01 Nov 2010  Research & Ideas

How IT Shapes Top-Down and Bottom-Up Decision Making

What determines whether decisions happen on the bottom, middle, or top rung of the corporate ladder? New research from professor Raffaella Sadun finds that the answer often lies in the technology that a company deploys. Key concepts include:

  • Enterprise Resource Planning software is a decentralizing technology: It provides information that enables lower-level managers to make more decisions without consulting their superiors.
  • By the same token, Computer-Assisted Design and Computer-Assisted Manufacturing software creates a situation in which the plant worker needs less access to superiors in order to make a decision.
  • The better the data network, the easier it is for workers to lean on superiors and rely on them to make decisions. It's also easier for executives to micromanage and keep all the decisions in the corporate office.
  • Trust is also a key factor in determining whether decisions are centralized at headquarters or decentralized at the local level. Research finds that the average level of trust of a multinational's home country tends to influence the level of decentralization in that company.

 

What determines whether decisions happen on the bottom, middle, or top rung of the corporate ladder? New research offers a surprising conclusion: The answer often lies in the technology that a company uses.

Information-based systems, such as Enterprise Resource Planning (ERP) software, will push decision-making toward the bottom of the corporate ladder. Communication systems, such as e-mail and instant messaging applications, will push the decision-making process toward the top.

And that means developing an IT strategy isn't all about deploying the best technology, says Raffaella Sadun, an assistant professor of strategy at Harvard Business School.

"If a CEO can trust his senior managers, he will be more willing to decentralize decision-making"

"The bottom line is that whoever is in charge of the acquisitions and the IT strategy, they obviously cannot just think about the technology side, they also have to think about the organizational side," she says. "Traditionally, technology is thought of as a tool that enables empowerment, but that's not always the case."

Sadun discusses the issue in "The Distinct Effects of Information Technology and Communication Technology on Firm Organization," a paper she cowrote with Nicholas Bloom of Stanford University and Luis Garicano and John Van Reenen of the Centre for Economic Performance, London School of Economics.

"Technologies that make the acquisition of information easier at the lower level of the hierarchy are associated with a decentralization of the decision-making process," Sadun says. "On the other hand, we have the communication technologies, which actually do exactly the opposite."

IT's different roles

Companies, however, often fail to consider the disparate roles of their software systems, let alone their effects on organizational behavior. Rather, they lump "information technology" into one amorphous idea—the "IT" department—which encompasses all the technology in the organization.

"Technology tends to be dumped into a single category," Sadun says. "The reality is that IT is a huge, heterogeneous set of technologies."

Similarly, when examining issues such as organization and productivity, industry and academic studies historically tend to treat information and communication technologies as "an aggregate homogeneous capital stock," according to the paper. To that end, Sadun and her fellow researchers set out to show how—and why—managers need to consider the very different organizational effects of communication and information technologies.

"This difference matters not just for firms' organization and productivity, but also in the labor market, as information access and communication technology changes can be expected to affect the wage distribution in opposite directions," their paper states.

The researchers looked at non-production decisions such as capital investment, new hires, and new product plans. Such decisions are either centralized near the top of the corporate ladder or decentralized and delegated to the top of a particular business unit. And the decision makers often depend on ERP software, which facilitates the dissemination of information throughout a large company, enabling detailed coordination among various operating units.

Next, they looked at production decisions, which involve figuring out the tasks necessary to meet the goals and deciding how to pace them. These decisions are generally the bailiwick of either a factory floor worker or a supervisor. For those cases, the researchers studied the role of Computer-Aided Design (CAD) and Computer-Aided Manufacturing (CAM) software in decision-making.

In both instances, the researchers hypothesized that the information software would lead to decentralized decision-making. Because the software eases access to the information necessary to make important choices, both the ERP and CAD systems would increase the likelihood that plant managers and production workers would make decisions and act on them without having to consult an executive at headquarters.

On the other hand, the team hypothesized that a rise in leased lines and corporate intranets would lead to a rise in centralized decision-making at the top of the corporate ladder.

Enabling micromanagement

In the past, communication often depended on faxes, overnight delivery services, "snail mail," or site visits. Even with phone calls, it was difficult for anyone at headquarters to make educated decisions and communicate them to branch offices. In those cases, it was natural to cede control of daily operations to a local manager.

With today's networking technologies, it's easier for top executives to keep a constant flow of communication with branch offices. However, the network may actually deter innovation. When technology makes it easier to communicate, erstwhile independent workers may find themselves pestering their bosses with e-mailed questions throughout the day. Micromanaging executives find themselves making all the decisions and constantly sending mandates down the corporate ladder.

"Whenever there is a reduction in the cost of transmitting information, it's easier for the person down in the hierarchy to communicate with the CEO," Sadun says. "And the CEO can monitor constantly what this person is doing and just give orders, rather than rely on the judgment of those below."

The research team evaluated data from some 1,000 manufacturing firms in eight countries, including detailed technology rollout histories and surveys that gauged the relative decisional autonomy of plant managers and floor workers. (In gauging the factors that determine whether a firm adopts any given technology, the researchers considered geographic variables that might affect the cost of acquiring the technology—the firm's distance from the Walldorf, Germany, headquarters of ERP market leader SAP, for instance, and the fact that telecom industry regulations vary from country to country, which means networking prices vary, too.)

The findings were consistently parallel with the hypotheses: An increase in the penetration of ERP systems led to a substantial increase in plant manager autonomy. A CAD/CAM deployment raised the likelihood of floor worker autonomy. But communication technologies served to lower autonomy, meaning more decisions happened at the corporate level.

"I was reassured and surprised at the same time that these results were holding across countries and industries," Sadun says.

The importance of trust

That said, Sadun notes that technology is hardly the only factor that determines whether a firm allows decision-making both up and down the corporate ladder. Another major factor lies in cultural differences across and within countries. In a separate study, Sadun found that otherwise similar companies showed huge differences in decision-making tactics, according to their geographical location. In the paper "The Organization of Firms across Countries," coauthored with Bloom and Van Reenen, she documents that firms located in areas with high levels of trust tend to be systematically more decentralized than those in areas with low levels of trust.

Sweden and Portugal, for example, seem to be on opposite ends of the trust spectrum. "There's huge cross country heterogeneity in the way even apparently similar firms decide how to allocate decision rights within the firm," Sadun says. "Take Swedish manufacturing companies, for example. You see that they are completely decentralized, and the middle manager is basically a mini-CEO with loads of decision-making power. And then you take a firm that produces exactly the same good, but instead of in Sweden, it's in Portugal. And there, the middle manager doesn't decide anything and is completely dependent on the authority of the CEO.

"In our research," she continues, "we argue that different levels of trust are a key determinant of these differences. If a CEO can trust his senior managers, he will be more willing to decentralize decision-making. For example, there might be a lower concern about the fact that managers will use their power to pursue their personal interests instead of those of the firm."

About the author

Carmen Nobel is senior editor of HBS Working Knowledge.

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Comments

    • Amir Parssian
    • Professor, IE Business School

    I guess first and the foremost we need to make a clear distinction between information technology (IT) and information systems (IS) since they are not the same thing albeit used interchangeably. IT is merely concerned with technologies while IS is about people factor and their adoption and interaction with IT.

    Second, it may be more clear if we define what types of decisions we are considering here. Operations and line managers make tactical decisions while higher rank managers make strategic decisions. Although ERP systems are very useful to operations managers, they are less useful to middle and top rank managers who often use business intelligence (BI) systems to communicate and monitor the execution of their decisions.

    Third, the dependence of lower rank managers on their superiors is usually not a matter of what IT they use but rather the corporate culture they cultivate. I would hypothesis that with or without technologies in place these hierarchies function as they do now.

     
     
     
    • Heinz-Peter Sebregondi

    Over more than 30 years working for IT companies with headquarters outside Germany I experienced all phases: No fax and extremely expensive international phone calls over land lines only, some fax, some fax and some email, some fax and more email and some mobile phones up to today's 24/7 always on. I can clearly confirm the results of Prof. Sadun. There is much more micro-managing today which is mostly just waste. Still, there is an additional key element that often goes unnoticed: The product/service maturity life cycle. With the global commoditization and standardization of products and services you need more and more a military-like command and control organization: Some people plan and decide centrally and the field just executes locally and is monitored centrally again. On the other hand, when your business model is delivering locally highly customized high margin services such as the big System Integrators (SIs, e.g. Accenture etc.) do, you need decentralized decision making to get the best results. Maybe there is a cultural reason why SIs headquarterd in countries with a rigid top-down decision making are not among the globally leading SIs.

     
     
     
    • Anonymous

    Prof. Parssian brings up a interesting hypothesis about corporate culture driving the choices in information and communications technology.

    On several occassions, I've observed that family-owned or dominated enterprises in Asia are not willing to implement integrated systems. Instead, these families prefer to collate the information manually in order to get an overall view of how their companies are doing.

    Much of this behavior seems to emanate from the preference to keep the true picture of corporate performance only in the hands of a select family members.

     
     
     
    • Armin Pearn
    • Bees2B

    Why should bottom up decision making not also involve strategic decisions? Why should the CEO not focus mainly on establishing/strengthening the culture and the trust inside the company resulting in good decision making by her co-workers at the front line? Raffaella describes the big opportunity to shift a much higher percentage of decisions in an enterprise to bottom up decision making, which are - provided there is a strong shared culture and easy access to reliable information - faster and more effective. As companies learn to unlock the power of bottom up decision making I would expect a rather massive impact on hierarchie as suggested by Raffaella.

     
     
     
    • Heinz-Peter Sebregondi

    Legal aspects that have changed over the last 10 years in America also put a huge constraint on communication and decision making in public companies. Still 10 years ago every manager could very openly discuss in detail financial performance data and people didn't worry about information leagage to the public.

    But nowadays companies need to make sure that all investors get the same information at the same time. As a result only the Executive Committee has all data and publishes them internally and externally very cautiously and selectively from a PR perspective and how it could impact the share price. Particularly info about bad news and info outside your narrow silo is rare. As a result as a manager or employee you are wondering sometimes whether you really get all relevant performance data to do your job in the best interest of the company.

     
     
     
    • Alexander Marx
    • Mannheim Business School

    Having a decade of working experience formerly employed at the largest IT company in the world advising CIOs, I can only concur with Prof. Sadun. I would consider myself as still one of the "younger" generations that is able to grasp the sheer variety of communication tools, but for corporations this is a burden at times causing "jitter" up the reporting line. Information Filtering is, at times, very difficult and does not "scale" (here technical terms: too much information to process; at least for a human being). On the same line, especially in the areas of Business Software, like SAP, there has been a shift towards "accelerated" Business Intelligence, giving real-time information on a business. Again, here the communication, or better, representation of the data is critical for corporate managers to benefit from. Real-time business intelligence could (in the future: will) govern a business' success, thus cannot be ignored. It is going to be interesting though how company will adopt to these challenges in the next decade. My prediction is that a good IT strategy, influenced by an excellent CIO, can bring an enterprise to the next level of business success. Combination of Technology and business is the key.

     
     
     
    • Grenville Lannon
    • University of Nottingham Business School

    This looks like another exploration of the 'determininsm' debate - does the technology determine the nature of its use, or does the organisation determine the way in which technology is used? One could equally argue that corporations with particular decision making cultures adopt information technologies which reaffirm those cultural norms. I'm personally not convinced that technology acts so independently of pre-existing organisational factors that it creates these decision-making patterns itself. Interesting piece of research though!

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    IT is a decision making enabler in view of its role to employ techniques leading to quicker dissemination of information required for decision making. Chief Information Officer (CIO) plays key role and helps in making available the strategically important information to the decision makers. For this, it is necessary to have technology suited to the operational requirements of the company. We must keep pace with the improved technologies in the market and deploy the latest versions particularly by those involved in taking decisions on matters of crucial concern. All decision making cannot be top-down only though most would be these. Depending on an action, IT resources appropriate to it need be provided.

     
     
     
    • Narendar Singh
    • Professor and Consultant, Freelancer

    The environment for business has undergone a chnage world over especially in India. The legal aspect and necessity has compelled industry and corpote world to provide information to all share holders at the same time. The denial of information leads to depriviation of one of the staek holders. This has a very negative impact on the company. However, technology provides edge. Hence the IT. The IT use is determined by necessity and vice a versa. Information with stake holders provides the necessary levage to the company. Hence, here the technology is being used by comapny to levarage its image.

     
     
     
    • Dr Nikhil Zaveri
    • Director, SEMCOM Institute, Vallabh Vidyanagar, Gujarat, India

    IT, now, cannot be viewed in isolation. The entire firms's decision-making pattern will decide the flow of information. Firms need to distinguish between 'Tactical' vs 'Strategic' decisions. The more autonomy to Middle and lower levels for decision-making, the more time to the Top for planning. Hence, diligent use of IT is imperative.

     
     
     
    • Wahib Farah
    • Group Executive Director, Cedarcom Group

    I totally agree with you regarding the importance of trust in any decision making process whereby the most effective approach is using decentralized decisions... This trust will empower middle management and let them take daring and calculated risks decisions... Any CEO should promote, trust and nurture other potential talented leaders within his own company...

     
     
     
    • Martin Cawthorne-Nugent
    • Consultant, Independent

    Isn't this about two dimensions? 1) Access to information whose structure is appropriate to the decisions to be made and the timescales available. 2) Cultural encouragement to take decisions where the information is structured appropriately for the decision that is to be made.

    The technology aspect influences the sheer volume of information and the speed with which it can be structured. The traditional "information systems" view focuses on pre-defined models and rules to structure information so that the technology can deliver capability in the time available - ERP, CAD, CAM. More recent developments shift much of the modelling and rules closer to run time - internet search engines for example or complex event processors that fire rules as data streams in (rather than after it has been structured and stored).

    Perhaps this is as much about the definitions of structured/unstructured information and decision making. The really interesting bit is the impact of social networking (Rafaella's instant messaging?) and the capability to distribute unstructured information independent of the organizational hierarchy and user access permissions (see "HBS Faculty on 2010's Biggest Business Developments" elsewhere http://hbswk.hbs.edu/item/6596.html ).

    If middle managers have no role in structuring information, then decision-making will have to gravitate either to the top or to the bottom of the organization.

     
     
     
    • Nalin Kumar
    • Program Manager, Microsoft

    Having worked in two major corporates (Microsoft and Infosys), I feel top-rung ladder provides the framework and the bottom line is left with utmost freedom to unleash the full potential within defined framework.

    I believe top-down decision making is neccessary if an enterprise is looking for new business development. Also, it is needed where the business is mature for realizing full potential even if one applies the simple principle of PDCA (Plan, Do Check, Act). At the same time, fostering an environment of bottom-up decision making is neccessary to bring the best out of the talent pool employed and keeping them motivated.

    Hence, I would rather suggest best mix of both decision making styles is the key. Again the best mix (described above) can depend on factors such as industry maturity, cultural differences and employee's skill set.

     
     
     
    • Anonymous

    I can never get enough information. I'm not certain how we got where we are without the IT skills over the last 25 years. Nalin Kumar is correct a balance of information and knowledge is the best mix.

     
     
     
    • Ricky Formoso
    • Management consultant, ProModel - Philippines

    Simulation-based enterprise wide decision making is increasingly becoming more and more popular, even in emerging economies like the Philippines.

       But the degree of its usefulness however is dictated to the extent that frontline managers, who have the better information of a company's available resources, are being drawn into the dynamics of an enterprise'  strategic decision-making process. And this is essential in today's business environment considering intensified competition with globalization.
    
       Unfortunately, this is where the disconnect begins: strategic managers' time frame, by the nature of their functions, are inherently long-term (capacity projection, etc). Frontline executives, for their part are on the shorter-term (production schedules, etc). 
    
       Blending together the two different realities is therefore the most desirable scenario. And the success rate is obviously higher when the two "worlds" come together in the planning table. But we know this is impossible when the executive office is miles away from the factory and distribution offices.
    
        Truly, this is where technology differentiates between the market leader and the market follower. The fast-response organizations, and the laggards. And the market has the best way of rewarding one over the other.