Trade-offs in Organizational Architecture: Information Systems, Incentives, and Process Design
Abraham Seidmann and Arun Sundararajan
Last revised:November 2002
Abstract:
We present a framework and a set of analytical models, which study functional and process-oriented organizational design. Drawing from theories of information technology and organizational design, queuing theory, and principal-agent theory, we model simultaneous trade-offs between different types of information systems, fixed and performance based incentives schemes, and variations in the design of work systems. The effects of crucial parameters such as knowledge intensity, information asymmetry, technology responsiveness, mass customization, and activity rates are also studied.
We demonstrate that process-oriented organization is desirable when processes are large, when customers demand significant customization, and when the nature of work is such that information asymmetry is naturally high. However, functional organization is optimal in a number of contexts, particularly when work is knowledge intensive, technology responsiveness is low, when there is high variation in activity rates, and when processes in firms have few steps. While typical changes in work design are complemented by changes in either information technology or employee incentive schemes, we show that the simultaneous introduction of information systems and performance-based pay is not necessarily optimal; rather than being complementary, these changes are substitutable drivers of improved organizational performance. Our framework and results also provide significant context-specific managerial insight into the value of technologies such as intranets, knowledge management systems, expert systems and workflow management systems. In addition, we provide a general formulation and solution technique that will enable the modeling of hitherto intractable problems involving a principal-agent problem in a tandem network of queues.
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