Department of Informatics To Be Smart or To Be Alone? Exploring return on investment and problems in smart city Master thesis 15 HEC, course INFM10 in Information Systems Presented in [June, 2016] Authors: Alexander Regander David Månsson Supervisor: Paul Pierce Examiners: Benjamin Weaver Miranda Kajtazi To Be Smart or To Be Alone? Månsson and Regander To Be Smart or To Be Alone? Exploring return on investments and problems in smart city Authors: Alexander Regander and David Månsson Publisher: Dept. of Informatics, Lund University School of Economics and Management. Document: Master Thesis Number of pages: 232 Keywords: Smart city, collaboration, return on investments, problems, challenges, infor- mation systems, sustainability, Europe. Abstract: The European Nations foresees a growing population and a trending urbanization which, pose significant health, environmental and social concerns. Municipal decision makers attempt to leverage the smart city concept as a means to maintain the prepossessed living standard in the city because they cannot manage the radical change themselves. However, the smart city con- cept force municipalities outside their comfort zone and into new collaborations between in- ternal organizations as well as external partnerships with universities, citizen and industries. The new collaborations are riddled with problems that hamper smart city advancements and convolute return on investment. This thesis attempts to further the discussion on return on investment and expose the most predominant problems in smart city initiatives from the mu- nicipal decision makers’ perspective in mid-sized European cities. – 1 – To Be Smart or To Be Alone? Månsson and Regander Content 1 Introduction ......................................................................................................................... 7 1.1 Purpose ........................................................................................................................ 8 1.2 Research Questions ...................................................................................................... 8 1.3 Disposition ................................................................................................................... 9 1.4 Delimitation ................................................................................................................. 9 2 Method .............................................................................................................................. 10 2.1 Pre-study .................................................................................................................... 10 2.2 Research Design ........................................................................................................ 11 2.2.1 Methodological considerations .......................................................................... 12 2.3 Selecting Theoretical Model ...................................................................................... 13 2.4 Selecting Literature: Return on Investment ............................................................... 16 2.5 Selecting Literature: Problems and Challenges with Smart City .............................. 19 2.6 Developing the Problem Framework ......................................................................... 22 2.7 Data Collection .......................................................................................................... 24 2.8 The Interview Guide .................................................................................................. 25 2.9 The Interviews ........................................................................................................... 26 2.10 Target Sample ............................................................................................................ 27 2.11 Analytical Method ..................................................................................................... 28 2.12 Research Quality ........................................................................................................ 31 2.13 Research Ethics .......................................................................................................... 32 3 Literature Review .............................................................................................................. 33 3.1 Smart City .................................................................................................................. 33 3.2 Conceptualizing Smart City ....................................................................................... 36 3.3 Return on Investment ................................................................................................. 38 3.3.1 Economical sustainability .................................................................................. 39 3.3.2 Environmental sustainability .............................................................................. 39 3.3.3 Social sustainability ............................................................................................ 40 3.3.4 One rock two birds ............................................................................................. 41 3.3.5 The returns of a smart city are concealed ........................................................... 41 3.4 Problems with Smart City .......................................................................................... 42 3.4.1 The technical problem domain ........................................................................... 42 3.4.2 The non-technical problem domain .................................................................... 44 4 Empirical Findings ............................................................................................................ 47 4.1 Smart City Perspective .............................................................................................. 47 4.2 Return on Investment ................................................................................................. 49 4.2.1 Economic sustainability ..................................................................................... 50 – 2 – To Be Smart or To Be Alone? Månsson and Regander 4.2.2 Environmental sustainability .............................................................................. 52 4.2.3 Social sustainability ............................................................................................ 54 4.2.4 Other impacts ..................................................................................................... 55 4.3 Measuring Return on Investment .............................................................................. 56 4.4 Problems .................................................................................................................... 58 4.4.1 Collaboration ...................................................................................................... 58 4.4.2 Financial ............................................................................................................. 63 4.4.3 Governance ......................................................................................................... 64 4.4.4 Contextual .......................................................................................................... 65 4.4.5 Political ............................................................................................................... 66 4.4.6 Security ............................................................................................................... 67 4.4.7 Interoperability ................................................................................................... 68 4.4.8 Privacy ................................................................................................................ 69 4.4.9 Newfound problems ........................................................................................... 70 4.5 Empirics summarization ............................................................................................ 73 5 Discussion ......................................................................................................................... 75 5.1 Return on Investment ................................................................................................. 75 5.2 Problems .................................................................................................................... 76 5.2.1 Collaboration ...................................................................................................... 76 5.2.2 Financial ............................................................................................................. 77 5.2.3 Governance ......................................................................................................... 78 5.2.4 Contextual .......................................................................................................... 79 5.2.5 Political ............................................................................................................... 80 5.2.6 Security ............................................................................................................... 81 5.2.7 Interoperability ................................................................................................... 81 5.2.8 Privacy ................................................................................................................ 82 5.2.9 New problem ...................................................................................................... 83 5.2.10 Iteration of the Problem Framework .................................................................. 84 6 Conclusion ........................................................................................................................ 85 6.1.1 Limitations ......................................................................................................... 87 6.1.2 Recommendations for further research .............................................................. 88 Appendix 1: Exhibits ................................................................................................................ 89 Appendix 2: Tables .................................................................................................................. 92 Appendix 3: Interview Guide ................................................................................................... 95 References ................................................................................................................................ 99 – 3 – To Be Smart or To Be Alone? Månsson and Regander – 4 – To Be Smart or To Be Alone? Månsson and Regander Figures Figure 1. Research design decisions (Recker, 2012) ..................................................... 13 Figure 2. Illustration of the segmentation processes to reach the unit of analysis .... 28 Figure 3. Coding of transcription text ........................................................................... 30 Figure 4. Mapping of codes to problem framework .................................................... 30 Figure 5. Simplified illustration of the interpretation of smart city in this paper .... 34 – 5 – To Be Smart or To Be Alone? Månsson and Regander Tables Table 1. Top 10 Information Systems Theories 2014 ................................................... 15 Table 2. Literature Review: Returns on Smart City Investments .............................. 18 Table 3. Problems Related to Smart City Development .............................................. 21 Table 4. The Problem Framework ................................................................................. 23 Table 5. Extraction of the Problem Framework .......................................................... 26 Table 6. Extraction of the Interview Guide .................................................................. 26 Table 7. Consolidation of Interviewees ......................................................................... 47 Table 8. ROI - Consolidation of Empirical Data .......................................................... 50 Table 9. Consolidation of Empirical Data ..................................................................... 59 Table 10. Extract of: New Problems - Consolidation of Empirical Data ................... 71 Table 11. New Problems - Consolidation of Empirical Data ....................................... 94 Table 12. Interview Guide Overarching Questions ...................................................... 95 Table 13. New Iteration of the Problem Framework ................................................... 84 – 6 – To Be Smart or To Be Alone? Månsson and Regander 1 Introduction The European Nations declare that approximately half of the world’s population is living in cities and this number is anticipated to continuously grow to sixty percentages in 2030 (Vlacheas et al., 2013). This trending urbanization already poses significant health and envi- ronmental concerns for urban living such as: waste management, air pollution, traffic conges- tions and scarcity of resources. Additionally, aging technical and physical city infrastructure inadequately supports the anticipated growth in population. Observed from a competitive lens, cities with increasing urbanization are advised to redevelop their infrastructure to compete globally. Competitive cities produce a desirable place for edu- cated and skilled citizens to live and work as well as attracting growing industries to leverage continued external investment and a robust tax base. (Chourabi et al., 2012). Harrison et al. (2010) argue that sustained or enhanced quality of life can be achieved through advances in city services and resources which are fundamental in competition between cities. However, these challenges necessitate that municipalities do more with less due to limited financial-, environmental- and human resources (Naphade et al., 2011). These challenges prompt cities across the globe to study smarter ways to manage them while striving towards more sustainable and liveable cities leveraged by information communication systems (ICT), these cities are commonly labelled smart city (Chourabi et al., 2012). The integration between thirty different city agencies and coherent information systems allowed Rio de Janeiro to ana- lyse historical data and pre-emptively prevent car accidents, traffic congestions and keeping the city operational and safe during environmental hazards (Singer, 2012). In another example, Bloomberg reports that “The Edge” was recently finalized in the Nether- lands and is praised as the smartest building in the world (Randall, 2015). The building facili- tates 28,000 sensors all connected to a central dashboard which allows The Edge to track en- ergy usage, lighting and heating to suit individuals’ personal preferences. Abundant amounts of energy is generated through solar panels, water systems store hot water during summers to use during winters and entire sections of the building are shut off during less busy days which yield a sustainability score above 98 percentages according to British rating agency (Randall, 2015). The opportunities and incentives to leverage a smart city in order to combat challenges with increased urbanization are evident. Less evident is the anticipated return of investment (ROI) in smart city. ROI for smart cities concerns multiple levels in the short term, such as opera- tional efficiency, increased productivity or energy savings (Harrison et al., 2010). In a longer time span, cities may value their brand reputation, strategic positioning, impact on society and public safety (ibid). However, the smart city concept is complex and still emerging (Chourabi et al., 2012) which arguably complicates accurate calculations of return on investment. Large volumes of invest- ments required in concert with long term delays to maturity constitutes two out of many barri- ers to financing smart cities, according to recent research conducted by the European Com- mission (Ferrer et al., 2013). Furthermore, municipal leaders experience difficulties in map- – 7 – To Be Smart or To Be Alone? Månsson and Regander ping quantifiable factors to measure, and the limited demonstrators commonly lack the scala- bility to have actual impacts on the economy (Cosgrave et al., 2013). Manville et al. (2014) accentuates that it is especially difficult to monetize societal oriented initiatives such as smart city which may explain the difficulties in measuring the return on investment. The desirable returns on investments range from cost reducing incentives to public safety, which convolutes prioritizations for transforming cities and it all comes with a hefty price tag that underscores the importance of allocating scarce resources accurately. It could also be argued that the difficulties in discussing or measuring return on investment as expressed in literature accentuates the need for further research. Moreover, smart city initiatives are riddled with problems and challenges to overcome in or- der to reap the benefits of smart city investments. One of the predominant challenges is how to achieve a strategic alignment between the key stakeholders of smart city development; people, technology and institutions (Nam and Pardo, 2011a). Problems in smart city initiatives range from technical to governance to managerial challenges (Ojo et al., 2014). Issues such as stakeholder and citizen participation (Ibid), interoperability of systems (Nam and Pardo, 2011b) as well as privacy and security concerns (Kitchin, 2014a) are common dif- ficulties. These problems debatably convolute and hinder cost efficient ROI which are im- portant considerations for all smart city stakeholders and holds especially true for governmen- tal institutions, such as the municipality, that has to allocate scarce resources in smarter ways in order to tackle the growing urbanization. 1.1 Purpose The purpose of this study is to advance the discussion on return on investment in addition to exposing the most predominant problems with smart city initiatives from the municipal per- spective in mid-sized European cities. To support this discussion, a brief review of the under- standing behind the concept smart city help shape the foundation to further debate return on investment and experienced problems. The study may serve as fundament for primarily mu- nicipal, but also other smart city stakeholders, to make more accurate decisions to combat future problems in pursuit of desirable impacts. 1.2 Research Questions  What return on investment do municipal decision makers hope to achieve with smart city?  What are the most predominant challenges in a smart city from the municipal decision maker’s perspective? – 8 – To Be Smart or To Be Alone? Månsson and Regander 1.3 Disposition The thesis is divided into four overarching chapters. This initial chapter contains introductory elements to project the problem area and accentuate the need for further investigation regard- ing return on investments and challenges with smart city initiatives. Henceforth follows the chapter of methodologies used in conducting this research. The methodology chapter attempts to preserve a high degree of traceability and covers the research approach and an in-depth argumentation of selected literature which concludes with a theoretical model based on 63 studied articles. The following chapter reviews the targeted literature sample regarding return on investment and problems in smart city. The fourth chapter syntheses the empirical data which is subse- quently analysed and contrasted with the literature review. The thesis concludes with a reflec- tive discussion of noteworthy findings which are ultimately summarized in a compact form. 1.4 Delimitation This thesis attempts to determine the level of returns which arguably serves as an indicator for priority, although, verifying bankability and cost-benefit ratio with respect to the real needs extends past the scope of this paper. This research is not trying to associate a particular set of problems in search of a specific re- turn on investment. For example, this thesis will not claim that interoperability in between information systems is the most predominant challenge when striving towards societal sus- tainability. – 9 –