Page 48 - DMGT505_MANAGEMENT_INFORMATION_SYSTEM

Unit 3: IT Impacts

3.1 Economic Organizational and Behavioural Impacts Notes

3.1.1 Economic Impacts

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 cost. 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 fort.

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. A principle (owner) employs “agents” (employees) to perform
work on his or her behalf. However agents need constant supervision and management, because
they otherwise will tend to pursue their own interests rather than those of the owners.

Notes As firms grow in size and scope, agency costs or coordination cost rise, because
owners must expend more and more effort supervising and managing employee.

3.1.2 Organizational and Behavioral Theories

Behavioral researchers have theorized that information technology could change the hierarchy
of decision making in organizations by lowering the costs of information acquisition and
broadening the distribution of information. Information technology could bring information
directly from operating units to senior managers, thereby eliminating middle managers and
their clerical support workers. Alternatively, information technology could distribute
information directly to lower- level workers, who could then make their own decisions based
on their own knowledge and information without any management intervention.

Figure 3.1: The Agency Cost Theory of the Impact of Informa-
tion Technology on the Organization

Task

Technology People

Structure

As firms grow in size and complexity, traditionally they experience rising agency costs. IT shifts
the agency cost curve down and to the right, allowing firms to increase size while lowering
agency costs.

Implementing information systems has consequences for task arrangements, structures, and
people.

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