should be possible. A
considerable initial artefact to achieve this is the characterisation of attributes of the emerging
phenomenon of Shadow IT. For this reason, the goal of this paper is to explore the business decision
on how to fulfil IT needs, which allows drawing an overall concept to explain Shadow IT emergence.
Prior research has analysed opportunities and risks of Shadow IT (Behrens, 2009). Most existing
publications particularly try to explain its emergence by focusing on the environment of Shadow IT
(Behrens and Sedera, 2004; Györy et al., 2012) or investigate special issues with minor relevance to
the overall phenomenon (Spierings et al., 2012; Ortbach et al., 2013a). The analysis of existing
Shadow IT on a broad empirical basis is missing. Regarding IT Governance approaches to control
Shadow IT, research offers fundamental orientations (Györy et al., 2012). However, theory-based
mechanisms to implement them do not exist. This research contributes to the discussion on explaining
emerging Shadow IT and introduces an approach based on Transaction Cost Theory (Williamson,
1975). This delivers a practical basis to control Shadow IT and extends IT Governance research.
The paper proceeds as follows: After discussing the status quo in Chapter 2, we present Transaction
Cost Theory as the background for the interpretation of our study and outline our research methods in
Chapter 3. The realization and the results of these methods are presented in Chapter 4. In Chapter 5 we
discuss the triangulated results and IT Governance implications. The last chapter summarizes the
paper’s insights and provides suggestions for future research.
2 Status Quo
Opportunities and risks of IT solutions developed by end users have been under consideration since
the 1980s. At this time companies consciously started to transfer small scale development tasks from
the IT department to the end users to overcome resource obstacles (Rockart and Flannery, 1983; Alavi
et al., 1988). End user computing research focuses on technological and organizational components
(Brancheau and Brown, 1993; Barker and Fiedler, 2011). In this approach, management is fully aware
of the activities and supports them as an integral part of the IT service strategy (Ferneley, 2007).
However, besides the intended concept, departments and users also deploy solutions without the
awareness of management (Ferneley, 2007; Gerrity and Rochart, 1986) and on a bigger scale than
management intended. This can be characterized as Shadow IT.
Equivalent keywords used in literature for Shadow IT are shadow systems, feral systems, grey IT,
rogue IT and hidden IT. In order to systematically identify the status quo of peer-reviewed research in
this field (Webster and Watson, 2002), we queried several academic databases (Ebscohost Business
Source Complete, ScienceDirect, ProQuest, IEEE Xplore, ACM Digital Library, AIS Electronic
Library, Jstor), IS journals (based on AIS senior scholars’ basket) and proceedings of established IS
conferences (ACIS, AMCIS, ECIS, HICSS, ICIS, PACIS) using the named keywords in combination
with information technology, information services, information systems and information security. In
the first step we limited the search to abstract, title and keywords. Relevant papers out of 32 initial hits
were selected and duplicates were removed. A total of 16 publications remained. Finally, we
conducted a backward- and a forward-search to avoid missing references (Webster and Watson, 2002).
Aiming at a better understanding on the emergence of Shadow IT we focused on practical examples
described in prior research. As only few concrete examples could be identified in the remained papers,
we expanded the search for the named keywords in a second step to a full text search. After removing
non-relevant hits and duplicates, we filtered out practical cases and recorded them in a database. With
this process overlapping situations occurred where some papers describe several examples and some
examples are described in different papers. In total we could identify 36 examples from 30 papers.
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 3
2.1 Shadow IT Phenomenon
Shadow IT supports business processes and tasks. In contrast to formal solutions, which are registered
in the asset and configuration management and planned within the service portfolio (van Bon et al.,
2007), Shadow IT is usually not embedded in the organizational IT service management. This
differentiation leads to the following definition
1
(Zimmermann and Rentrop, 2012): "The term Shadow
IT describes business process supporting IT systems, IT service processes and IT staff. They are
deployed autonomously within business departments and by IT users. Thereby, Shadow IT entities are
involved neither technically nor strategically in the IT service management of the organization, and
therefore, neither included in the asset and configuration management nor in the service portfolio."
Typical Shadow IT occurrences are application programs, spreadsheet and desktop database solutions,
cloud services, mobile devices, hardware equipment, support structures, or a combination thereof.
Scientific work on Shadow IT has increased in the recent decade. Contributions focus on occurrences
(Shumarova and Swatman, 2008; Walters, 2013) and effects (Behrens, 2009; Györy et al., 2012;
Silvius and Dols, 2012) of Shadow IT. Many of them refer to the response of users to new Enterprise
Systems (ES) (Scott and Wagner, 2003; Behrens and Sedera, 2004; Jones et al., 2004; Boudreau and
Robey, 2005; Houghton and Kerr, 2006; Kerr et al., 2007; Kerr and Houghton, 2008; Behrens, 2009).
These publications describe shadow systems, which circumvent the organizational ES. Few papers can
be found on how to manage Shadow IT (Györy et al., 2012; Rentrop and Zimmermann, 2012).
2.2 Shadow IT Emergence
Several studies describe a connection between Shadow IT and BITA. BITA in an organization states
the ability to fulfil and dynamically harmonize business strategies, goals and needs with IT capabilities
(Henderson and Venkatraman, 1993; Luftman, 2000). Organizations aim for a mature BITA (Luftman,
2000). Achieving this requires, inter alia, a well-functioning relationship between business and IT
departments (Luftman, 2000). Behrens and Sedera (2004) work out gaps between the IT needs of the
business and the provided Enterprise System which can be filled by shadow systems. Based on a case
study in a university they observed organizational, individual and technological conditions influencing
these gaps after an ES implementation. A large gap and intervening conditions like the availability of
resources and user expertise encourage shadow systems (Behrens and Sedera, 2004). Other authors
define these gaps as a misalignment (Jones et al., 2004) resulting from "the relational, strategy and
structural detachment of IT and business" (Györy et al., 2012). Misalignment, which can influence
Shadow IT, mainly occurs in situations of inadequate functionalities of the ES (Jones et al., 2004),
insufficient organizational flexibility (Behrens and Sedera, 2004), long implementation time and high
initial costs of new formal solutions (Györy et al., 2012) and missing involvement of business people
during formal IT implementations (Györy et al., 2012).
Based on the identified examples in literature, several arguments for the decision to implement
Shadow IT can be found. Although many actual reasons for the emergence of these examples are
partially connected to misalignment, the decision in favour of Shadow IT seems to be finally triggered
by more specific reasons within the relationship of business and IT. For the identified examples,
departments and users describe hurdles in addressing the IT department regarding ideas or IT needs
due to assumed time delays (Craig, 1999; Behrens and Sedera, 2004; Wagner et al., 2011; Niehaves et
al., 2013), assumed communication and complexity costs (Kumar et al., 2003; McAlearney et al.,
1
An appropriate and differentiating definition of Shadow IT is missing in English literature. Therefore, a translated definition
from a German-speaking reference had to be used in this paper, which expands the identified literature on the phenomenon.
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 4
2010), or unpleasant experiences from the past (LeFave et al., 2008; Berente et al., 2008; Scott and
Wagner, 2003). In these situations the examples show that the implementation of Shadow IT is easier,
faster, more flexible and allows a quick reaction to ad-hoc or non-routine issues (Graham, 2002;
Houghton and Kerr, 2006; McAlearney et al., 2010; Beimborn and Palitza, 2013).
Kerr et al. (2007) describe power tensions as a further impact factor on Shadow IT. In their single case
study, they analysed the reaction of users to an ES implementation where the operational departments
wanted to gain back control and built shadow systems (Kerr et al., 2007). Based on these findings,
Spierings et al. (2012) developed a power-based approach following Structuration Theory (Giddens,
1979) and the concept of knowledge workers (Drucker, 1999), who are able to wield power from the
bottom of hierarchical structures by using information and knowledge (Spierings et al., 2012). Based
on this and by analysing three shadow systems, Spierings et al. (2012) show different stages of how
users reacted to losses of productivity and control, which arose from a poor fit of a new ES to local
needs. Users without sufficient skills to develop IT solutions autonomously can only submit to or
dismiss the new ES (Askenäs and Westelius, 2000). However, users with sufficient skills may develop
Shadow IT to circumvent the ES to compensate for their personal loss of productivity and control. If
they have low influence, they will do this only in hidden form. In contrast, if they have high influence
or are supported by a senior executive with hierarchical power, they will operate in open defiance.
Similarly, Thatte et al. (2012) describe power and resistance to policies leading to Shadow IT in their
model of structural strain. Summing up these findings and referring to examples in literature (Behrens
and Sedera, 2004; Morton, 2006; Kerr et al., 2007; Spierings et al., 2012), power-based aspects of
departments to gain back control provide another explanation for Shadow IT emergence.
Another approach explaining Shadow IT emergence can be found in the debate on IT consumerization
(Harris et al., 2012), driven by the individualization of IS (Ortbach et al., 2013a; 2013b). On a macro
level, IT consumerization describes “the trend of adopting technologies originally developed for the
consumer market for professional use in enterprises” (Ortbach et al., 2013a). This includes formal
adoption of consumer IT, but also informal adoption in terms of Shadow IT (Ortbach et al., 2013a).
On a micro level, Ortbach et al. (2013a) define "consumerization behavior of an individual as the
usage of technologies from the private (or dual-use) space for business purposes". Based on the unified
theory of acceptance and use of technology (Venkatesh et al., 2003) and its extension to consumer
usage behaviour (Venkatesh et al., 2012), several quantitative studies (Ortbach et al., 2013a; 2013b;
Loose et al., 2013; Dernbecher et al., 2013) show why users choose consumer IT in their work life. In
case of an informal adoption, these studies also offer insights into the emergence of Shadow IT. The
study results show that the performance expectancy (Ortbach et al., 2013a; Loose et al., 2013) and the
habits (Dernbecher et al., 2013) of individuals are significant for their behavioural intention to use
consumer IT for business purposes. Furthermore, the identification with devices or solutions (Loose et
al., 2013) and social influences (Ortbach et al., 2013a; 2013b) contribute to this intention. Referring to
these studies and identified Shadow IT examples from literature (Boudreau and Robey, 2005; Berente
et al., 2008; McAlearney et al., 2010; Houghton and Mackrell, 2012), individual behaviour-based
aspects explain the decision of users to implement Shadow IT.
Hits
Relevant
Duplicates
Results
with examples
No. of examples
Title/Abstract/Keywords (T/A/K)
32
20
4
16
12
17
Full text (without T/A/K)
440
48
4
44
18
19
Total
472
68
8
60
30
36
Academic Databases: Ebscohost,
ScienceDirect, ProQuest, IEEE
Xplore, ACM, AIS Electronic
Library, Jstor
Potential
explanation
for Shadow IT
emergence:
Not enough information
18
Power
5
Individual behaviour
5
Assumed hurdles in business IT relation
14
Table 1. Results from literature search on practical Shadow IT examples
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 5
Table 1 presents the prior research on concrete examples in practice and potential explanations for
their emergence. Thereby, 18 Shadow IT examples are not described with detailed enough information
and focus rather on their existence or subsequent effects (Shumarova and Swatman, 2008; Walters,
2013; Wagner and Newell, 2005; Huuskonen and Vakkari, 2013). Moreover, the results show that
potential explanations are not necessarily disjoint. Power-based reasons, individual behaviour-based
reasons and hurdles in the business IT relation can influence the decision in favour of Shadow IT
simultaneously (Behrens and Sedera, 2004; McAlearney et al., 2010; Spierings et al., 2012).
2.3 Summary and Research Question
Despite the growing discussion regarding Shadow IT, research is in its infancy towards understanding
the phenomenon. So far, empirical studies on Shadow IT have been primarily based on few concrete
examples. Furthermore, the identified practical examples are usually not the main focus within the
studies and are only described on a thin information base without concentrating on the reasons for
their emergence. This is because most studies concentrate on user reactions to newly implemented ES
and the role Shadow IT plays as one of several possible consequences. Moreover, many contributions
deal with universities as objects of study (Scott and Wagner, 2003; Behrens, 2009), which represent
special types of institutions. Studies with a broad database covering several practical Shadow IT
examples in typical work environments within economic institutions are missing.
Important progress in research has been made regarding the connection of Shadow IT, alignment and
IT Governance. Shadow IT indicates misalignment and an operational solution for it is offered (Györy
et al., 2012). Addressing Shadow IT in the domain of IT Governance enables the achievement of a
higher level of alignment maturity (Györy et al., 2012; De Haes and Van Grembergen, 2008).
However, misalignment seems to merely describe one driving factor for the emergence of Shadow IT,
other arguments in this context point at more specific reasons within the relationship of business and
IT. To progress in the question of possible governance mechanisms, it is of interest to have a closer
look at the decision of business departments and users in favour of Shadow IT.
Some theory-based explanations for this issue have been developed based on power and individual
behaviour aspects as previously discussed. In fact, both approaches refer to special issues. The power
aspect focuses mostly on the business reaction to the loss of control due to a new ES. The individual
behaviour aspect regards consumer IT, which is only one of several possible Shadow IT occurrences.
Hence it is necessary to investigate Shadow IT in economic institutions in a more general way.
As shown in prior research it is important to find a way to control the phenomenon. Derived from top
management perspective, existing fundamental IT Governance orientations to manage Shadow IT are
IT-control, user-oriented and user-driven approaches (Györy et al., 2012). The challenge is to
implement these general orientations. To address this, a theory-based explanation on the major causes
of emerging Shadow IT is essential. Thus, we intend to answer the subsequent research question:
Why do business departments and users decide to implement Shadow IT, instead of referring to
existing formal IT structures?
Following this question we now present the further theoretical background and the applied methods.
Based on this and the status quo we interpret subsequently explored data from literature and practice.
3 Research Approach
This chapter describes the theoretical background of our research to be able to interpret our subsequent
study results. We introduce Transaction Cost Theory and demonstrate why this theory is worth
consideration in the attempt to explain emerging Shadow IT. Furthermore, we present the methods
applied in the study and show why these are appropriate to answer the research question.
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 6
3.1 Theoretical Background: Transaction Cost Theory
Prior research shows that Shadow IT emerges depending on the relationship between business and IT
departments (Györy et al., 2012). In case of IT needs for business support, exchange processes
between these two actors would normally lead to formal solutions. IT demand processes (van Bon et
al., 2007) demonstrate this internal exchange relation: Business departments and users can trigger a
transfer of IT services and capabilities from the IT department into the business processes. From an
economic point of view, this exchange situation represents a transaction, as "a transaction occurs when
a good or service is transferred across a technologically separable interface. One stage of activity
terminates and another begins." (Williamson, 1985) From business department and user perspective,
two possibilities arise if IT needs occur: organizing the implementation of the desired solution
autonomously, or carrying out the transaction with the IT department using formal processes. This
option describes a type of make-or-buy decision (Walker and Weber, 1984), which is theoretically
substantiated in Transaction Cost Theory (Coase, 1937; Williamson, 1975).
Originally developed to explain why firms exist rather than just markets (Coase, 1937; Williamson,
1975), as a part of the new institutional economics, Transaction Cost Theory is also a valuable
instrument to analyse transactions at an internal level of organizations (Williamson, 1985). The theory
is based on the fact that transaction costs occur for the actors of economic exchange in addition to the
production costs for the exchanged goods or services themselves (Coase, 1937; Williamson, 1975).
These transaction costs refer to the processing and organizing of exchange (Williamson, 1985) in ex
ante, e.g. for informing, drafting and negotiating before the conclusion of agreements and in ex post,
e.g. due to subsequent changes or setup, running and monitoring tasks.
As stated above, the decision to implement Shadow IT represents a type of make-or-buy decision. This
understanding implies that Transaction Cost Theory can be valuable to analyse the phenomenon.
Existing research fails to consider this decision in the business IT relation. Besides the approaches in
the status quo, we take this into account in exploring Shadow IT examples and their emergence.
3.2 Method
To understand underlying business decisions, we focused on existing Shadow IT examples. Since
most research contributions only gather few examples, we decided to collect new practical data in a
triangulation approach (Denzin, 2009) to build a broader analytical database. As Shadow IT refers to
an organizational phenomenon with vague variables, we chose a triangulation of qualitative methods
(Myers, 1997; Creswell, 2009). We therefore used expert interviews (Flick, 2009) to obtain examples
from practice (Denzin, 2009) and conducted case studies (Yin, 2014) to gain additional insights into
the subject on a more general level regarding organizations. By using a methodological triangulation
we consider different perspectives, expand our argumentation basis and generate more reliable results
(Denzin, 2009). To develop the empirical methods, we were able to rely on experiences of the authors
(Flick, 2009). One author implemented several Shadow IT solutions on his own. The other author
observed Shadow IT from an IT department perspective. Figure 1 illustrates the research process.
We decided to combine the methods due to several benefits and to compensate for weaknesses. By
interviewing experts (Flick, 2009) we collected practical examples. Focusing on experts as individuals
and their experiences allowed us to derive reasons for Shadow IT emergence on a single example-
level. This method is appropriate as the knowledge of experts creates insights in a specific topic and
helps to prepare further methods of a study (Flick, 2009). We have benefited from this method by
asking directly about Shadow IT without organizational pressure as the participants from business
were interviewed outside of the workplace. The method provided a basis for the case studies.
However, we obtained no deep insight into the organizations themselves and into their BITA maturity.
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 7
We carried out case studies to explore Shadow IT implementations in the context of a more general
organizational level. In order to strengthen our findings, we followed a multiple-case study approach,
as specified by Yin (2014). The possibility of an in-depth analysis with different perspectives and the
consideration of alignment maturity represent the benefits of this method. In contrast to the expert
interviews, the weaknesses are that we were not able to ask directly about Shadow IT. Due to the
negatively associated term and because the business interviewees might have circumvented policies
and would not openly admit to this, we carried out a hidden inquiry.
Figure 1. Research process: Triangulation method overview
4 Realization and Results
We used a range of companies and experienced informants to ensure that evidence covers a wide
range of departmental views and different types of Shadow IT. The realization and the results of each
method are presented in the following sections in detail. Afterwards we describe the triangulation of
these results and the cross-method synthesis in Chapter 5.
4.1 Expert Interviews
We carried out face-to-face interviews with practitioners who were familiar with Shadow IT examples.
We chose these experts based on a triangulation of data sources (Denzin, 2009). Therefore, we
interviewed 7 business experts (2 department heads, 5 employees) who had experience and in-depth
insight into the implementation of Shadow IT. Furthermore, we interviewed 10 IT experts (8 IT
managers, 2 IT employees), who could describe Shadow IT instances that have been detected in their
companies. The 17 interviewees worked for French, German and Swiss companies. To achieve
comparison and identify recurring patterns (Yin, 2014) we selected interviewees from large
multinational companies (1.350-275.000 employees) with formally implemented IT service
management processes to distinguish Shadow IT from formal IT. We aimed at an adequate variation
of industries (Number of companies per industry: 3 x Manufacturing, 3 x Automotive, 2 x
Telecommunications, 2 x Pharmaceutical, 1 x Finance, 1 x Entertainment, 1 x Logistics, 1 x
Marketing) and gathered Shadow IT examples from different departments. Participants were contacted
directly, mostly at practitioner conferences. For the interviews we used a pre-tested, semi-structured
guideline with open-ended questions (Myers and Newman, 2007) which addressed two key parts; the
description of the examples and the reasons for their implementation. To ensure content validity, we
clarified the understanding of the term Shadow IT at the beginning. The interviews were conducted
between December 2011 and April 2013 and each lasted about 20–30 minutes, depending on the
number of instances a participant was familiar with. The answers were logged by taking notes. We
collected 39 examples at the point of saturation (Corbin and Strauss, 2008).
Plan, Define and Design
Prepare, Collect and Analyse
Analyse, Conclude and Triangulate
Develop research
question & theory
background
Select experts &
design interview
guideline
Select cases &
design data
collection
Conduct expert
interviews &
collect examples
Conduct
case study A
Conduct
case study B
Conduct
case study C
Analyse identified
examples from
expert interviews
Write individual
case report
Write individual
case report
Write individual
case report
Draw cross-case
conclusion
Discuss results
Write expert
interview report
Write cross-case
report
Develop central
concept
Draw cross-method
conclusion
Outline logical draft
on theory basis
Write triangulation
results
Expert Interviews
Multiple-Case Study
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 8
To analyse the data we followed the procedure proposed by Corbin and Strauss (2008) and coded all
transcribed notes of each example (open and axial). Thereby, the initial splitting of data and the
outlining of categories in open coding and the relating of the categories in axial coding went hand in
hand (Corbin and Strauss, 2008). This analysis led to five categories related to Shadow IT emergence.
Table 2 presents the categories, including the assigned elements in their relationship and code samples.
Category
Code samples
Relationship element
Shadow IT
implementation
• Autonomous development
• Own external sourcing / Own operation activities
Phenomenon
Misalignment in the
relation of business
and IT
• Missing/insufficient services, budget or know how in formal IT
• No/long lasting IT request fulfilments
• Historical/Cultural distance between business and IT
Context
Prohibitive
assumptions to
address formal IT
compared to an
autonomous solution
• Autonomous implementation is easier / faster
• Bad experiences with IT department/projects/changes afterwards
• Ad-hoc/small beginning of implementation in a prototyping way
• Missing information about existing IT services and costs
• No trust in formal IT services due to bad experiences
Causal condition
Power aspects
• Unauthorized implementation to gain control
• Self-image and organizational autonomy in the business
Causal side condition
Individual behaviour
• Existing habit of the employee with the solution
• Identity with the technology / the creative solution
Causal side condition
Table 2. Categories resulting from the analysis of the expert interviews
Business departments and users were driven by different elements to finally decide on the
implementation of IT in an autonomous way. In 34 of the 39 analysed examples, misaligned situations
built the fundament for Shadow IT. In all of these 34 examples the decision was influenced by an
assumed cumbersome way to address formal structures. The shadow implementation seemed faster
and did not require long negotiating time. This was also influenced by earlier experiences with the IT
department regarding new IT needs. The category of prohibitive assumptions presents the main causal
condition for the implementation of Shadow IT. Two side conditions reflect aspects of power and
individual behaviour, which played a decisive role in 11 respectively 9 examples, 5 of them
completely independent from a misaligned context. This explanation meets the status quo discussion.
In total, 14 examples resulted from an overlapping of the described conditions. In most of these
examples prohibitive assumptions combined with power or individual behaviour led to Shadow IT.
4.2 Multiple-Case Study
To facilitate theoretical and literal replication in the multiple-case study (Yin, 2014) we used a
purposive sampling strategy. For comparison reasons and to identify recurring patterns we selected 3
large German and Swiss companies with formally existing IT service management processes to
distinguish Shadow IT and formal IT. Within the cases we focused on different business processes and
departments. We chose companies from various industries in different situations regarding their
process stability to facilitate theoretical replication (see Table 3). Relying on our research question and
theoretical background, the unit of analysis was the business decision to implement Shadow IT.
We conducted the case studies between July 2012 and June 2013. Each lasted between 3–4 months.
During the collection of data we identified all process-related IT solutions, the formal and informal
ones, and existing gaps in the IT support. This complete inquiry was necessary because of two
reasons: First, as we chose a hidden identification of Shadow IT, we described the purpose of our
study as an inquiry of IT architecture. Second, for further analysis, it was necessary to distinguish the
decision to implement Shadow IT from the decision to request for formal IT solutions. Additionally,
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 9
we aimed at assessing the BITA maturity following the criteria of Luftman (2000), as an important
point from prior research. We used data triangulation techniques by applying internal documents
(process models, manuals), technical artefacts (software inventory tools, help desk reports), interviews
with business and IT people and contextual observations as sources of evidence (Yin, 2014).
Indus-
try
Em-
ployees
Analysed Processes/
Departments
Interviewees from
Company Situation
Business
IT
A
Insur-
ance
1.300
Benefits
Statements: private
& corporate clients
2 department heads
with detailed
process experience
1 IT manager with
IT architecture
experience
Established company,
operating on a national
level; stable processes
B
Engi-
nee-
ring
47.500
Order Management
of a Manufacturing
Unit (Sales, Con-
struction, Production,
Quality Management,
Shipment)
2 department heads
with overall process
experience; 3
employees with
detailed background
on the Shadow IT
1 IT manager
infrastructure, 3 IT
project managers
Core ES, 1 IT
manager help desk
Long-established com-
pany; part of a multi-
national conglomerate;
several restructuring
projects in recent years.
C
Elec-
tronics
5.500
Corporate Marketing
(Digital Media,
Corporate Design &
Event Management)
3 department heads
with detailed
process and Shadow
IT experience
1 IT project mana-
ger with overall IT
architecture
experience
Multinational company
with intense growth in last
few years due to increased
market demands.
Table 3. Multiple-case study: Company profiles
After analysing the documents, we started the first round of interviews following pre-tested, semi-
structured guidelines (Myers and Newman, 2007). Each interview lasted 1–2 hours. In the interviews
with the IT departments, we checked our understanding of the companies’ processes and the formal IT
architecture and investigated the status of BITA. The interviews with the business followed along the
processes and aimed at the identification of all IT solutions and existing IT gaps. Interview data on
Shadow IT was rarely in line with internal documents as Shadow IT is not formal. A better
consistency existed with results from applied technical artefacts such as computer scans on installed
software or analysed help desk service tickets on unknown solutions. By working out the differences
to the analysed formal architecture, we could determine instances of Shadow IT. Based on this, we
concentrated on the reasons why solutions were implemented autonomously or by addressing formal
IT. Furthermore, we focused on the BITA maturity. In a second round of brief interviews, we verified
our picture of existing IT solutions and the collected data. Based on our transcribed protocols, we
finally discussed the study report with the departments involved and recorded our overall observations.
We analysed each case study following the preceding argumentations in the status quo and the
theoretical background (Yin, 2014). Assessing the maturity of alignment (Luftman, 2000) was the first
step in this analysis. Then, we focused on the make-or-buy decision from a business perspective
whether or not to implement Shadow IT. In contrast to this, we also examined the path to implement
formal IT solutions and existing IT gaps. The analysis of each case study led to individual results.
Finally, we conducted a cross-case conclusion based on these results (Yin, 2014) to achieve insights
into the explanation of Shadow IT emergence on a general, organizational level.
The analysis reveals different insights into the implementation of Shadow IT. Table 4 presents the
results of each case study. Based on these, the cross-case synthesis confirms the connection of BITA
and Shadow IT. Although we might not have found all shadow entities in each study, a mature state of
BITA points to less Shadow IT. This argument is supported by the ratio of Shadow IT to all identified
solutions. Of course, the presented numbers also include less relevant Shadow IT entities and are
compared with formal core solutions such as comprehensive ES. Nevertheless, this argument provides
useful insight into the relation of Shadow IT and misalignment. However, in contrary direction, case A
showed that even situations with an excellent state of BITA cannot prevent Shadow IT completely.
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 10
Shadow IT
Individual case study results
A
6 solutions
(15%
of all IT
solutions in
the process)
• High level of Business IT Alignment (BITA) maturity
• Some small Shadow IT solutions filling small gaps in the formal IT offer
• Shadow IT (SIT) mostly started with ad-hoc solutions to organize work or for rarely
occurring business specific requirements. Autonomous implementation seemed faster
• In case of highly assumed efforts to fulfil needs, formal IT was requested or gaps remained
B
52 solutions
(57%
of all IT
solutions in
the process)
• Historically organizational distance of business and IT: Low level of BITA maturity
• Many SIT solutions in addition to the Enterprise System provided by the IT department
• SIT started small (prototypes of ideas), some led to large solutions
• Addressing central IT seemed too time-consuming and costly (too complex/bad experience)
• Missing know-how and transparency in the IT department. It was easier to buy external
resources or to develop solutions autonomously
• If fulfilling a need seemed too complex, formal IT was addressed or gaps remained
C
41 solutions
(66%
of all IT
solutions in
the process)
• Quick company growth with BITA harmonization in progress, but very slow: Poor BITA
• Business specific SIT started because of time-to-market: addressing IT department seemed
too costly and time-consuming concerning implementation, operation and changes
• Due to existing expertise and resources autonomous implementation seemed cheaper
• Only in case of highly assumed efforts, formal IT was requested
Table 4. Individual case study results
The majority of Shadow IT implementations followed the business argumentation that "the way to
address the IT department was too long" regarding time, costs, the transfer of requirements, or
building expertise in the IT department. Several interviewees stated that "there have been some bad
experiences in the past" with the IT department concerning "high and costly complexity in applying
for solutions", "deferred requests" and "long delivery times" because of time or budget problems,
"problems in changes or support after the implementation", or "no transparency in requesting and
implementation". Departments and users "needed a fast implementation" because of "time-to-market
reasons" or "ad hoc requirements", and to implement Shadow IT seemed easier. Sometimes they "just
wanted to try an idea" or "started a casual but creative solution for a problem" in a prototyping way.
These various assumptions about the efforts of contacting the IT department for a formal solution
combined with assumed low initial costs for autonomous solutions led to Shadow IT. In some cases
the decision to implement and especially not to handover a shadow solution to the IT department was
based on individual interest ("we liked the idea of creating such a system") or based on power
considerations of the responsible managers. Furthermore the interviews showed that in spite of
misaligned situations IT needs were implemented by formal IT or not implemented at all. This
happened when an autonomous solution was expected to be too complex regarding resources and
expertise of the business department or the costs of a solution were higher than the expected benefits.
5 Discussion
Based on the described status quo and Transaction Cost Theory, we now combine the findings from
the two sources and discuss the cross-method conclusion which leads to the resulting artefact of our
research. Afterwards we discuss IT Governance implications with regard to our research contribution.
5.1 Triangulation of Results
Following prior research (Györy et al., 2012) we could prove the connection of Shadow IT and
misalignment on a broader level of data. However, the results from cases B and C show that Shadow
IT does not compulsively follow IT needs in misaligned situations. Besides Shadow IT, also formal IT
solutions are requested or IT needs remain as IT gaps. On the other hand, a mature BITA level does
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 11
not prevent Shadow IT. Independent from misalignment, the study results confirm power- or
individual behaviour-based implementations of Shadow IT as illustrated in prior research (Spierings et
al., 2012; Ortbach et al., 2013a). However, these explanations are not representative of the majority of
Shadow IT instances. Findings from expert interviews and case studies highlight arguments in terms
of make-or-buy decisions. The results reveal assumptions from business perspective that prevent the
occurrence of a productive exchange with the IT department possibly resulting in a formal solution.
These assumptions follow, e.g., on earlier experiences or missing information on relevant parameters
for an exchange. These hurdles before a potential internal exchange and expected adjustments
afterwards can be placed on a level with ex-ante and ex-post transaction costs (Williamson, 1975).
Thus, transaction costs may prohibit (Williamson, 1979) the initiation of formal IT and lead to the
business decision of implementing an IT solution autonomously in the form of Shadow IT.
Figure 2 illustrates this influence of transaction costs from the perspective of business departments and
users. IT solutions are commonly expected to decrease production and transaction costs of business
processes (Bakos and Treacy, 1986). To fulfil IT needs by implementing an IT solution instead of
having no solution would therefore increase work performance and reduce these costs (A). Ongoing
production costs to operate an implemented autonomous IT solution and the allocation of total costs
for delivering and developing a utilized formal IT service decrease this reduction of process costs.
Following the formal way to fulfil the IT needs implies that transaction costs occur in the exchange
relation with the IT department (B). For an autonomous solution these transaction costs do not exist.
Figure 2. Transaction costs influencing the possible fulfilment of IT needs from a business view
As stated before, the study results clarify that misaligned situations influence Shadow IT. In relying on
Figure 2, this implies that misalignment increases transaction costs for a formal solution. Conversely,
a mature BITA keeps down these costs and reduces emerging Shadow IT, as formal IT structures are
more likely addressed. However, an ideal state of BITA where all IT needs are continuously fulfilled
is difficult to sustain (Cleven, 2011). During BITA harmonization processes occurring misaligned
situations can drive emerging Shadow IT. In addition, as mentioned before, Shadow IT is no inevitable
consequence of IT needs in misaligned situations. To explain this, the initial production costs
(Williamson, 1981) for autonomous implementations need to be considered. Furthermore, derived
from case study A, Shadow IT even emerges in situations with an excellent state of BITA. This results
as transaction costs always exist and may prohibit exchange relations with the IT department. Thus,
prohibitive transaction costs provide a more specific explanation for the business decision in favour of
Shadow IT while misalignment solely poses an additional possible driver for the assumed costs.
The business decision to react to an IT need requires initially an assumed reduction of costs for the
regarded business process by implementing an IT solution. According to our studies the assumed
reduction differs for formal and autonomous solutions only in a few cases. Therefore, the decision in
most cases only depends on the comparison of the above stated transaction costs for formal solutions
and the initial production costs for Shadow IT. The analysed codes from the expert interviews and the
findings from the case studies reveal that Shadow IT mostly starts in terms of small, ad-hoc, or
prototyped solutions. Thus, business departments and users assume initial production costs to be low.
The assumption is influenced by different intervening conditions such as expertise or access to
resources, as shown in prior research (Behrens and Sedera, 2004; Spierings et al., 2012). This means,
if business departments and users assume transaction costs for a formal IT solution to be higher than
initial production costs of an autonomous solution, they decide to implement Shadow IT. Especially
Autonomous solution
Formal solution
No solution
(A) Transaction costs
and production costs for
business processes
(B) Transaction costs for formal IT
solutions in the business IT relation
Cost Baseline
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 12
the case study results show the situation if the business side assumes the transaction costs in the
relation with the IT department to be lower than the initial production costs for Shadow IT. In these
cases, formal IT structures are addressed to fulfil the IT needs. In the few cases where the assumed
process cost reduction differs for formal and autonomous solutions, the net totals of the assumed
reductions to the corresponding transaction costs respectively production costs are taken into
consideration by business departments. Finally, there is no reaction to IT needs if no reduction of
business process-related costs can be assumed in consideration of necessary transaction or initial
production costs. This explains why some IT needs remained open in the analysed case studies. Figure
3 summarizes the stated possibilities in the business decision to fulfil IT needs.
Figure 3. Influence of transaction and production costs on business decisions to fulfil IT needs
Figure 4 presents the artefact answering our research question. It draws an overall concept to explain
Shadow IT emergence based on the triangulated results and characterized attributes stated before.
Shadow IT results from the business decision regarding the fulfilment of IT needs, which is influenced
by several causal conditions separately or along with others. Thereby, power and individual behaviour
play a minor part. The majority of emerging solutions results from prohibitive transaction costs in the
exchange relation of business and IT department. In this case, misaligned situations can additionally
influence these costs. Furthermore, the decision depends on the availability of resources and expertise.
Figure 4. Overall concept to explain the emergence of Shadow IT
5.2 IT Governance Implications
The results state that transaction costs always exist in the relation of business and IT. They constantly
influence business decisions on how to fulfil IT needs. From the local business perspective, Shadow
IT seems to be reasonable. In this perception departments and users are subject to their bounded
rationality and opportunism (Williamson, 1975). From the perspective of the entire organization,
occurring risks and inefficiencies partially revise the position. To integrate both perspectives and allow
measurable methods to manage Shadow IT, it is necessary to address the perceived transaction costs.
Transaction Cost Theory provides ways to manage transaction and production costs and to maintain
organizational adaptation simultaneously, by using governance structures (Williamson, 2005).
Recognizing transaction costs as an influencing element in the business IT relation contributes to IT
Governance and BITA research. Generally, reaching a mature level of BITA promotes the reduction of
transaction costs and their perception. In this way it reduces emerging Shadow IT. However, Shadow
A Assumed cost reduction for the business process (for:
autonomous IT (A) / formal IT (A'); (mostly A=A'))
C Assumed initial production costs for
an autonomous solution
B Assumed transaction costs for a formal solution
in the business IT exchange relation
Shadow IT
No reaction
Formal IT
solution
A' – B > A – C
A – C > A' – B
Business
decision on
how to fulfil
IT needs
A' – B < 0; A – C < 0
Resources & Expertise
Misaligned
situation
Prohibitive Transaction Costs
in the Business IT Relation
Individual Behavior
Power
Business
decision on
how to fulfil
IT needs
Shadow IT
Zimmermann et al. /The Emergence of Shadow IT
Twenty Second European Conference on Information Systems, Tel Aviv 2014 13
IT may emerge during BITA harmonization and even in situations with an excellent state of BITA.
Thus, potentially occurring Shadow IT should be addressed. Mechanisms are necessary to influence
the make-or-buy decision behind Shadow IT decisions in the most efficient organizational manner.
Transactions differ in their asset specificity, uncertainty and frequency (Williamson, 1985). These
dimensions are cost drivers and significant to choose the right way to coordinate organizational
exchange (Williamson, 2005). Due to their bounded rationality business departments do not recognize
these drivers in Shadow IT decisions. Organizations need to solve this problem by defining proper IT
Governance structures (Weill and Ross, 2004). An approach is to redefine the allocation of IT
activities for autonomous solutions. Based on the transaction specific dimensions, autonomous IT
activities can either stay in the business or need to be transferred to the IT department. This implies an
extension of IT Governance structures to decision rights on the business and user level as well as on
the level of an individual IT solution. Following this argumentation, managers should be able to turn
Shadow IT into a governed business-located IT. Allowing solutions with an informal character in a
certain scope addresses the opportunities and risks of Shadow IT and fosters the BITA harmonization.
6 Conclusion
Shadow IT emerges primarily, because business departments or users assume that transaction costs for
a formal solution are too high compared with an autonomous one. Misalignment can influence these
costs and thus Shadow IT emergence. A mature BITA reduces, but cannot entirely prevent Shadow IT
as transaction costs always exist in the business IT exchange relation. To manage Shadow IT,
Transaction Cost Theory should be addressed. This implies mechanisms on structuring IT activities in
terms of business-located IT and contributes to IT Governance research. Decision-makers and
researchers addressing the business IT relation may use these insights to adjust governance concepts.
Nevertheless, we acknowledge several limitations. The gathered data represent only a sample of
reality. However, due to the triangulation approach they should be sufficient for generalizable results.
Findings may differ in other cultural settings and organizational types, as we focused on companies in
Europe. Finally, our research is solely based on qualitative data. Due to vague variables, quantitative
research and especially the measurement of costs related to Shadow IT are challenging to determine.
Further research can build on the transaction cost-related explanation of emerging Shadow IT.
Addressing governance implications from Transaction Cost Theory allows to consider risks and
opportunities of business- and user-driven IT processes. It is necessary to specify ways to allocate IT
activities between business and IT departments based on the dimensions asset specificity, uncertainty
and frequency. Further studies may contribute to a higher knowledge level on managing Shadow IT.
Within the scope of IT Governance, we believe this paper provides an initial point for further research.
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