Adoption of Cloud Computing by SMEs in India: A study Adoption of Cloud Computing by SMEs in India Proceedings of the Nineteenth Americas Conference on Information Systems, Chicago, Illinois, August 15-17, 2013. 3 hierarchies (Malone et al. 1987), internal coordination, IS ...

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  • Bhat Adoption of Cloud Computing by SMEs in India

    Proceedings of the Nineteenth Americas Conference on Information Systems, Chicago, Illinois, August 15-17, 2013. 1

    Adoption of Cloud Computing by SMEs in India: A study of the Institutional Factors

    Completed Research Paper

    Jyoti M. Bhat

    Indian Institute of Management, Bangalore


    Cloud computings potential to be transformational depends on the ecosystem developed for adoption. Given the evolving

    nature of the technology, the adoption of cloud comes with many issues which organizations and regulators are grappling

    with. The on-demand, elastic nature of the cloud based services is projected as being most suitable for Small and Medium

    Enterprises (SMEs). In this paper we analyze the adoption of cloud computing by Indian SMEs using transaction cost

    economics. As IT usage by Indian SMEs has not been wide spread, we use the factors and inhibitors of IT adoption by SMEs

    and compare them with the transaction costs related to cloud computing for SMEs to identify institutional factors required to

    ensure success of cloud adoption by SMEs.


    Cloud Computing, Adoption, Transaction Cost, Institutional Factors.


    Cloud computing is a disruptive technology which allows the IT industry to offer computing as a utility. Cloud computing

    allows software and hardware to be delivered as on-demand services over the internet in a pay-as-you-use model (Armbrust

    et al, 2009, NIST, 2009). The ability to access software and hardware on-demand as against having to invest in owning and

    maintaining them on-premise is the main advantage of cloud computing especially for the small and medium enterprises

    (SME). SMEs are typically more flexible in using and adopting emerging technologies as their existing IT investments are

    not huge, and hence can adopt cloud computing faster. This has been the case in developed countries like UK, US and the

    European Union.

    The Indian government is a strong supporter of cloud computing and is encouraging its adoption by SMEs. The on-demand,

    elastic capacity and usage-based-billing access to software and hardware services will enable Indian SME to focus on their

    core business and increase their competitiveness. The above simplistic conceptualization of cloud computing as a utility and

    general purpose technology, does not aid in appreciating the opportunities and complex challenges of adopting cloud

    computing (Brynjolfsson, et al., 2010). Additionally, the current hype around cloud computing does not help users in

    objectively evaluating its potential, costs and risks (Harris and Alter, 2010). Some of the concerns are related to privacy,

    security, anonymity, support, capacity, lock-in, compliance, government surveillance, reliability, and liability. Efforts have

    been made by governments (like in the US, Australia, European Union) to address many of these concerns. The Indian

    government is also studying the need for a cloud policy and reviewing other related policies and regulations for modifications

    required for cloud computing.

    In this paper we analyze cloud computing adoption by SMEs in India from an institutional factors perspective. We provide a

    background of existing studies and activities by the government. We also review the literature on cloud computing,

    transaction cost economics, and IT usage by SMEs in India to provide the background for our analysis. We then use the

    transaction cost perspective to understand the institutional factors required for usage of cloud computing by Indian SMEs.


    In this section we provide an overview of cloud computing and its benefits and disadvantages. We conduct a literature review

    of Transaction cost economics and its usage to analyze Information Systems and cloud computing. We identify the

    transaction costs associated with cloud computing based on the survey. We identify the factors and inhibitors of IT usage by

    SMEs through existing empirical studies and analyst reports.

  • Bhat Adoption of Cloud Computing by SMEs in India

    Proceedings of the Nineteenth Americas Conference on Information Systems, Chicago, Illinois, August 15-17, 2013. 2

    Cloud Computing

    Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable

    computing resources (for example, networks, servers, storage, applications, and services) that can be rapidly

    provisioned and released with minimal management effort or service-provider interaction. (NIST, August 2009)

    Cloud computing is an Internet based service model, where applications, hardware and data hosted by a third party is

    provided on-demand to the user. The applications are referred to as Software as a service (SaaS), the hardware and

    infrastructure is referred to as cloud (Armbrust et al, 2009). Armbrust et al. also define various terminologies of cloud

    computing. A cloud available as a pay-as-you-go usage is called a Public cloud and the services sold are referred to as Utility

    computing. The services can be accessed at three different levels

    Infrastructure as a service (IaaS) Computer processing time, servers, data storage, etc. are provided. These services are typically used by the It group.

    Platform as a service (PaaS) The development environment with programing language and tools is provided to software developers. These are used to create new applications.

    Software as a service (SaaS) There are several offerings at this level. Productivity enhancing applications like Google docs, business process functionalities like and applications that focuses on collaboration and

    social networking like email, Facebook and LinkedIn.

    The various parties involved in the cloud computing environment are cloud providers, cloud users, SaaS provider, SaaS user.

    Large enterprises use similar cloud technologies and have their own dedicated hardware and software. While this is called

    private or hybrid clouds (when same software infrastructure is used in a private cloud and in the public cloud) it does have

    the same advantages of a public cloud. Some of the main advantages of public clouds are availability of infinite computing

    resources on demand, lack of up-front commitment on resources and ability to ramp up and scale down resources as per need,

    ability to pay per usage on a short-term basis (Armbrust et al, 2009). SMEs also benefit due to economies of scale at the

    cloud provider end which helps in providing increased security and latest software products and upgrades. There are various

    local and multinational (MNC) cloud service providers (CSP) in India (Kshetri, 2011). Amazon, Google, Microsoft and

    VMware are the big MNC CSPs offering IaaS and PaaS. While some of these CSPs have local data centers in India, many of

    them leverage their infrastructure across the world. Many Indian companies have partnered with these MNCs and act either

    as cloud brokers or PaaS and SaaS providers. The big Indian IT services companies have partnered with the MNC PaaS and

    SaaS providers and offer system integration and implementation services. Microsoft, Google, Webex and are

    some of the MNCs providing SaaS based offerings in India. There are a few Indian SaaS providers who target SME segment

    with business process offerings like Sabrix (tax computation), Tally (accounting) and TCS (email to ERP solutions) (Zinnov

    2010). There are many productivity enhancing tools and collaboration application available in the SaaS mode, many of which

    are free and open source software. These are being used extensively by SMEs and retail customers in India.

    Cloud computing requires different IT skills to develop and deploy applications on the cloud. These are specialized skills

    related to architecture and design to leverage the elastic capacity and remote access to data and application. The potential of

    cloud computing is realized only when the adopting businesses restructure their business models and organization structures

    to leverage the capabilities of the cloud (Brynjolfsson, et al., 2010). The adoption of cloud is a cost and risk-based decision

    and driven purely by technology benefits (Armbrust et al, 2009; Martens and Teuteberg, 2012). While cloud adoption implies

    that the IT requirements of the organization are catered to by a third party, it differs from IT outsourcing in several aspects

    (Chou and Chou, 2007; Xin and Levina 2008). IT outsourcing is a relationship contract where the organization still owns the

    physical assets and maintains control over the IT decisions with the specific tasks being executed by the service providers. In

    cloud computing, the computing assets are typically owned by the CSPs and organizations access these resources based on

    need and pay as per usage without any time limitations. When viewed as a utility service, the cloud transactions ideally

    should happen over the market and not be relationship based.

    The uncertainties due to evolving cloud technologies, market based transactions, the need for investment decisions related to

    physical, technical and computing assets, and the lack of regulations and government action are the factors to be considered

    for analyzing cloud computing adoption. Hence transaction cost economics provides an apt lens to analyze these issues and


    Transaction Cost Economics and Institutional Factors

    Transaction cost economics (TCE) has been used by many Information Systems (IS) researchers to study the different issues

    related to IS and organizations, like external coordination costs and firm size (Brynjolfsson, 1994), electronic markets and

  • Bhat Adoption of Cloud Computing by SMEs in India

    Proceedings of the Nineteenth Americas Conference on Information Systems, Chicago, Illinois, August 15-17, 2013. 3

    hierarchies (Malone et al. 1987), internal coordination, IS and firm dimensions (Gurbaxani and Whang 1991) and, choice

    between keeping IT systems in-house and outsourcing (Aubert, et al., 1996, Cheon et al., 1995). While TCE is now being

    applied to understand the cloud computing adoption (Nuseibeh, 2011), especially SaaS application types, business models

    and adoption (Benlian et al., 2009; Chou and Chou, 2007; Xin and Levina, 2008), there are limited studies on the factors

    driving or inhibiting the adoption of cloud services (Hoberg et al. 2012).

    TCE was first introduced by Coase in 1937, when he raised the question of why firms exist and, the learning and haggling

    costs involved in market transactions. Williamson extended the work by analyzing the nature of these costs and the

    governance choices. Williamson (1975) defined markets and hierarchies as two alternate governance structures (in addition to

    other hybrid forms) and observed that organizations choose different governance mechanisms for the economic activities

    based on the differential transaction costs. While choosing the governance structures, firms economize on the sum of product

    costs and transaction costs (Williamson, 1981). When applying TCE to IT outsourcing and cloud adoption, the reduction in

    production costs due to economies of scale at the producers end is balanced by the increased transactions costs related to

    negotiating, contracting, monitoring and managing the outsourcing relation. The three dimensions of differential transaction

    costs are frequency of transaction, uncertainty and asset specificity (Williamson, 1985). The propensity of organizations to

    adopt cloud computing depends upon these three dimensions of the transaction cost. These dimensions are examined in detail

    below and summarize in table 1.

    Asset specificity in the context of cloud relates to the vendor lock-in due to firm data residing with the CSP and lack of

    portability across CSP offerings due to standardization and interoperability issues. The transaction costs related to asset

    specificity are vulnerability to price increases, reliability issues, CSPs financial stability (Zhang et al. 2010), uniqueness of IT

    skills due to proprietary environments of the CSP and, switching costs (Sarkar and Young, 2011). A high degree of

    customization requirement of the SaaS services from the firm can also be viewed as increasing the asset specificity

    (Nuseibeh, 2011) in cloud adoption. Asset specificity increases transaction costs and hence negatively impacts the adoption

    of cloud. Organizations will adopt cloud only for the IT operations and applications which are generic and have standard

    offerings from CSPs. These are typically the productivity enhancing tools and collaboration applications.

    Uncertainty refers to the degree of change in the firms requirements, and in the case of IT can be considered as the

    complexity of the IT product or service. Unpredictability of the technology trends, service quality parameters like security

    and privacy, scalability and elasticity, service-continuity, reliability and liability (Armbrust et al, 2009, Jaeger et al. 2008,

    Sarkar and Young, 2011) increase uncertainty which increases the ex-ante costs of drafting, negotiating and framing the

    cloud contracts. Reputation and fate sharing with other customers of the cloud is a unique aspect of uncertainty in cloud

    computing (Armbrust et al, 2009). Blacklisting of the IP address of the CSP by spam-prevention services due to inappropriate

    behavior of one of the CSP customers will impact all other users. There are currently no legal contractual arrangements

    which can safeguard customers against this.

    As the frequency of transactions increases firms have an incentive to internalize production to reduce the contracting costs

    (Williamson, 1985). This characteristic of transactions is of particular interest to IS researchers due to the high transaction

    volume electronic partnerships, though the implicit view point is contradictory to that of TCE. With the Internet and related

    technologies, there are competitive advantages in externalizing many high volume transactions that can be executed

    electronically (Chatterjee et al., 2006). IT vendors prefer customers with huge volume and frequency of transactions.

    Williamson also made two behavioral assumptions of bounded rationality (leads to incomplete contracts) and opportunism.

    The incomplete contracts and environmental changes lead to opportunistic behavior during the ex-post contractual stage.

    Opportunistic behavior leads to reduced trust and hence failure of markets and the need to regulate. Economists explain

    institutional arrangements from the perspective of economizing the transaction costs associated with negotiating, monitoring

    and enforcing contracts (Williamson, 1985). The institutional factors like the formal laws and regulations and enforcement

    mechanisms are means to reduce uncertainty by containing opportunistic behavior of the powerful agents, when mutual

    negotiations are not possible. There are a few studies which have examined the role of p...


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