08 Jul 2011Working Paper Summaries

Delegation in Multi-Establishment Firms: Adaptation vs. Coordination in I.T. Purchasing Authority

by Kristina McElheran
Scholars have intensely studied the similarities and differences between organizations that are decentralized in their decision making versus those favoring more command-and-control central authority. What leads to a firm following a decentralized approach, and can that approach be predicted? Professor Kristina McElheran advances previous, largely theoretical, research on this subject to explore in the real world the economic determinants affecting how IT purchasing authority in 3,000 multi-establishment companies was allocated between central headquarters and outlying establishments. Key concepts include:
  • Theoretically, organizations are expected to delegate authority when local choices are most important to the overall value of the firm, when local information advantages are significant, or when the cost of processing firm-wide information at the center grows too great. Centralization is predicted when the value of firm-wide coordination dominates these adaptation and information-processing concerns.
  • The research confirmed most of those assumptions, but surprisingly, and contrary to leading models, found that the larger the size of the firm the less likely it was to delegate IT purchasing authority. Contrary evidence was also found in firms that produce a great variety of products and in units that operate outside the mainstream of the parent.
  • These findings provide some of the first empirical evidence supporting prominent team theory models of organizational design, where demands for adaptation and coordination conflict within the organization and determine decision rights based on their relative importance as well as the information-processing and communication costs within the firm.

Author Abstract

Recent contributions to a growing theory literature have focused on the tradeoff between adaptation and coordination in determining delegation within firms. Empirical evidence, however, is limited. Using establishment-level data on decision rights over information technology investments, I find that a high net value of adaptation is strongly associated with delegation, as are local information advantages and firm-wide diversification; in contrast, a high net value of within-firm coordination is correlated with centralization. Variation across establishments within firms is widespread: most firms are neither fully centralized nor fully decentralized. Delegation patterns are largely consistent with standard team-theory predictions; however, certain findings, such as a negative correlation between delegation and firm size, call for a consideration of agency costs, as well.

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