What is the impact of information systems on organizations

Information systems have become integral, online, interactive tools deeply i nvolved in the minute-to-minute operations and decision making of large or­ganizations. Over the past decade, information systems have fundamentally altered the economics of organizations and greatly increased the possibilities for organizing work. Theories and concepts from economics and sociology help us understand the changes brought about by IT.

1. Economic Impacts

From the point of view of economics, IT changes both the relative costs of capital and the costs of information. Information systems technology can be viewed as a factor of production that can be substituted for traditional capital and labor. As the cost of information technology decreases, it is substituted for labor, which historically has been a rising cost. Hence, information technology should result in a decline in the number of middle managers and clerical work­ers as information technology substitutes for their labor.

As the cost of information technology decreases, it also substitutes for other forms of capital such as buildings and machinery, which remain rela­tively expensive. Hence, over time we should expect managers to increase their investments in IT because of its declining cost relative to other capital investments.

IT also affects the cost and quality of information and changes the econom­ics of information. Information technology helps firms contract in size because it can reduce transaction costs—the costs incurred when a firm buys on the marketplace what it cannot make itself. According to transaction cost theory, firms and individuals seek to economize on transaction costs, much as they do on production costs. Using markets is expensive because of costs such as lo­cating and communicating with distant suppliers, monitoring contract compli­ance, buying insurance, obtaining information on products, and so forth (Coase, 1937; Williamson, 1985). Traditionally, firms have tried to reduce transaction costs through vertical integration, by getting bigger, hiring more employees, and buying their own suppliers and distributors, as both General Motors and Ford used to do.

Information technology, especially the use of networks, can help firms lower the cost of market participation (transaction costs), making it worthwhile for firms to contract with external suppliers instead of using internal sources. As a re­sult, firms can shrink in size (numbers of employees) because it is far less expen­sive to outsource work to a competitive marketplace rather than hire employees.

For instance, by using computer links to external suppliers, automakers such as Chrysler, Toyota, and Honda can achieve economies by obtaining more than 70 percent of their parts from the outside. Information systems make it possible for companies such as Apple Cisco Systems and Dell Inc. to outsource assembly of iPhones to contract manufacturers such as Foxconn instead of making their products themselves.

As transaction costs decrease, firm size (the number of employees) should shrink because it becomes easier and cheaper for the firm to contract for the pur­chase of goods and services in the marketplace rather than to make the product or offer the service itself. Firm size can stay constant or contract even as the com­pany increases its revenues. For example, when Eastman Chemical Company split off from Kodak in 1994, it had $3.3 billion in revenue and 24,000 full-time em­ployees. In 2017, it generated $9.5 billion in revenue with only 14,500 employees.

Information technology also can reduce internal management costs. According to agency theory, the firm is viewed as a “nexus of contracts” among self-interested individuals rather than as a unified, profit-maximizing entity (Jensen and Meckling, 1976). A principal (owner) employs “agents” (em­ployees) to perform work on his or her behalf. However, agents need constant supervision and management; otherwise, they will tend to pursue their own in­terests rather than those of the owners. As firms grow in size and scope, agency costs or coordination costs rise because owners must expend more and more effort supervising and managing employees.

Information technology, by reducing the costs of acquiring and analyzing information, permits organizations to reduce agency costs because it becomes easier for managers to oversee a greater number of employees. By reducing overall management costs, information technology enables firms to increase revenues while shrinking the number of middle managers and clerical work­ers. We have seen examples in earlier chapters where information technology expanded the power and scope of small organizations by enabling them to per­form coordinated activities such as processing orders or keeping track of inven­tory with very few clerks and managers.

Because IT reduces both agency and transaction costs for firms, we should expect firm size to shrink over time as more capital is invested in IT. Firms should have fewer managers, and we expect to see revenue per employee in­crease over time.

2. Organizational and Behavioral Impacts

Theories based in the sociology of complex organizations also provide some understanding about how and why firms change with the implementation of new IT applications.

2.1. IT Flattens Organizations

Large, bureaucratic organizations, which primarily developed before the com­puter age, are often inefficient, slow to change, and less competitive than newly created organizations. Some of these large organizations have downsized, reduc­ing the number of employees and the number of levels in their organizational hierarchies.

Behavioral researchers have theorized that information technology facili­tates flattening of hierarchies by broadening the distribution of information to empower lower-level employees and increase management efficiency (see Figure 3.6). IT pushes decision-making rights lower in the organization be­cause lower-level employees receive the information they need to make de­cisions without supervision. (This empowerment is also possible because of higher educational levels among the workforce, which give employees more capabilities to make intelligent decisions.) Because managers now receive so much more accurate information on time, they become much faster at making decisions, so fewer managers are required. Management costs de­cline as a percentage of revenues, and the hierarchy becomes much more efficient.

These changes mean that the management span of control has also been broadened, enabling high-level managers to manage and control more workers spread over greater distances. Many companies have eliminated thousands of middle managers as a result of these changes.

2.2. Postindustrial Organizations

Postindustrial theories based more on history and sociology than economics also support the notion that IT should flatten hierarchies. In postindustrial societies, authority increasingly relies on knowledge and competence and not merely on formal positions. Hence, the shape of organizations flattens because profes­sional workers tend to be self-managing, and decision making should become more decentralized as knowledge and information become more widespread throughout the firm.

Information technology may encourage task force-networked organizations in which groups of professionals come together-face-to-face or electronically— for short periods of time to accomplish a specific task (e.g., designing a new au­tomobile); once the task is accomplished, the individuals join other task forces. The global consulting service Accenture is an example. Many of its 373,000 em­ployees move from location to location to work on projects at client locations in more than 56 different countries.

Who makes sure that self-managed teams do not head off in the wrong direc­tion? Who decides which person works on which team and for how long? How can managers evaluate the performance of someone who is constantly rotating from team to team? How do people know where their careers are headed? New approaches for evaluating, organizing, and informing workers are required, and not all companies can make virtual work effective.

2.3. Understanding Organizational Resistance to Change

Information systems inevitably become bound up in organizational poli­tics because they influence access to a key resource—namely, information. Information systems can affect who does what to whom, when, where, and how in an organization. Many new information systems require changes in per­sonal, individual routines that can be painful for those involved and require retraining and additional effort that may or may not be compensated. Because information systems potentially change an organization’s structure, culture, business processes, and strategy, there is often considerable resistance to them when they are introduced.

There are several ways to visualize organizational resistance. Research on or­ganizational resistance to innovation suggests that four factors are paramount: the nature of the IT innovation, the organization’s structure, the culture of peo­ple in the organization, and the tasks affected by the innovation (see Figure 3.7).

Here, changes in technology are absorbed, interpreted, deflected, and defeated by organizational task arrangements, structures, and people. In this model, the only way to bring about change is to change the technology, tasks, structure, and people simultaneously. Other authors have spoken about the need to “un­freeze” organizations before introducing an innovation, quickly implement­ing it, and “refreezing” or institutionalizing the change (Kolb and Frohman, 1970).

Because organizational resistance to change is so powerful, many informa­tion technology investments flounder and do not increase productivity. Indeed, research on project implementation failures demonstrates that the most com­mon reason for failure of large projects to reach their objectives is not the fail­ure of the technology but organizational and political resistance to change. Therefore, as a manager involved in future IT investments, your ability to work with people and organizations is just as important as your technical awareness and knowledge.

3. The Internet and Organizations

The Internet, especially the World Wide Web, has an important impact on the relationships between many firms and external entities and even on the organi­zation of business processes inside a firm. The Internet increases the accessibil­ity, storage, and distribution of information and knowledge for organizations. In essence, the Internet is capable of dramatically lowering the transaction and agency costs facing most organizations. For instance, a global sales force can receive nearly instant product price information updates using the web or in­structions from management sent by e-mail or text messaging on smartphones or mobile laptops. Vendors of some large retailers can access retailers’ internal websites directly to find up-to-the-minute sales information and to initiate re­plenishment orders instantly.

Businesses are rapidly rebuilding some of their key business processes based on Internet technology and making this technology a key component of their IT infrastructures. If prior networking is any guide, one result will be simpler business processes, fewer employees, and flatter organizations than in the past.

4. Implications for the Design and Understanding of Information Systems

To deliver genuine benefits, information systems must be built with a clear un­derstanding of the organization in which they will be used. In our experience, the central organizational factors to consider when planning a new system are the following:

  • The environment in which the organization must function
  • The structure of the organization: hierarchy, specialization, routines, and business processes
  • The organization’s culture and politics
  • The type of organization and its style of leadership
  • The principal interest groups affected by the system and the attitudes of workers who will be using the system
  • The kinds of tasks, decisions, and business processes that the information system is designed to assist

Source: Laudon Kenneth C., Laudon Jane Price (2020), Management Information Systems: Managing the Digital Firm, Pearson; 16th edition.

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