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Faculty Working Paper 91-0133
Political Economy Series #48

330

B385

1991:133 COPY

Lock-In and the Costs of Switching Mainframe
Computer Vendors: What Do Buyers See?

Shane M. Greenstein

Department of Economics

Bureau of Economic and Business Research

College of Commerce and Business Administration

University of Illinois at Urbana-Champaign

No.

Papers in the Political Economy of Institutions Series

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(or "Let Them Be Bribed" Working Paper #1436

No. 9 Bhaskar Chakravorti. "Asymmetric Information, 'Interim' Equilibrium and Mechanism Design" Working Paper #1437

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Rafael Gely and Pablo T. Spiller. "A Rational Choice Theory of the Supreme Court" Working Paper #89-1559

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Luis Cabral and Shane Greenstein. "Switching Costs and Bidding Parity in Government Procurement of Computer
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Charles D. Kolstad. "Hotelling Rents in Hotelling Space: Exhaustible Resource Rents with Product Differentiation."
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No.

NO.

No.

•Jo.

No.

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BEBR

FACULTY WORKING PAPER NO. 91-0133

College of Commerce and Business Administration

University of Illinois at Urbana-Champaign

April 1991

Lock-In and the Costs of Switching Mainframe Computer Vendors:
What Do Buyers See?

Shane M. Greenstein

Department of Economics

University of Illinois at Urbana-Champaign

This essay is a substantial revision of the second chapter of my Stanford doctoral dissertation. Tim
Bresnahan, Paul David, and Roger Noll provided more sagacious advice than I could possibly follow.
Discussions with Pablo Spiller have been very useful. The center for Economic Policy research at
Stanford University, The Babbage Institute, and the National Science Foundation provided funding. All
remaining errors are my own.

Abstract

No careful empirical research has confronted the widely-held belief
that the costs of switching computer vendors tends to produce technological
"lock-in". Using several studies by federal agencies into the costs of
switching mainframe computer vendors, this article concludes that the
present literature overlooks many important factors that lead a computer
buyer to lock-in to an incumbent vendor. For one, a computer user can
invest in (far-sighted) "anticipatory converters" in advance of a future
acquisition. These converters reduce the realized level of anticipated
switching costs. In the cases studied here, the incentives for making these
investments depended on many factors, and the incentives were usually too
low. Second, the level of future switching costs are often not known to the
decision-maker when a potential vendor switch is considered. This is
important because managers can bias their estimates of the costs of
switching vendors and, in effect, influence the extent to which a
procurement favors an incumbent. In the cases studied here, because the
estimates of switching costs were often subject to large errors, and
because the costs of making a wrong estimate fell largely on computer
users, users had incentives to bias their estimates to favor incumbents.
Finally, this experience suggests that analysis of switching costs should
not treat buyers as monolithic organizations, i.e. decisions pertaining to
computer system use, switching cost estimation, and vendor selection were
not coordinated within the federal bureaucracy. Rather, resolution of
bureaucratic conflict influenced tendencies for users to "lock-in" to an
incumbent vendor.

In most cases new ADP (Automatic Data Processing) technology
will require modifications in system configurations,
telecommunications and especially software, that can become
intricate, lengthy and difficult to resolve. Hence, . . . managers
in both the public and private sectors tend to prefer new
technology that is as compatible as possible with existing
technology to minimize disruption in the conversion process.

— Office of Technology Assessment (1986), page 20.

I. Introduction

Switching costs are costs incurred as a consequence of a buyer
switching between alternative suppliers of essentially the same product.
Large switching costs can make buyers reluctant to switch suppliers. This
reluctance has two important consequences. First, it potentially provides
incumbent suppliers market power.1 Second, it may influence buyer and
supplier choices among alternative technologies for a product. Markets may
"lock-in" technical alternatives compatible with early technological
leaders and "lock-out" incompatible alternatives.2

Notable empirical studies of technology lock-in include studies of
nuclear power plant design (Cowan 1988) , video cassette recorders
(Rosenbloom 1989) , the typewriter keyboard (David 1985, 1986) , and stereo
systems (Postrel 1990) . These studies show that if a user invests in
systems of compatible components, some past investments typically retain
their value when the user purchases more compatible components but lose
their value when the user purchases incompatible components. This produces
an inter-temporal link in a buyer's decisions, which, in turn, influences
producer pricing, output and product design decisions over time. All these
intertemporal links help produce technological lock-in.

The computer market is another example often cited as one that fits
the mold. Because users of computer systems invest in systems of compatible
components, i.e. hardware and software, it is widely believed that computer
users tend to "lock-in" to their incumbent vendors.

No careful examination of the computer market has confronted this
belief with empirical fact nor with skepticism. This is unfortunate because
the belief need not necessarily survive the close scrutiny of such a

confrontation. For example, that buyers invest in a systems of compatible
components, by itself, does not establish that buyers find it costly to
switch vendors relative to the benefits of doing so. Nor, by itself, does
it establish that buyer and vendor decisions are linked in a way that
produces technological lock-in.

Why has this belief not been examined? The absence of empirical
research on this issue is probably best explained by the difficulty of
collecting information about the majority of computer users in the United
States, who are private firms. Summaries of many users' experiences with
changing vendors, if there is any experience at all, are usually not
publicly available. What is often made public, surveys of "customer
loyalty," provides ambiguous inferences regarding the relevance of
switching costs to most buyer's decisions.3

Because of the dearth of information about private firm's experiences,
it would be remarkable if enough examples existed for an empirical study of
technological lock-in. One of the contributions of this article is that it
brings one such set of examples to light.4

The set of examples used in this article were recorded in the late
1970s. At that time many federal agencies began to experience large
expenses related to the conversion of their software from one mainframe
architecture to another. These "conversion costs" raised a number of
unexpected problems when agencies ordered replacement acquisitions. Because
of these problems, the topic of conversion was closely studied by several
federal oversight agencies who employed specialists in the computer field -
- i.e. the Government Accounting Office (GAO) , the National Bureau of
Standards (NBS) , and the General Services Administration (GSA) . These
studies left a detailed and public record of the conditions surrounding
more than a dozen actual acquisitions and the solutions attempted to
conversion problems.

The analysis of this article aims to synthesize these studies for an
audience interested in the economics of lock-in. The analysis will identify
the structural conditions contributing to switching costs and lock-in, if m
any occurred at all in practice. The principal novelty of this article
derives from its conclusions. While the analysis does not conclude that the

present literature users improper "stylized facts," it does argue that the
present literature has overlooked many relevant structural features that
determine a buyer's tendency to lock-in to an incumbent vendor. In
particular, this article strongly questions the fundamental presumption of
previous analysis that buyers can costlessly formulate and implement
consistent inter-temporal strategies for dealing with high vendor switching
costs.

II. A Summary of the Analysis

With the notable exception of Williamson's (1975, 1979) pioneering
work on related issues, the present literature on switching costs has
generally treated users as monolithic, overlooking the role of decision-
making at many levels within a organization making a purchase. In contrast,
the studies done of federal agencies demonstrate that the structure of
decision-making within an organization determines the incentives of a buyer
to lock-in to an incumbent vendor.

This argument is broken into four sections. The first section verifies
what was long suspected: mainframe computers systems possess many of the
technical features that potentially lead to large switching costs. That is,
computer systems exhibit "technological interdependence" and incumbent
vendors possess advantages in a competitive procurement. The first section
also summarizes the suggestive, but inconclusive, empirical evidence on the
magnitude and importance of switching costs for vendor choice. The
ambiguity of these conclusions motivates a close examination of
acquisitions in practice, a task that constitutes the bulk of the analysis.

The second section discusses how difficult it is to estimate the costs
of switching vendors. In practice, buyers make estimates that are often
subject to large errors. Moreover, buyers have only a limited number of
options for reducing those errors. That is, the price and quality of a non-
incumbent's system has uncertainty associated with it. This is problematic
since a large underestimate of the costs of switching vendors can lead to a
costly switch to a nonincumbent vendor, while a large overestimate grants
excessive market power to an incumbent providing an upgrade. This dilemma
influences how estimates are made (and biased) and how the costs of being
wrong are allocated, which, in turn, influences the extent to which an

}

incumbent vendor is favored.

The third section examines whether switching costs are outside the
control of the user. It finds that vendors1 technology choices were not
solely responsible for a buyer's switching costs, as is generally presumed
by most previous economic analysis. Rather, users can invest in
"anticipatory converters". That is, in anticipation of a future
acquisition, users could make (far-sighted) investments that could
significantly change the level of switching costs later. The analysis
argues that the incentives for making these investments depend on many
factors within an organization, but were generally too low in the cases
studied here.

The final section highlights the relevance of bureaucratic conflict
for the vendor choices made in practice. As was common for mainframe
purchases throughout the country in the 1970s, the buyer and the user were
usually not the same decision-maker — i.e., large capital purchases like
mainframe computers were funded by someone other than those who eventually
programmed the system. However, those who provided the funding often
disagreed with those who used the system over decisions pertaining to
vendor choice and system use. Moreover, those who funded the purchase could
not easily monitor the actions of those who used it. In practice,
resolution to this bureaucratic conflict largely determined the tendency
for users to "lock-in" to an incumbent vendor or not, because it determined
who provided the estimates of the costs of switching vendors and how the
burden of those costs were funded. These decisions, in turn, influenced the
investment in anticipatory converters and the importance of switching costs
for an actual vendor purchase.

The main danger in studying federal agencies is that their experiences
may be unrepresentative of other mainframe users in the country. Though all
expenditure on computers by public and quasi-public organizations
represents roughly a quarter of the United States computer market, federal
agencies comprise less than 5 percent of the mainframe market.6 To guard
against the danger of inference from an odd example, the discussion focuses
on agency use of commercial general purpose computers commonly used in the m
United States in the late 1970s and early 1980s.7 Moreover, the discussion
highlights where the federal procurement process resembles or differs

significantly from other mainframe users, universities and private
industry.

III. Switching costs and mainframe computers in federal agencies

This section establishes that mainframe computers in the federal
government do possess the technical features usually associated with
technical lock-in.

In most models of buyer choice subject to switching costs, a buyer
makes investments with a supplier that continue to have positive value if
the same supplier is selected again, but have no value if any other
supplier is chosen. The motivating case is one where an old and depreciated
system is replaced with a new similar system. Some old equipment works with
a new system from the incumbent supplier, but not with equipment from any
other supplier. It is as if the nonincumbent supplier charges a price, Pm ,
for his system and the buyer pays that price, while the incumbent charges
Pj - S for essentially the same system, where S is the value of the old
equipment the buyer will continue to use with the new system.

The simplest theoretical representation seems to describe switching
mainframe vendors, though it misses some other (one time) expenses
associated with switching. In practice, switching costs arise due to: (a)
site preparation, such as raising floors, installing cooling units and
electrical and communication connections; (b) training personnel to use a
new vendor's unique system features; (c) dual operation of systems while
one is installed, tested, and brought up to an acceptable operational
level; (d) disruption of operations while new hardware is installed; (e)
re-optimizing new systems to unanticipated problems; and (f) the direct
costs of software conversion if existing software was a component worth
preserving. Most of these expenses are minimal if one stays with the same
supplier when upgrading mainframe purchases, but the costs of (b) , (c) ,
(e) , and especially (f) can be substantial if a change between suppliers of
incompatible technologies occurs.8

a. Technical interrelatedness and incompatibility.

Previous work has identified several technical features of products
that result in switching costs, and, not surprisingly, these features can

be found here. First, commercial computer systems display what Paul David
(1975, 1985, 1986, 1987) has called "technical interrelatedness" : tasks
require a multi-component system and that set of components must be
technically compatible in order to work together and achieve efficiency in
system performance.

It is easy to illustrate each of the two aspects of technical
interrelatedness with mainframe computers. An essential technical feature
of general purpose computer systems is that they are composed of a variety
of compatible components — central processor unit(s) , input-output
devices, communication terminals, memory devices, and "software" — the
programming that directs a system's hardware to manipulate information in a
desired predictable manner. Table 1 contains a listing of the number of
these components for different types of commercially available general
purpose computers in use by federal agencies in 1979, clearly demonstrating
that a large number of a variety of components make up a typical
commercially available general purpose system.9 Table 2 illustrates that
these components are typically supplied by the same firm. Note, however,
that though hardware equipment complimentarities are important, the most
important complementarity for economic purposes is not displayed — the
relationship between hardware and software, and/or software and human
training.

Evidence of the compatibility requirement is also easy to find,
especially in the extensive discussions of the cases when that requirement
is not satisfied. Examples of incompatibilities include the following: plug
and socket do not necessarily fit together physically or if they do fit
together, they may not identically translate electronic signals in a
similar manner; system software, the code that translates user written code
into machine commands, is usually unable to work with hardware
architectures other than the one on which it is written unless the software
is altered; higher level software, usually embodying commands for a
particular application, can be incompatible with particular system software
implementations available on the new machines; higher level software that
is optimized for implementation on one machine architecture can lose
significant performance if implemented on another system. In this case m
compatibility is not a dichotomous variable, but rather, describes a
condition that varies by degrees;10 data files written in a particular form

may be unsuitable for specific hardware models (NBS 1980) ; different
manufacturer's systems use different system software, requiring retraining
of the personnel who use the system.

Because of all these levels of technical interrelatedness, switching
costs arose due to changing from one incompatible systems to another, not
due to changing suppliers, per se. However, because there tended to be a
one-to-one association of suppliers with computer mainframe technical
families in the 1970 and early 80s, with a few notable exceptions, these
differences tended to be indistinguishable in practice.11 In general, users
could not "mix and match" components from different manufacturers. This
well-known feature of systems was frustrating to users.12

b. An incumbent's advantages.

With vendor's offering incompatible systems, two factors worked to an
incumbent's advantage in a competitive procurement to replace hardware.13
Long-lived assets obviously give the incumbent an advantage. Different
components depreciate at different rates, leaving, at any time, some
components that could continue to be used in future systems and some that
required immediate scrapping. For example, the median age of processors of
commercially available general purpose systems in 1979 was six years (mean
= 6.3, s.d. = 3.6).14 In addition, software and programming obviously does
not physically fall apart, nor is previous training immediately
forgotten.1 Once operational, software and training are useful as long as
the proper complementary components are in place. Hence, to provide an
equivalent, fully operating system the nonincumbent must supply features
which the incumbent need not.

Focusing on only length of life of assets paints a somewhat deceptive
picture, however. Also important is whether that old hardware, software, or
training continues to have value in use. The value in use varies for each
situation, depending on the demand for services the system provided and the
necessity for reconfiguring a system to provide a new application.
Generalizations are difficult because the details vary from one situation
to another. In some instances, the interrelationship between the
idiosyncracies of an application and the idiosyncracies of software
constrained changes in the applications, which left the incumbent as the
natural supplier of complementary components. In other cases, where the

applications were in need of radical alteration, rewriting most of the
system software was a viable economic alternative.

A second factor contributing to an incumbent's advantage in a
competitive procurement involves the time it took to correct conversion
problems. It is well known that many improvements in software on the
incumbent machine — improvements that were added over time and through
much use and testing — cannot be easily translated to a new machine but,
in fact, must be reinvented through extensive testing and trial and error
aimed at learning how to take advantage of the unique features of the new
system. Moreover, this trial and error must occur in sequence — only after
one part of the program is polished can another be developed. In addition,
programmers cannot usually anticipate all the practical difficulties to
achieving a desired "look and feel" in system performance. Agency's
experiences confirm this general property of software design: no other
input, even a very elastic supply of programmers, can substitute for the
amount of time needed to refine software through trial and error. 6

The consequence of this technical constraint should not be
underestimated. Users faced a choice between (a) a relatively "quick"
conversion to a compatible system, or (b) a longer wait (as much as a year
or more) to install a new working system from a nonincumbent. More will be
said about. this later.

c. Observing switching and its determinants.

Establishing the existence of switching costs, by itself, does not
demonstrate their relevance over a wide range of situations. Switching
costs will be relatively larger in some situations than in others.
Switching costs matter most when old hardware components, particularly
processors, are to be replaced with new technical generations because this
situation requires that all the software on the old system be made
compatible with the new system. Switching costs also influence supplier
choice if existing systems and new systems must work together in the new
configuration, or if the new system will employ any software developed on
the old system. Switching costs, in the sense used earlier, are not *
relevant to vendor selection where old technologies have been orphaned — ^
e.g. no new upgrade is available, which was not uncommon in the 1970s.
Incumbents no longer possess advantages because the old equipment is not

upward compatible with any new generation. All potential vendors and the
incumbent are on equal footing. However, an orphaned system's switching
costs may influence other aspects of new system choice, such as the timing
of an acquisition.17

What is the quantitative evidence that the switching costs were a
large problems in many cases? Despite much information about computer
procurement, an answer is difficult to formulate because the relative
influence of switching costs on buyer decisions are not easy to measure,
and disclosure laws prevent outsiders from examining the costs that
influenced decision-making in an actual acquisition.

However, several publicly available studies were done of federal
agency conversions. These are summarized in the appendix to Greenstein
(1989) .18 These studies found that the total switching costs between
incompatible systems could vary over a large range. They could be anywhere
from 22 to 250 percent of the price of the acquisition of the new system,
depending on management practices, software quality, and other uncertain
factors. By another measure, these conversion costs were anywhere from 13
to 128 times the average monthly rental for the newly acquired system (or
roughly one to ten times the average yearly cost).19 These studies leave
the impression that switching costs are distributed asymmetrically —
bounded from below and skewed rightward by a few especially costly
unpredictable circumstances.20

The lowest conversion expenses involved an upgrade between machines
from the compatible IBM system 360 and 370 families. All the system-
specific features of software implemented on the 3 60 were preserved in the
upgrade to the larger 370 machine. These conversion expenses totalled 1
percent of price of acquisition or one-half the costs of one month's
average rental.

There are several reasons to think that conversion expenses in federal
agencies could be large. The installed stock of commercial general purpose
mainframes, as shown in Table 3 is quite large, often exceeding 2,000
systems in any year.21 Table 4 shows that the number of new acquisitions
per year is also high enough that if switching costs are a problem it is
likely that the dollar value of this problem is large for the whole federal

}

government. Finally, Table 5 lists the publications by federal oversight
agencies that dealt with problems related to switching vendors. It is hard
to imagine that this effort would be expended if switching costs were not a
problem for a substantial number of federal agencies.

Despite the previously described suggestive evidence, systematic
econometric evidence has led to ambiguous conclusions. The main observable
consequence of switching costs — repeated buyer choice of the same product
— may also be explained by persistent buyer preferences for the unique
services provided by a vendor. Rarely does a set of micro-level data
provide direct measures of either a customer's anticipated switching costs
or buyer preferences; thus data does not permit an observer to distinguish
between the effects of switching costs and others preferences in accounting
for temporal patterns of purchases. Econometricians have not found methods
for solving this problem other than imposing arbitrary functional forms.22

Despite these difficulties, Greenstein (1991) was able to find some
evidence that incompatibility influenced vendor choice from 1972 through
1983. This research investigated the patterns of choices by offices of
federal agencies that had experience with only one vendor prior to their
next acquisition. It found that after many economic factors were controlled
for, a large part of the tendency for former IBM users to switch to other
vendors arose primarily from the fact that limited compatible upgrades were
available for users of very old IBM equipment (e.g., the IBM 1400 series).
Federal buyers who previously used IBM equipment and could upgrade to a new
compatible system (e.g. IBM 360/370) tended to choose IBM as often as users
of other vendors selected those vendors again. This result is the first
econometric analysis of the relevance of compatibility for vendor choice.23

Other quantitative work yields more cautious conclusions. Greenstein
(1990) investigated whether the extent of a user's investment, which should
correlate with switching costs, helps predict whether agencies sole-
sourced, rather than competitively procured, from an incumbent. This
research formally tested the hypothesis that high switching costs could
give incumbents such an advantage that agencies would have little reason to
solicit multiple bidders under competitive procurement procedures. From a m
sample of single-incumbent users, it found that the extent of investment
with an incumbent does positively predict sole-sourcing from the incumbent,

but it does not dominate the observed results, contrary to expectations.
Many other economic factors predicted the choice of procurement procedures
and can often overwhelm any apparent (and measured) advantage an incumbent
seems to have.

Quantitative evidence is suggestive, but inconclusive. A deeper
understanding of switching costs warrants careful analysis of actual
acquisitions. The following analysis accomplishes this by analyzing the
problems confronted by federal agencies who switched to a new mainframe
vendor for a replacement acquisition.

IV. Two additional factors

The following section analyzes two factors that play important roles
in the case studies of switching costs: (1) the difficulty of estimating
future switching costs; and (2) the extent to which switching costs are a
function of previous user behavior. To emphasize that these factors are
distinctive from organizational issues, the focus of the last section, and
to provide a basis for more general conclusion, the discussion focuses on
agencies that use commercial computer technology and does not rely on
features peculiar to the computer's use in the federal government.

a. Uncertainty about switching costs.

Previous theoretical work has closely analyzed the consequences of one
source of uncertainty: buyers make their initial investment in a vendor's
system without knowing who will have the best system for their needs in the
future (e.g. Klemperer, 1987) . This is clearly a factor in vendor choice,
though perhaps, less so in federal agencies where the choice is often done
in a formal procurement process that cannot easily accommodate long-term
expectations about industry trends (Kelman 1990) .24

Rather, this case highlights the relevance of other sources of
uncertainty. In particular, when buyers choose between incumbent and non-
incumbent vendors, they typically do not know with much certainty the
likely future monetary level of switching costs, the overall feasibility of
conversions, nor the likely length of time to complete a conversion. Many
of these problems can be traced to unanticipated and unavoidable problems
in "fine-tuning" newly converted software. Moreover, how these uncertain

variables are estimated is important for future vendor choice. A large
underestimate of the costs of switching vendors could lead to (ex post) an
"unnecessary" and costly switch to a new vendor, while a large overestimate
effectively grants an incumbent vendor monopoly power over the next
upgrade, which can lead to a more costly acquisition price.25

There was substantial technical uncertainty surrounding the
feasibility of conversion. It was difficult to "transport" software between
incompatible systems, because software typically embodied features needed
for a unique application in the agency and was technically complementary to
the system on which it was developed. In practice, software was written for
a particular set of needs and for a fixed set of users trained to use it.
Software lost some (if not all) of its functions when implemented on
alternative systems, even those that were technically more advanced, as
measured by benchmark programs.26 Hence, it was difficult to duplicate
easily a former system's performance using the same software on another
system.27

Agencies could anticipate that there would be problems during
conversion, even if they could not anticipate what those problems would be.
Large conversion expenses were inherently difficult to estimate, even for
experienced conversion experts. Software conversion costs did not follow a
calculable algorithm based on a readily observable feature of the code,
such as the number of lines. Unanticipated costs could often be traced to
poor documentation of earlier programs, fragile code — held together by
"bubble gum and bobby-pins" — which was difficult to get working again
until a crucial bottleneck in the code was understood, and "patchwork code"
— a program composed of unsystematic additions to the basic software
program, the logic of which was hard to reconstruct years after the
program's many creators had departed from the agency.28 Any one of these
characteristics made it difficult to retrace the operational logic
underlying old programs. Many of these problems were difficult to
anticipate until software conversion was underway or largely accomplished.

In the 1970s there was little an agency could do to reduce that
uncertainty. During a conversion agencies could either invest in preservings,
old software on new machines or invest in reinventing their software on the™
new hardware. Either option was time-consuming and costly. In-house

conversions usually took too long because the required number of
programmers exceeded an agency's available staff, especially with large
jobs. Moreover, old staff usually had little experience with conversion and
misunderstood what was required. Programmer knowledge about software
implementation and programming procedures were useful on an old system but
not necessarily useful on a new system.29 It was no better out of house:
contracting out for conversion services could be quite difficult and
expensive because performance standards were difficult to specify in a
contract, especially when the output was idiosyncratic. Conversion experts
also were difficult to find, because this type of problem was not common in
private industry. Many private firms were undependable, and agencies
frequently had to use their own staff to refine the conversion programs for
which they contracted.30

Not surprisingly, conversion costs could be greatly underestimated or
overestimated if the agency's office was not very experienced with
conversion, which they frequently were not (since conversions occur
infrequently at the same location) . Conversions could also be greatly
underestimated or overestimated if the conversion work contained several
unpredictable and largely intractable problems.

All of this was problematic since a large underestimate of the costs
of switching vendors could lead to a costly switch to a new vendor, while a
large overestimate effectively grants an incumbent vendor monopoly power
over the next upgrade, which led to a more costly acquisition price.31 Not
surprisingly, reduction of the uncertainty surrounding conversions became
the focus of many publications and efforts.32 For example, since the early
1980s, the Office of Software Development in the GSA has housed experts in
conversion problems, professionals who are experienced in the special tools
required for these problems. There is also considerable documentation of
oversight and advisory agencies providing aid in the form of expert advice,
bibliographic material on conversion tools, and other managerial guidance
material. For evidence of this, see Table 5. Ironically, these effort to
extinguish the blaze are the best evidence that the blaze was large.

In sum, buyers had limited options for reducing the uncertainty over a
nonincumbent 's product quality and eventual costs of installation. Not only
could switching costs be large, but a nonincumbent ' s eventual "price" was

14
subject to a large variance.

Generally speaking, it is important to understand the incentives of
managers and users to bias their estimates too high or too low. For
example, to the extent that decision-makers incurred some of these costs
and to the extent that they were risk-averse, this enhanced the advantage
an incumbent vendor already possessed. The analysis below will argue that
how the risks of being wrong were allocated between buyer and seller
influenced the incentives of managers and users to bias their estimates.
These estimates, in turn, largely determined the actual vendor choice.

b. Converter technologies and anticipatory investments.

A second feature of switching costs highlighted by this case is the
extent to which buyers control the level of future switching costs. In most
models of markets subject to switching costs, buyers are assumed to make a
vendor/technology choice, then use the product for some time and finally
make another vendor choice, where the later choice may be subject to an
exogenous level of switching costs. While this partially resembles the
situations observed in federal use of mainframes, it misses important links
between the decisions made about the use of a system and the costs paid to
switch vendors at a later date.

That users influence the level of future switching costs to some
extent is not too surprising, especially if decisions are coordinated over
time. When decisions are coordinated, buyers can spread switching costs
over time in innocuous ways. After all, if a user can foresee with
certainty that he will be staying with the same hardware vendor in the
future, he will likely telescope that decision to the present by taking
anticipatory actions. For example, buyers may purchase incremental
peripheral equipment for existing systems or develop software that raises
switching costs (were a switch to be made) . Such actions are irrelevant if
under all circumstances the next system upgrade is with a compatible
vendor.

In fact, the links between user actions and future switching costs are
more complex than that. Users can make extensive efforts to change future a
switching costs, and those efforts are often related to decisions made
daily. In the case of federal computer systems, these efforts included

standardization of component parts, greater use of higher-level language
programming, and efforts to achieve modularity of software and system
design and structured programming. Two users, starting with exactly the
same system, could end up with substantially different switching costs if
their tendency to make anticipatory investments differed, i.e. if their
day-to-day use and programming practices largely differed.

The analysis of these activities can best be placed in the context of
a discussion of "converter" technologies — bridges between incompatible
systems that free the buyer to use alternative system sub-components
without necessitating investment in an entirely new system. Converters have
received some attention in the literature because their introduction has
important (and sometimes surprising) consequences for industry dynamics.33
It is now recognized that third parties can enter with technical "bridges"
to system incompatibilities. Those converters result in systems that are
complementary in various sub-components, thereby integrating systems at
various costs.

Instead of focusing on converters provided by third parties, this case
highlights the role of converters provided by users. Here two types of
converter technologies were important in mainframes — anticipatory and
retrospective converters, a distinction previous research has not
recognized. Retrospective converters are tools for easing the pain of
conversions when they take place — often provided by parties other than
the buyer or system vendor. Anticipatory converters differ in that they are
installed by the buyer prior to any definite decision to switch suppliers.
For technical reasons explained later, anticipatory actions regarding
mainframe computers can only be taken prior to the decision to go through
with a conversion.

Examples of tools for retrospective conversions can be found in the
Office of Software Development in the GSA, as noted earlier. This office's
existence alone reveals the benefits of trying to ease conversion costs
once a decision to convert has been made. In addition, bringing old
software installed on new machines up to performance levels achieved on the
old system took time and manpower, a cost agencies willingly incurred to
save software. There was also an additional opportunity cost associated
with taking programmers away from their efforts to improve the performance

16
of existing programs.

Since retrospective conversions were costly, yet desired, it would not
be surprising to observe farsighted actions designed to reduce the costs of
anticipated retrospective conversions, should that option be likely. As
predicted, examples of attempts to use anticipatory converters are seen in
the attempts to make all software "transportable" prior to any switch —
i.e. make it perform consistently when implemented on technically
comparable (or improved) new systems possessing architectures (or system
software) incompatible with the one on which the software was originally
developed.

Attempts occurred in both government-wide programs and at the level of
an agency's office. Some government wide programs passed the costs of
anticipatory conversions to vendors. These included attempts to standardize
manufacturer's higher level languages, 4 and attempts to coordinate
manufacturers to produce similar physical interfaces.35 Other efforts aimed
to share the costs of anticipatory conversions among agencies included
efforts to standardize software at different agencies on a few well-
developed programs and efforts to establish software pools, where agencies
can swap programs. Aside from eliminating redundancy, the latter two
efforts tried to make basic software available to all agencies, no matter
who the hardware manufacturer was. Still other government-wide efforts
attempted to change agency programming. These were connected with attempts
to standardize all programming in higher level languages, such as ADA or
Cobol, and attempts to provide advisory material on the need for
"documented, modular programming" in higher level languages.

All these efforts, if followed, were designed to result in systems
that were composed of interchangeable component parts. These actions
attempted to make conversion a more routine procedure, eliminate some of
the uncertainty about the magnitude of switching costs, and reduce some of
the need for retrospective converters. The goal was to have a system of
code that would perform on any manufacturer's system at any time,
regardless of the one for which it originally was developed and of when it a
was developed. This is precisely what we would expect an investor
anticipating conversion problems would try to do.

Such anticipatory converters were costly to do; and it may have
required programmer cooperation among many agencies, which was not easily
forthcoming. Often there were differences between the organization's and
agent's benefits from taking these actions, a topic discussed later.
Whatever the cause, case studies of conversions in the mid 1970s make clear
that ideal programming practices were generally not followed in the past.
Most agencies' stocks of software remained compatible with a limited set of
available architectures at any point throughout the 1970s.37

In sum, previous user management decisions influenced the costs of
switching vendors when a switch was made. Users who did not make efforts to
install anticipatory converters faced higher switching costs than those who
did. Hence, if conversions are a likely option, it is important to
understand the incentives of managers to account for the value of making
efforts to reduce their cost.

V. "Lock-in" within Bureaucratic Organizations

The existing theoretical literature on switching costs often presumes
that the level of costs is exogenous to the buyer and known at the time of
purchase. The previous discussion showed that these assumptions overlook
two other characteristics of switching costs in practice, that switching
costs are uncertain and are partially endogenous. This section discusses
several more reasons why this is important. Uncertainty and the endogeneity
of switching costs interact with bureaucratic conflict, either increasing
or decreasing tendencies for buyers to lock-in to incumbent vendors or
incumbent technology.38

The key distinctions in this section are between the "user" of a
system, the "buyer" of a system, and the "estimator" of the costs of
switching vendors. The analysis has not needed these distinctions until
now. As shown below, these cases demonstrate that the same individual need
not have responsibility for daily system use, choices among competing
vendors, nor evaluating the costs of switching vendors. When decision
making for these three decisions is split among different individuals,
related decisions do not tend to be well-coordinated. Thus, the assignment
of responsibility for decisions and their coordination, determines, in
effect, the ultimate importance of switching costs for vendor choice.

a. The Separation of Funding from Use

As was common for mainframe use throughout the country in the 1970s,
in the federal bureaucracy large capital purchases like mainframe computers
tended to be funded by someone other than those who eventually used the
system. This separation of funding and use often lead to principal/agent
conflicts over vendor choice and generally over many parts of the
procurement process. In this case, the "principal" was the US Congress or
its designated oversight agency, who ultimately provided funding for the
equipment. The "agents" were those within the federal agency who used the
mainframe computer and who ultimately invested in anticipatory converters.
Quite typically a small number of experts within the computer systems
department of the agency made the majority of the daily decisions
concerning mainframe use and the "principal" could monitor these decisions
only imperfectly.

The heart of the problem is that even if the principal and the agent
both used the same information, they are likely to perceive different
benefits and costs from choosing an incumbent vendor instead of a non-
incumbent vendor for a replacement acquisition. In the general case, it is
commonly believed that agent's value technically proficient systems more
than principals and that agents do not value dollar savings as much as the
principal. In other words, an agent will prefer the computer equivalent of
a "Cadillac", while the principal would rather he used a "Chevy" (Kelman,
1990, Marshall et. al., 1990, Greenstein, 1991).

Switching costs complicate this conflict because the costs to the
principal of switching are not likely to be the same as to the user. This
observation has two parts. First, the principal pays the costs of switching
no matter which vendor wins a bid. That is, switching costs grant the
incumbent some monopoly power, so he can bid less aggressively. If the
incumbent wins the procurement, the principal ultimately pays a high price
to the incumbent. If the nonincumbent wins, the principal ultimately pays
for the costs of switching to the nonincumbent. Second, for the agency,
the costs of the two outcomes can differ substantially. Switching to a
nonincumbent takes time and effort, and it prevents system users from ,
pursuing other projects, private opportunity costs the capital budget
generally only partially covers. Staying with the incumbent costs the

agency much less in these terms. Thus, the agent generally has less
incentive to switch vendors than the principal .

This principal/agent conflict turns the estimation of switching costs
into an extension of the general bureaucratic conflict. Users would like
those estimates to reflect the user's private costs of switching, while the
principal would prefer that those estimates reflect the entire
organization's costs and benefits. The principal will likely distrust any
estimate of switching costs made by users, since the user has an incentive
to exaggerate the costs of switching vendors as a means to favor the
incumbent. Due to their experience with the system, however, users are
better positioned to estimate the likely costs of switching.

The principal/agent problem also turns the effort expended to reduce
the costs of anticipated switching vendors into an extension of the general
bureaucratic conflict. This is not so surprising since, as was shown in the
previous discussion, there is no obvious correspondence between an user's
private costs and benefits of expending effort and the organization's costs
and benefits. In general, it is widely believed that the programmer's
private incentives are too low. This belief is partly due to the positive
externalities of standardization: it takes effort by one programmer, but
many other users may benefit. This belief is also partly due to historical
experience — e.g. the absence of ideal programming practices in the 1970s,
as already mentioned.

In sum, the assignment of authority to make procurement choices, to
estimate the costs of switching vendors, and to use the system on a regular
basis, cannot be understood without understanding the resolution of
bureaucratic conflict in an organization. As shown below, these assignments
ultimately determine the influence of switching costs on vendors choice.

b. The tendency to lock-in and bureaucratic conflict

In practice, the principal will have to create a mechanism to induce
users to reveal the true costs of switching vendors. If such means cannot
be found, the principal has two options. He can either let the users, who
have better information about the costs of switching vendors than anyone
else, makes those estimates and bias them as expected, or find some other
means for making such estimates, such as hiring a technical expert to

resolve the question.40 The previous discussion suggests that if users
choose their vendors and bear the costs of underestimating switching costs,
then biases in a user's estimates of the costs of switching to

nonincumbents will likely accentuate tendencies to lock-in. If the

. . . . I

principal creates a successful monitoring mechanism, then this reduces this

tendency to lock-in. '

In addition to the relationships already mentioned, the incentives to
make far-sighted investments also depends on the outcome of bureaucratic
conflict, especially the shape of the funding for the new aquisition. That
is, it depends upon whether switching costs are partially or fully covered
by a one-time capital budget or whether it is partially covered out of
agencies' operating budgets. If switching costs are fully covered in the
capital budget, then this induces something like a "moral hazard" problem.
Agencies have little incentive to take actions to minimize the cost of a
switch if the costs are fully covered, irrespective of the outcome. This
should accentuate tendencies to lock-in to incumbents. In the other case,
if the agency's operating budget largely covers the costs of switching,
their incentives to make investments to limit switching costs are much
higher. Due to more programming directed at anticipatory converters,
switching costs decline, which may result in more switching. This should
decrease tendencies to lock in.41

Because the principal will want the agency personnel to take more
action to reduce future switching costs than the agency programmers will
likely take, there is a clear incentive for the principal to monitor user
programming. A principal will want to assess the degree to which an agency
is responsible for the level of switching costs realized later. He may also
want to counteract the tendency of incumbent vendors to encourage
programming practices that raise the costs of switching later (e.g.
programming in a system-specific language) . The less a programmer
internalized those costs, the more likely his actions will accentuate
tendencies to lock-in to incumbents. Not surprisingly, such themes can be
found throughout the GAO reports written on conversion expenses (Table 5) .

A related problem concerns the principal's efforts to monitor and 1
control investment by users and incumbent vendors in relationship-specific
assets. The level of effort expended by agencies in vendor-specific assets

will be influenced by the probability that the user will have to switch,
especially as the time for a new replacement approaches. Likewise, a vendor
has an incentive to invest in factors that raise switching costs, in order
to raise the probability that the user will find it too costly to switch to
a nonincumbent when an upgrade is reguired. However, the vendor also has an
incentive to neglect those factors that are ignored in the evaluation of
new bids. Vendors will not invest in the guality of the relationship
between the vendor organization and the government users if it is
unaccounted for in the evaluation of bids of incumbents and nonincumbents.
Indeed, one recent study shows that all these circumstances can occur
(Kelman, 1990) .

Agency incentives ultimately depends on the user's discretion level,
i.e., whether administrative rules substantially constrain his vendor
choice. The totality of the previous analysis argues that if the agency has
full discretion over the choice of vendor they tend to lock-in to the
incumbent. If the principal tries to change the agent's incentives and
closely monitors the choice, the outcome depends on the regulations imposed
by the principal on agency decisions.42 Thus, one open guestion for this
case, and cases similar to it, concerns the principal's ability to
counteract the user's bias towards the incumbent with restrictions on
agency discretion or with an appropriate contract rewarding verifiably good
behavior.43

Previous work only partially indicates whether restrictions on agency
discretion, usually in the form of administrative rules, reduce the
tendency to lock in or not. Work by Marshall, Meuers, and Richards (1990)
argues that the rules for protesting vendor decisions largely shape the
enforcement of the principal's rules. Under some rules the incentives for
losing vendors to protest are greater than is optimal and under others too
low. Those protest incentives ultimately shape an agency's incentives to
prevent protest, perhaps by estimating switching costs properly. Related
work by Greenstein (1991) argues for a slightly different emphasis. That
is, the principal is often left with a choice of either applying a
procedural rule that is appropriate sometimes, but not too stringent at
other times; or letting the inherently biased agent evaluate the inherently
subjective information that is relevant to a vendor choice. Different
circumstances warrant stringent rules or exceptions to them. When stringent

rules are applied, switching-costs estimates are more likely to be biased
downward due to the de-emphasis on intangible future cost. When agencies
are given full discretion, the tendency to lock-in is appreciably higher.

The overriding theme of these observations is that the role of i
switching costs cannot be understood without understanding the assignment
of authority for purchasing, switching cost estimation, and system use. All
play a role within a more general bureaucratic conflict.44

c. Switching Costs and Organizations in the Private Sector

How relevant are these observations for commercial mainframe use by
the private sector? Many of the same fundamental factors observed in
federal agencies will continue to influence the role of switching costs in
private firms and universities, the two largest users of mainframes. For
example, switching costs result from technical incompatibilities and asset
durability, which should persist in computer use in private industry; the
technical reasons for difficulty in estimation of switching costs will not
change in private industry; and the technical links between anticipatory
converters and switching costs will not change in private industry; the
same principal/agent conflicts and verif iability problems are as likely to
arise because system users will continue to informational advantages over
their supervisors.45 (See Inmon (1986) for discussion of this problem in
the data processing departments of private firms) .

What may differ in the private sector is the structure of authority
among different individuals within an organization and the coordination
mechanisms employed. While it is possible for private organizations to
establish performance-based contracts with its computer managers — e.g.,
dismiss a manager for poor performance or reward an excellent manager with
monetary bonuses — such instruments are limited by the administrative law
governing many public organization, such as federal agencies. In addition,
private organizations may not employ a procurement process that follows
such distinct and rigid stages as does federal procurement. The
relationships between switching costs and particular aspects of a decision
will also be less defined within a private firm if administrative rules do
not circumscribe an agent's decision-making as much.

More generally, economists tend to think that budget considerations
affect the incentives of workers in the public sector less than in the
private. The absence of any structural incentives to realize future
organization goals might lead to more myopic behavior by federal agencies
than one would find in the private sector.

VI. Where to go from here?

With a rare exception, previous economic thinking about switching
costs and lock-in has presumed that buyer organizations are monolithic,
overlooking the role of decision-making at many levels within an
organization. In contrast, this article demonstrated that, for reasons not
all of which are peculiar to the federal government, the coordination of
decision-making within an organization has important consequences for the
role of switching costs. This observation strongly questions the
fundamental presumption of previous analysis that buyers can costlessly
formulate and implement consistent inter-temporal strategies for dealing
with high switching costs. If decisions regarding one component of a system
are partially insulated from consideration of decisions related to
compatible components, then coordination within organizations will not be
likely or even possible.

This conclusion, especially its emphasis on the role of an
organization, motivates further research in the economics of market subject
to large switching costs. This article argues for different structural
assumptions and different questions in future analysis — e.g. questions
that emphasize the coordination of decisions related to vendor choice, the
variance of uncertainty regarding the future level of switching costs, and
the incentives to invest in anticipatory converters. At the very least, we
should expect to find in public and private firms a variety of responses to
bureaucratic conflicts. Those responses ultimately determined the observed
tendency of buyers to lock-in to incumbent vendors in practice.

24
Endnotes

1. See Farrell (1987), Farrell and Shapiro (1988), (1989),
Klemperer (1987a), (1987b), Spiller and Scheffman (1990), von
Weizsacker (1984), Williamson (1975) and (1979), for theoretical
work on buyer behavior when it is subject to switching costs.

2. See Arthur (1983), (1987), Cowan (1987), David (1975) (1985),
(1986) , and Church and Gandal (1990) for recent theoretical
analysis of "lock-in" phenomenon. See David and Greenstein (1990)
for an overview of the extensive standardization literature,
which overlaps with both the literature on lock-in and switching
costs.

3. See International Data Corporation, EDP Newsletter. 12/18/74,
2/12/75, 12/8/75, 1/21/77, 12/5/78, 12/29/80. See Greenstein
(1990) for a discussion of these surveys and the difficulties of
interpreting them.

4. Indeed, the records used in this article were produced for a
variety of reasons related to the topic of technological lock-in.

5. Indeed, an extensive record exists. The most relevant studies
for this paper include investigations on the problem from the
Government Accounting Office (1977a, 1977b, 1980a, 1980b, 1981) ,
the General Services Administration's Office of Software
Development and Information Technology (1981, 1982, 1983a, 1983b,
1984, 1986), the National Bureau of Standards (1980a, 1980b,
1983) , as well studies cited in the last two reports. A partial
bibliography is produced in the references.

6. See EDP Industry Reports, various years.

7. See Gray (1981) for a discussion of general purpose
applications in the federal government.

8. See the GAO 1980a, Appendix II, and the summary of that
appendix. The typical conversion between compatible systems was
represented by the IBM 360 and 370, which has low retraining and
reconfiguration costs.

9. General purpose mainframe definitions are borrowed from
Auerbach reports (1962-1975) , Phister (1979) , and especially the
IDC General Purpose mainframe surveys published in the EDP
Industry Reports (1974-1982) , and Annual surveys of the industry
(1983-1986) . This choice excludes all minicomputers, small
business computers, desk top systems, and systems sold primarily
for dedicated applications, but does include large mainframes for
applications which might be called "scientific". The source of
definitions guarantees that the systems were widely diffused in
the private market as well; hence, the phrase "commercially
available." See Greenstein (1989) data appendix for a full
definition.

10. This trait is partly due to the sophisticated programmer's
tendency to use the most convenient features of a system when
writing programs, features that need not be the same on other

machines. One might expect manufacturers to encourage this
programming practice as a means to raise switching costs.

11. A limited amount of CPU compatibility across firms did also
exist (For example, the RCA 7000 series, IBM360-370 series,
Amdahl and National Advanced Systems all roughly fall into the
same product family) . These constituted a small fraction of total
federal sales through the early 1980s. See Greenstein (1990) for
an idea of its magnitude.

12. Industry records frequently refer to the incompatibilities of
the architecture and system software of the general purpose
mainframes produced by IBM, Burroughs, Univac-Sperry, NCR, CDC,
Honeywell, DEC, and others (See Auerbach Reports, for example) .

13 . Competitive procurement means that agencies hold an auction
for the right to provide some component of their system. In
practice, agencies may anticipate that one vendor is likely to
possess a large advantage over all competitors. In this case, the
agency many choose to by-pass competitive procedures and sole-
source (See Greenstein, 1991) .

14. Of course, the average age at replacement is not the same as
the expected age at replacement for all processors. In a growing
population of processors, it would provide a lower bound. Only in
a stationary population would the two coincide. Case studies
typically talk about contracting for systems with expected lives
of six to eight years. See GAO 1981, for example.

15. There was an analogous phenomena in the typewriter keyboard
case. David (1986) notes that the durable asset there was the
memorization of keyboards by touch typist. Like software for the
human mind, it was costly for some users to reprogram themselves.

16. See Brooks (1971) , for a similar emphasis on the
technological necessity of solving complex software design
problems in sequence, rather than in parallel. Each sub-problem
needs to base its approach on solutions to previous problems in
the sequence.

17. There is some evidence to suggest that federal users of
Control Data systems persisted in holding onto their "orphaned
systems," delaying new purchases for a long time (GSA 1987,
1988) .

18. The estimated and actual cost (mid-70s dollars) of software
conversion alone were large: $1.5 million for software conversion
at EPA, 531,000 lines of code converted for an estimated $950,000
at the Navy base in Norfolk, 125,000 lines of applications for an
estimated $559,000 at the naval base in Jacksonville, 332
application programs for $486,000 was estimated at the Naval base
in Pensacola but 291 programs eventually were converted for $4.5
million, 14 of 571 totally converted and many partially done at a
cost of $3,4 million at the USDA in Kansas City, 571 application
programs for $3.4 million, 296 programs estimated at $338,000 for
the USDA in New Orleans, but which eventually came to several
million, and $4.5 million for application software conversion at
the VA. In contrast, the one compatible upgrade had software

total conversion expenses of $13,900. These slightly
overestimated net conversion costs, because even an upgrade with
the same supplier will contain some switching costs, but
underestimated switching costs by neglecting some non-pecuniary
costs. See Appendix for a conversion costs component breakdown.

19. These are ball park estimates. The first set were computed by
taking the very precise estimates of total conversion costs in
the case studies and comparing them with the average system
price, as listed in the IDC General purpose surveys for that year
and 1981 for any earlier conversion (Purchase price estimates did
not begin appearing until 1981 and most cases came from the late
70s) . They came to 23%, 22%, 27%, 50%, 68%, 79%, 150%, 210%, and
250%. The second set were computed by comparing the same
conversion estimates against the IDC average monthly rental for
that system in the year of installation. These came to 13, 14,
32, 37, 46, 70, 72, 123, and 128 times the rental price. See
appendix.

20. Some allowance in these numbers must be made for the limited
technical expertise concerning switching costs in the late 1970s
within the federal government. Once switching costs were better
understood, the costs of switching should be somewhat lower.
However, these studies leave the impression that the costs could
only partially be attributed to the limited technical expertise.
Even where there was some expertise, as in the military, the
costs could still be substantial.

21. This is only commercial systems, or systems for which we can
get information about their use in private industry. This
excludes many but not all uses that are especially idiosyncratic
to the government, commonly found in the Defense and Energy
departments. See Greenstein (1989) appendix for a definition of
commercial systems.

22. See Heckman and Singer (1982) for example.

23. In addition, Greenstein (1990) argues that evidence is
consistent with the view that most switching costs originate with
the installation of the first system. In other words, the user
pays a one time expense in order to learn how to use a vendor's
machines. All subsequent hardware acquisitions after the first do
not contribute much to the costs of switching vendors later.

24. In addition, the time horizon for those expectations must be
longer in agency use than in private industry. Federal system
life is known to exceed private industry system life. See GSA
(1987, 1988) .

25. In a competitive procurement vendors can bid against one
another and have similar products, even if one has a system
compatible with the user's, while another does not. If S
represents the estimate of the costs converting to a new system,
then the level of S largely determines the bidding behavior of
the two vendors. These bid prices then determine the likelihood
that a user will switch vendors (See Cabral and Greenstein,
1990) .

26. Examples of functional loss are numerous. GAO (1980a) ,
reports a case of converting line for line a program that
previously took three minutes that then took forty-five minutes
to operate on the new system. See GAO (1980a) . It also reports a
case where a program used to take five hours took twenty-two
hours on a new system. It had to be completely rewritten to take
advantage of features of the new system (and took only three
hours to run when completely rewritten) .

27. Strictly speaking, the application need not be a unigue one,
though all the examples I know typically do involve software that
possess some unique features related to the application. Market
supplied implementations of software on one system may also not
easily transfer to another system. Suppliers of software then
might absorb some switching costs if a large number of buyers
switch systems. Thus, market supply of software does not
eliminate switching costs, though it may spread the incidence of
implicit burden between buyers and suppliers of peripheral
components. David (1986) makes a similar point during his
discussions about the reluctance of typing school instructors and
the first touch-typists to memorize alternative (non-QWERTY)
keyboards or coordinate their decisions.

28. GAO (1976), p. 20-21 discusses this, often citing programs
whose documentation quality was sacrificed for urgent needs of
the past, or whose development was done in a patchwork and
unsystematic fashion.

29. This last switching cost is typically incurred during
"retraining" and does not include nonpecuniary costs such as
morale or staff turnover. See GAO (1980a), p. 44.

30. GAO (1980a), pp. 49, 52, 51, 57, 61.

31. This does not imply, however, that using the most accurate
estimate of switching costs is in the interest of the government
as a whole. Underestimates induce more switching and also more
aggressive bidding from incumbent vendors. The optimal level of
switching cots to incorporate will trade off these two factors.
See Cabral and Greenstein (1990) .

32. See GAO (1977b, 1980a), GSA (1981, 1982, 1983a, 1983b, and
1984) for more information on the management and implementation
of conversions and their cost components. Also see GSA (1986) ,
for a well-developed attempt at a conversion cost algorithm, an
attempt which demonstrates the inevitable complexity of doing the
task in a thorough and complete manner.

33. See David (1985, 1986), David and Bunn (1987), Carlton and
Klamer (1983), Farrell and Saloner (1988).

34. Despite attempts to the contrary, it appears to be common for
even the fairly standardized higher level languages, such as
Cobol, to get implemented in incompatible forms on different
manufacturer's systems (Bob Dornan, private communication). There
are a large number of FIPs publications devoted solely to this
subject. See NBS (1977) for a review.

35. See NBS (1977) , or any of a large number of FIPS (Federal
Information Processing Standards) publications.

36. Not surprisingly, the latter two efforts have had trouble
because each agency tended to design and modify programs to its
own unique needs, not internalizing whether another agency might
want to copy it or desire another modified configuration.

37. It is a puzzling that there exist no extensive discussions in
public records of hardware solutions to system incompatibilities,
e.g. what are sometimes known as translators. If it were
economically viable in some situations, then one would have
expected some discussion. Is this silence evidence that these
were not viable, or is this silence a function of the sample of
problems examined by the writers in the 1970s? The sole exception
is one reference to "emulation" — imitation of one system's
software by another system's. This discussion does not recommend
that emulation be used as along-term solution to incompatibility
problems, citing the inefficient use of hardware resources that
results. It was only recommended when an essential database was
embedded in an old system where conversion was difficult. See GAO
(1980). Of course, there are a large number of attempts to
standardize software, as seen in many FIPS publications. Some of
this is anticipatory, such as the standardization on ADA and most
is not.

38. The following is a short synopsis of the latter half of
chapter 2 of my thesis. Similar points can be found in Greenstein
(1990) .

39. For example, let the incumbent and nonincumbent produce
perfect substitutes except for the costs of switching. Let the
incumbent have a cost of Ct and the nonincumbent have a cost of
Cj-j , where the costs of switching to nonincumbents is S. If
bidding were characterized by Bertrand behavior, then C, < CNI + S
implies a winning bid by the incumbent just under CNI + S. But if
C, > CNI + S, then the winning bid is by the nonincumbent and he
bid just under C, - S. The switching cost is then paid by the
principal after the switch. In either event, the principal pays
for S, either through a higher price or through an actual switch.

40. The present system employs the "technical expert" option.
Experts within the Office of Software Development, as sub-agency
of GSA, make estimates of the costs of switching vendors and
those costs are used in evaluation of competing bids. See OSD
(1986) .

41. A related issue concerns the rules for accounting for
switching costs by the official procurement process. If such
costs are ignored, then switching vendors becomes more likely.
Yet, the costs of switching decline due to agency investments.

42. See Cabral and Greenstein (1990) for a discussion of how
different rules regarding the use of switching costs in vendor
choice can yield widely different outcomes.

43. Since government administrative rules only apply to computer
procurement of a value greater than $25,000, it is likely that
the processes influencing the tendency to lock-in to personal
computer, work station, and/or small mini-computer systems is
much different from the processes influencing the tendency to
lock-in to mainframe hardware.

44. Other aspects about switching costs also change in a
bureaucratic setting. It is not always to the advantage of the
principal to incorporate fully switching costs into his
evaluation of competing bids. If the principal can commit to
ignoring switching costs in the evaluation of bids, then such a
commitment induces incumbents to bid more aggressively. There are
many circumstances in which the extra expenses from occasionally
switching vendors on average can be outweighed by the gains from
lower bid prices from the incumbent. See Cabral and Greenstein
(1990) . Indeed, under some circumstances partially accounting for
switching costs can be superior to fully accounting for them or
to not accounting for them at all. The optimal procurement
system, from the principal's perspective, will vary depending on
who the incumbents are and the level of information about
switching costs held by the vendors, as well as the federal
agencies — trade-offs that economists have yet to fully analyze.
Such trade-offs are relevant for federal procurement, where the
Congress can commit to bidding evaluation procedures through the
use of administrative law and protest procedures. However, such
issues may be less relevant for private firms, who may not have
any such commitment mechanism available.

45. Due to their technical delicacy, their size, and their
complexity, mainframe computers tended to be overseen by
specialized departments within private firms. It was not at all
unusual in the 1970s and early 1980s for system users and the
source of funding to be separate in large private firms.

Table 1

Number of components in systems in 1979 inventory
(Commercially Available General Purpose Systems only)

TYPE

SYSTEMS

MEDIAN

MEAN

ST.D.

CPU

2488

1.60

3.03

STORAGE

2488

15.8

23.6

INPUT/OUTPUT

2488

14.4

33.9

TERMINALS

2488

14.5

56.6

OTHER

2488

2.64

9.67

Source: ADP inventories, 1979, orignal data.

CPU stands for any central processing units.

Storage units stands for any of the following: Mag tape, core unit,
drum unit, disk unit, misc. storage, multi-purpose control.

Input/Output stand for any of the following: Card reader and/or punch,
papertape reader and/or punch, OCR unit, mag data recording unit, mag ink
character recognition unit, data converter, media converter, plotter,
printer, image handling unit, display unit, operator console, control for
10 channels, misc. system 10 controls.

Communications terminals stands for any of the following: Card
terminal, mag tape terminal, papertape terminal, printer terminal, input
console, multiplexor control, misc. terminals and related units.

Other stands for any of the following: EDPE (electronic data
processing equipment) , card punch, tape punch/verifier, sorter, collator,
reproducer/gang punch, interpreter, misc. PCAM or EDPE and unknown.

Table 2.

Number of components in systems in 197 9 inventory by manufacturer
(Commercially Available General Purpose Systems)

Machine manufacturer same as system designer:

TYPE

SYSTEMS

MEDIAN

MEAN

ST.D.

PER

CPU

2476

1.33

1.21

99.5

STORAGE

2406

11.3

16.2

96.7

INPUT/OUTPUT

2410

12.0

27.4

96.8

TERMINALS

2382

10.2

41.6

95.7

OTHER

2427

2.27

8.85

97.5

Machine manufacturer differs from system designer:

TYPE

SYSTEMS

MEDIAN

MEAN

ST.D.

PER

CPU

155

4.55

9.72

0.62

STORAGE

953

12.9

23.2

38.3

INPUT/OUTPUT

746

9.23

30.9

30.0

TERMINALS

1647

7.95

44.0

66.2

OTHER

1962

1.47

3.77

78.8

Source: ADP inventories, 1979, orignal data

Note: Systems stands for the number of systems with at least one piece of
equipment of the designated type and either made by or not made by the
system designer.

Per is the percentage of systems with at least on machine of the
designated type from the same or different manufacturer out of the total
number of systems with any at all.

See Table 1 for remaining definitions.

Table 3

System Supplier for Stock of General Purpose Mainframe Systems.

MANU

72 73

TOTAL

3229 3053 3037 3860 2646 2544 2508 2565 2509

2395

Source: Federal ADP Equipment Inventory, 1971-1979, 1983, original
data. See GSA ADP Activities Summary, various years, and Gray (1977) ,
(1978) , (1979) , and (1981) , and Greenstein (1987) for summaries and detail
Also see pages 1 - 11 of NBS 1981 for similar estimates.

Notes: The table includes only commercially available general purpose
mainframe systems, as defined by IDC EDP industry reports (various years) ,
and Digital Equipment Corporation VAX systems. The table only includes
acquisition of federal owned or leased systems from external supplier.

Table 4

Commercially Available General Purpose Mainframe Systems
acquired each year by Federal agencies from external suppliers

Manu

80-83

Total

296

220

279

132

244

140

154

720

2282

Notes: Acquisitions were estimated by comparing systems at Federal agency
offices in adjacent inventory years. Year is the year the first processor
for a system first appeared in the data inventories. Due to unavailability
of original data for years 1980, 1981, and 1982, all acquisitions in these
years were estimated from inventories for 1983.

The table may overestimate total acquisitions if all intra and inter
agency transfers are not recorded, but internal consistency check revealed
that this problem is not likely to be large.

Table 5
Oversight Reports Concerned with Conversion Problems; 1977 - 1986

General Accounting Office Publications:

1977, "Millions in Savings Possible in Converting Programs from one
Computer to Another," Sept. 15, 1977, FGMSD-77-34.

1980, "Conversion: A Costly, Disruptive Process That Must be Considered
When Buying Computers," June 3, 1980, FGMSD-80-35.

General Services Administration Publications:

Office of Software Development and Information Technology:

1981, Conversion Contracting Techniques Associated with Procurement of
Replacement ADP hardware System. GSA/FCSC-1/003 , PB82-145079, NTIS, Sept,
1981.

1982, Conversion Work Packages. Report No. OSD/FCSC-82/002 , July 1982.

1983, Conversion Plan Outline. Report No. FCSC-83-002, Jan. 83.

1983, Software Conversion Lessons Learned. Volume I. FCSC-83/003, 1983

1984, Preparing Software Conversion Studies. OIT-FCSC-84/001, 1984.

1986, Conversion Cost Model (Version 4) . Cost Model handbook. May 30, 1986,
OSDIT/FSMC-86/005

National Bureau of Standards Publications:

1980, Conversion of Federal ADP Systems: A Tutorial.. August, 1980,
C13. 10:500-62.

1980, Data Base Directions — The Conversion Problem. September, 1980,
C13. 10:500-64.

♦

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No. 44 Pablo T. Spiller. "A Rational Choice Theory of Certiorari: Hierarchy. Strategy and Decision Costs at the Courts"
Working Paper #91-0110

No. 45 Pablo T. Spiller. "Agency Discretion Under Judicial Review" Working Paper #91-0111

No. 46 Charles D. Kolstad and Michelle H.L. Turnovsky. "Production with Quality Differentiated Inputs" Working Paper #91-
0118

No. 47 Pablo T. Spiller and Santiago Urbiztondo. "Political Appointees vs. Career Civil Servants: A Multiple Principals
Theory of Political Bureaucracies" Working Paper #91-0129

No. 48 Shane M. Greenstein. "Lock-In and the Costs of Switching Mainframe Computer Vendors: What Do Buyers See?" Working
Paper #91-0133

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