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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
ABSTRACT
Cloud computing’s 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.
Keywords
Cloud Computing, Adoption, Transaction Cost, Institutional Factors.
INTRODUCTION
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.
BACKGROUND
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.
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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 Salesforce.com 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 Salesforce.com 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
risks.
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 firm’s 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 policies and institutional factors
required for cloud computing (Jaeger et al., 2008) and the usage of existing regulations to handle the cloud (Ryan et al.,
2011). Many countries have already put forth policies for the cloud like “Cloud first” policy in US and the cloud computing
strategy by the Australian government. The European Commission has asked CSP to improve the contracts to address many
of the uncertainties associated with cloud usage. In India currently various policies and laws like the Information Technology
Act 2000, 2011 Information Technology Rules, The Indian Contract Law, the Credit Information Act of 2005 and Telecom
Regulatory Authority of India Act of 1997, provide laws and policies related to digital records, digital signatures,
cybercrimes, and data security. As such there is no legal framework in India to enforce contracts and penalize opportunistic
behavior by the cloud providers. Currently the various government departments are studying the need for a separate cloud
policy for India (CII, 2012). The CSPs locate their data centers and servers across global locations and hence the jurisdiction
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of the contract and the local data-related regulations of the CSP locations may create difficulties for the cloud customer to
seek enforcement. From a sociological perspective institutional theory emphasizes how institutional arrangements confer
legitimacy and the actions of an entity are viewed as proper or appropriate within some socially constructed system of norms,
values, beliefs, and definitions (Scott, 2008). Hence institutions are the macro-level rules of the game which can be formal
(e.g. laws and regulation) as well as informal constraints (e.g. codes of conduct, social norms and culture) (North, 1991).
Though Confederation of Indian Industry (CII) is working to create awareness on cloud computing benefits and policy
formation, there are no focused industry associations and bodies facilitating cloud adoption in India.
TCE Dimensions Contributing factors to transaction costs
Asset Specificity Vendor lock-in due to data residing with CSP,
Lack of standardization and interoperability across CSPs
Proprietary environment of CSP leading to increased switching cost and unique IT skills
Increased customization of software services
Uncertainty Unpredictability of technology trends
Lack of clarity on the cloud service performance parameters
Data Privacy, security and compliance issues
Uncertainty related to liability, reputation and fate sharing
Frequency Smaller volume and frequency of transactions
Institutional factors
(Laws and regulations)
Lack of suitable rules to handle cloud computing requirements
Jurisdiction of cloud contracts
Local data-related regulations of the global CSP locations
Lack of industry bodies and agreements
Table 1: Summary of TCE dimensions and institutional factors of Cloud computing
IT Usage by Indian SMEs
Various studies by Indian industry bodies show that IT usage by SMEs is quite low (FCCI 2012). Among SMEs using IT
products, it was found that they use basic IT tools like spread sheets, document editors and email. While awareness of
advanced IT products exists with the SMEs, they do not adopt these products like ERP, SCM, etc., due to various reasons like
lack of in-depth knowledge of the products; substitute them with other generic IT tools and operations not large enough to
justify the investment (FCCI 2012). An IDC India report finds that SME market contributes a larger share in desktops and
printers as compared to storage and servers (IDC, 2011). This implies that the infrastructure needs of SMEs are limited as
they do not process huge amounts of data.
Kannabiran and Dharmalingam (2011) in their study of the auto ancillary SME industry find that the low adoption of
advanced IT products is due to lack of in-house IT skills, financial constraints, lack of customized IT products and lack of
awareness of the available tools. These factors would be applicable to adoption of cloud computing as well. Kannabiran and
Dharmalingam also found that while competitive environment is the significant factor for adoption of advanced IT products,
access to financial resources or lowered cost of software would lead to adoption of ERP and other advanced IS products.
They also found that lack of supporting infrastructure and perceived risk of information security does not deter SMEs from
adopting advanced IT products.
SMEs are usually located in clusters and some of the infrastructure requirements like electricity and connectivity are provided
by the government in these locations. Information security requirements of SMEs are minimal as they own small amounts of
data and the intranet/extranet protocols can handle the security requirements of these firms. One of the main deterrents to
adoption of advanced IT products is the lack of IT manpower. SMEs are not able to attract personnel with the required IT
skills due to lower wages, and the attrition of people with IT skills to larger organizations and IT industry adds to their
disadvantage (Patibandla 1998). This also results in a lack of awareness of the available IT products and their functionalities.
Software product vendors design advanced products for large enterprises and these do not suit the needs of the SMEs.
Additionally most of the enterprises IT products need to be adapted to the Indian environment, as these are typically standard
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Proceedings of the Nineteenth Americas Conference on Information Systems, Chicago, Illinois, August 15-17, 2013. 5
products from global players. While there are many IT SME players which develop such products, there is a perception that
investment in software upgrades, maintenance and skill enhancements increase the total cost of ownership of IT.
Cloud computing with its advantages of low upfront investment, elastic capacity, access to latest software and upgrades, may
help SMEs in India adopt advanced IT products which will help them improve productivity and become globally competitive.
But are the environmental and the institutional factors supportive for SME adoption of Cloud computing in India?
CLOUD COMPUTING AND SMES IN INDIA
The cloud technologies and pricing models of the public clouds appear very attractive for SMEs to adopt IT in their
organizations and day-to-day activities. While India is known to leapfrog technology generations and adopt the latest
technology at a faster pace (like the mobile penetration in India), it would require a conducive environment and institutional
factors for SMEs to adopt cloud computing. They would have to make the leap from very basic in-house use of IT tools to
adopting cloud for advanced IT products. The role of government to facilitate IT innovations and the importance of
institutional factors in the diffusion of IT innovations is well established (King et al., 1994). Nelson (2009) in an advisory
document for the US government stressed the important role that governments can play in advancing the use of cloud
computing. Some of the actions mentioned by Nelson are- being ‘model users’, updating their IT procurement rules to
support procurement of systems with a cloud service model, and the need to encourage experimentation with the cloud.
Gartner (2010) identifies five roles government organizations could play in order to realize and maximize the benefits of
Cloud Computing - User, Provider, Broker, Storefront, and Regulator & Supervisor.
The Government of India is very supportive of cloud computing usage by SMEs and has initiated several projects to study the
need and requirements to setup cloud computing infrastructure in India. Project Baadal by the Department of Micro, Small
and Medium enterprises is one such project which is collecting IT usage data with the aim to provide cloud based services to
SMEs at low cost. The CII is seeking clarity on several policies to speed up cloud adoption with focus on both the supply and
demand side of cloud computing (CII, 2012). Most of the recommendations by CII are related to governing the service
quality, data and network privacy and ownership and taxes. While all of these are required for building capacity and creating
an ecosystem for cloud computing in India, they do not directly encourage cloud adoption by SMEs in India as the issues
involved are different for the SME segment. Below we compare the transaction costs of cloud computing and the factors
which inhibit and encourage IT adoption among SMEs to help us identify the institutional factors required to support cloud
adoption among SMEs.
• Lack of awareness of the benefits of IT, Cloud computing and advanced software products increases the uncertainty
and search costs for SMEs. There is a need to increase the awareness of SMEs on the benefits and usage of IT and
cloud computing through various programs and trainings. These activities can typically be taken up by industry
bodies and associations.
• The lack of IT skills and the unavailability of suitable advanced IT products for SMEs are inhibitors which
compound the asset specific transaction costs related to proprietary environment and increased customization. The
IT industry in India is more export-oriented and hence the unique skills required for cloud are not available to the
domestic IT market. Moreover the pricing models and rates of the export oriented Indian IT industry are very
expensive for the SME segment users. The global MNC do not yet find the Indian SME segment lucrative enough to
offer specific products to this market. Hence there is a need to encourage development of IT products and services
for the domestic market, especially the SME segment. This market for cloud SME products can be best catered to by
the SME IT sector using cloud based infrastructure. The IT skills required by SMEs can also be outsourced to the
SME IT firms. Hence there is a need to develop the SME IT sector which can focus on the domestic market.
• Lack of cloud specific policies to handle vendor lock-in and contractual safeguards are compounded for SMEs as
they lack the financial power and resources to take on the powerful global CSPs.
• The uncertainty related to data privacy in the cloud is negated by the lack of concerns related to information
security by the SMEs.
• Smaller volume and frequency of transactions of the SMEs increases the cost, but can be handled if SME clusters
adopt cloud as a group. This will require the SMEs to co-operate and group together in spite of the competitive
nature among them. Such cooperation provides negotiating power to the SMEs to procure domain specific products
and other requirements from the CSPs. Industry bodies can also facilitate the negotiation with the CSPs. One such
pilot has already been initiated in a SME cluster in West Bengal by the government along with the CII. The pay-as-
you-go pricing model of the cloud works in favor of the SMEs as it reduces the upfront financial investments
required for IT adoption. Better pricing can be negotiated if SMEs approach CSPs as a cluster or group.
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• Jurisdiction of the cloud contracts and data-related regulations at the remote locations are aspects which can only be
handled through formal cloud regulations and rules by the respective Indian government departments.
The institutions forms, both formal and informal, required to support SME adoption of cloud computing in India can be
classified as markets, public and private ordering. Regulations by the government in the form of laws and legislations are
classified as public ordering and the process of setting of social norms by the parties involved in the regulated activity (in
some manner) is called private ordering. Table 2 provides a summary of the institutions identified above to encourage cloud
computing adoption by SMEs in India
Institutional form Purpose
Markets Encourage a market for software products and SaaS for SMEs with appropriate
incentives for players
Encourage domestic IT outsourcing to cater to the IT service requirements of
SMEs.
Public Ordering Regulatory body which can regulate the cloud providers and enforce cloud
contracts.
Private Ordering An industry body which can create awareness and promote cloud adoption
among SMEs, facilitate aggregation of cloud requirements and negotiate
contracts with CSPs.
Table 2: Institutions to support SME adoption of Cloud computing
CONCLUSION
The elastic nature and pricing model of cloud computing is claimed to be the reasons for SMEs to benefit from cloud
adoption. Given the financial constraints and lack of infrastructure needs due to smaller size and data of the SMEs, the
advantages do not resonate with the needs of SMEs. The primary benefit of cloud adoption for SMEs comes from the SaaS
offerings. But the lack of software products suitable for Indian SMEs and the other inhibitors of IT adoption may act as a
deterrent to the success of cloud among SMEs. We studied cloud computing and its implications to SMES using the theory of
transaction cost economics. Comparing the various dimensions of the transaction costs of cloud computing with the inhibitors
of IT adoption by SMEs helped us identify the institutional factors which may encourage cloud adoption by SMEs. The study
is limited as it depends on literature review and news articles related to actions taken by the government. Future work can
empirical verify the various parts of this study like the identification of the transaction costs for cloud computing and
inhibitors of cloud adoption by SMEs. The current study aims to inform policy making on some aspects specific to SMEs
which may have been overlooked due to the overall focus on cloud computing adoption in India.
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