Will Information Technology Really Turn Organizations Upside Down This Time?

SUMMING UP

Do not read too much into a possible relationship between the development of information technology and the incidence of “upside-down” management. That’s the overwhelming message from responses to the column raising questions about the possible connection between the two.

First, as Greg Waldrip points out, let’s get things in perspective. These are only means to carry out a strategy after goals are determined, all in a supportive management environment. Dennis Crane concurs, adding that “Information technology should only turn businesses upside down when they’ve already determined that there’s some truly fundamental reason to do so.”

Some question whether the “upside down” organization is an idea whose time has come. David Koltermann warns, “The potential revolution to turn management upside down is overstated… In the marketplace of ideas, inhabited by academics and consultants …personal advancement may be better served by being provocative than by being right.”

Others question the importance of the linkage between information technology and the shape of the organization. Allen Roberts suggests that the latter is just one of many potential impacts of information technology, implying that it may not be the most important.

For any of this to have a high degree of relevance, however, depends on other factors in the view of respondents. As John Ladge states, “I know first-hand that it can work, but it really depends on the culture of the organization.” Waldrup puts it more strongly: “Providing more information without creating an atmosphere that allows people to use their judgement will only cause failure.”

Still others pointed out that information technology is most often used in the context of “medium risk, medium gain scenarios like credit card processing, market forecasting, etc.” in Shankar Avsb’s words. He suggests that information technology will play a major part in remolding organizations for only a few, but that “possibly, these would be organizations poised to become the new market leaders.”

Even if many things have to happen before fundamental organizational changes occur, it still leaves us with questions: Is this kind of change worth pursuing? If so, what changes in information technology and policies of disseminating its products will be required? If the process is a long one, is it even practical to begin it in organizations with “continuity-challenged” leadership? Is there any real purpose served by academics in continuing to spread the word about upside down management and preparing potential managers for its possible emergence? What do you think?

ORIGINAL ARTICLE

Periodically, somebody comes up with the idea of turning the organization upside down, with the customer on top. Those serving customers in the frontline come next, and top management winds up at the bottom. It’s eye-catching and too often grossly out of step with what really happens when organizations employ the concept.

Now we learn that the Army is experimenting with satellite-driven information technology that enables a tank commander to have a full view of the battlefield, including the positions of both friendly and enemy tanks. Armed with this knowledge, the best tank operators can make better, more timely decisions than their superiors—but only under certain conditions. First, frontline tank commanders have to have the intelligence and judgement to sort through a heavy load of information that is changing in real time (not unlike the best video game players). Second, the technology has to operate dependably, a problem in combat. And third and most significant, superiors have to be willing to delegate such decisions to frontliners. As a result, there have been as many spectacular failures as successes in military tests of the technology. In fact, the implementation of information technology generally has been quite disappointing to the “fighting bottom line” in the modern Army to date.

But let’s suppose that all three of these barriers eventually are overcome. What will it mean for the traditional hierarchical military chain of command? Or for business?

For years, W. Edwards Deming, the father of modern continuous quality improvement, had trouble convincing U.S. (as opposed to Japanese) auto manufacturers to implement the keys to improved quality. They include, among other things, improved information, training to improve quality, and delegating authority to frontline production workers to shut down a billion-dollar production line in the interests of quality improvement. More recently, Gary Hamel, in his book Leading the Revolution, has talked of putting such information to use in encouraging people at all levels of an organization to come up with new business ideas and advance them within the company.

If there is a common theme here, it is that information technologies, combined with proper selection, training, and the willingness of managers to rethink their jobs, have the potential for literally turning organizations upside down, changing forever what we have thought of as the role of management, if not leadership. But will it happen, given what the Army has found?

What about the unwillingness of frontliners to employ their information in the service of the organization as a whole, even if their individual performance may be penalized? What about the potential for substituting technology for judgement on the frontline? What about the fact that frontline employees are paid according to their rank rather than their potential impact on performance? And what about management’s ability to change? Is information technology fueling a false hope or are we really entering a new era of upside-down management? What do you think?

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 from Harvard Business School 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.”