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(originally published by Booz & Company)

How Information and Communication Technologies Affect Decision Making

Wider access to databases pushes decisions down the org chart. E-mail, Wi-Fi, and smartphones tend to push them up.

Title: The Distinct Effects of Information Technology and Communication Technology on Firm Organization

Authors: Nicholas Bloom (Stanford University), Luis Garicano (London School of Economics), Raffaella Sadun (Harvard University), and John Van Reenen (London School of Economics)

Publisher: Harvard Business School, Working Paper No. 11-023

Date Published: September 2010

Where on the corporate ladder are decisions being made? It depends, in part, on what kind of technology is being used, according to this paper. As data storage and processing costs have come down, the information in databases has become easier for employees to access. At the same time, the rapid spread of e-mail, wireless technology, and mobile phones has made it easier for employees to communicate. The authors of this study find that information-based software like databases moves decisions further down the corporate hierarchy, whereas communication technologies — such as e-mail and mobile phones — drive decisions toward the top.

The researchers analyzed data about organizational structure, collected in 2006 by the London School of Economics, on more than 1,000 firms in France, Germany, Italy, Poland, Portugal, Sweden, the United Kingdom, and the United States. As part of the study, hundreds of 45-minute interviews were conducted with plant managers in an effort to gauge the autonomy of supervisors and their workers. The researchers then compared this data against information from the multinational firm Harte-Hanks Inc., which collects detailed descriptions of corporate use of hardware and software systems. This allowed the authors to examine, for the first time, connections between firms’ organizational structure and the information and communication technologies they employ.

The authors looked at organizational decisions involving non-production issues (investments, hiring, and pricing, for example) as well as those affecting the factory floor, from the allocation of resources to the pace of production. Many of these decisions can be made by either corporate or local managers. But the researchers found that the advent of enterprise resource planning (ERP) software — which tracks production, energy use, sales, inventories, and human resources, among other things — dramatically boosted the availability of information to local managers, which in turn lessened their need to consult with HQ. Similarly, on the factory floor, the emergence of computer-aided design (CAD) technology, along with ERP, means that workers can solve design and production problems without the input of their superiors.

But if these information-based technologies put more responsibility on lower-level employees, the rise of new communication systems has had the opposite effect, the researchers found. The spread of e-mail, company intranets, and multifunctional smartphones has made corporate managers more accessible than ever before.

The researchers conclude that companies should carefully consider how these kinds of technologies are used, in light of where in the corporate structure decisions should be made. For example, giving plant managers the authority to invest in new equipment requires training those managers to better understand financial decision making and cash flows. If acquiring this knowledge is too expensive or time-consuming, corporate headquarters can step in and make the call. But this, too, has a price, by making it necessary to install more sophisticated — and more expensive — communication systems to connect different levels of the hierarchy. In modern business communication, firms must answer the question, Are we better served if our employees take responsibility or ask for direction?

Bottom Line:
Less-expensive information and communication technologies have changed where decisions are made on the corporate ladder. Access to databases and advanced software allows lower-level employees to act with more autonomy, but the spread of e-mail and mobile phones means supervisors can be consulted with greater ease than ever before. When setting up their technology and communication systems, companies should carefully consider where on the chain of command decisions should be made.




How Information and Communication Technologies Affect Decision Making