IDEAS home Printed from https://ideas.repec.org/a/spr/infosf/v24y2022i6d10.1007_s10796-021-10214-9.html
   My bibliography  Save this article

Organizational Structure for the IT Department: Profit Center or Cost Center?

Author

Listed:
  • Joseph Vithayathil

    (Southern Illinois University Edwardsville)

  • Vidyanand Choudhary

    (University of California, Irvine)

Abstract

Why do some firms organize their IT departments as profit centers whereas other firms organize IT as a cost center? These commonly employed organizational structures are characterized by information asymmetry and decision rights afforded to the IT department. The complexity of IT and its ongoing rapid evolution lead to information asymmetry where the IT department has private information about technology and cost, and the consuming departments have private information about demand. Under the cost center organizational structure, the firm sets the quality and number of IT services offered by the IT department. Whereas under a profit center structure, the IT department makes decisions on quality, price and variety of IT services. We find that the quality of IT services under the cost center decreases with greater uncertainty in demand for IT services. We also find that the cost center structure can offer higher quality IT services than the profit center structure, and consumption of IT services can be higher under the profit center structure. The preferred organizational structure does not always provide greater variety of IT services than the alternate structure. The cost center is preferred when the marginal cost of IT services is sufficiently low, or the fixed cost of quality is sufficiently high.

Suggested Citation

  • Joseph Vithayathil & Vidyanand Choudhary, 2022. "Organizational Structure for the IT Department: Profit Center or Cost Center?," Information Systems Frontiers, Springer, vol. 24(6), pages 2053-2076, December.
    • Handle: RePEc:spr:infosf:v:24:y:2022:i:6:d:10.1007_s10796-021-10214-9
    DOI: 10.1007/s10796-021-10214-9
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10796-021-10214-9
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10796-021-10214-9?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
    2. Daron Acemoglu & Philippe Aghion & Claire Lelarge & John Van Reenen & Fabrizio Zilibotti, 2007. "Technology, Information, and the Decentralization of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(4), pages 1759-1799.
    3. Sanjeev Dewan, 1996. "Pricing Computer Services Under Alternative Control Structures: Tradeoffs and Trends," Information Systems Research, INFORMS, vol. 7(3), pages 301-307, September.
    4. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
    5. Gal-Or, Esther, 1985. "Information Sharing in Oligopoly," Econometrica, Econometric Society, vol. 53(2), pages 329-343, March.
    6. Gerrit Versteeg & Harry Bouwman, 2006. "Business architecture: A new paradigm to relate business strategy to ICT," Information Systems Frontiers, Springer, vol. 8(2), pages 91-102, February.
    7. Guilherme C. Wiedenhöft & Edimara M. Luciano & Gabriela V. Pereira, 2020. "Information Technology Governance Institutionalization and the Behavior of Individuals in the Context of Public Organizations," Information Systems Frontiers, Springer, vol. 22(6), pages 1487-1504, December.
    8. Adriano Olímpio Tonelli & Paulo Henrique Souza Bermejo & Pâmela Aparecida dos Santos & Larissa Zuppo & André Luiz Zambalde, 2017. "It governance in the public sector: a conceptual model," Information Systems Frontiers, Springer, vol. 19(3), pages 593-610, June.
    9. Esther Gal-Or & Anindya Ghose, 2005. "The Economic Incentives for Sharing Security Information," Information Systems Research, INFORMS, vol. 16(2), pages 186-208, June.
    10. Rajiv D. Banker & Inder Khosla & Kingshuk K. Sinha, 1998. "Quality and Competition," Management Science, INFORMS, vol. 44(9), pages 1179-1192, September.
    11. Barry A. Cumbie & Chetan S. Sankar, 2012. "Choice of governance mechanisms to promote information sharing via boundary objects in the disaster recovery process," Information Systems Frontiers, Springer, vol. 14(5), pages 1079-1094, December.
    12. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    13. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    14. Eric T. G. Wang & Terry Barron, 1995. "Controlling Information System Departments in the Presence of Cost Information Asymmetry," Information Systems Research, INFORMS, vol. 6(1), pages 24-50, March.
    15. Sanjeev Dewan & Haim Mendelson, 1990. "User Delay Costs and Internal Pricing for a Service Facility," Management Science, INFORMS, vol. 36(12), pages 1502-1517, December.
    16. Syaiful Ali & Peter Green, 2012. "Effective information technology (IT) governance mechanisms: An IT outsourcing perspective," Information Systems Frontiers, Springer, vol. 14(2), pages 179-193, April.
    17. Jim Hann & Ron Weber, 1996. "Information Systems Planning: A Model and Empirical Tests," Management Science, INFORMS, vol. 42(7), pages 1043-1064, July.
    18. Douglas Cumming & Sofia Johan & Denis Schweizer, 2017. "Information systems, agency problems, and fraud," Information Systems Frontiers, Springer, vol. 19(3), pages 421-424, June.
    19. Alessandra Colecchia & Paul Schreyer, 2002. "ICT Investment and Economic Growth in the 1990s: Is the United States a Unique Case? A Comparative Study of Nine OECD Countries," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 408-442, April.
    20. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70(6), pages 538-538.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Adah-Kole Emmanuel Onjewu & Sundas Hussain & Mohamed Yacine Haddoud, 2022. "The Interplay of E-commerce, Resilience and Exports in the Context of COVID-19," Information Systems Frontiers, Springer, vol. 24(4), pages 1209-1221, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Junjie Zhou & Xiaoshuai Fan & Ying-Ju Chen & Christopher S. Tang, 2021. "Information Provision and Farmer Welfare in Developing Economies," Manufacturing & Service Operations Management, INFORMS, vol. 23(1), pages 230-245, 1-2.
    2. Mukhopadhyay, Samar K. & Yue, Xiaohang & Zhu, Xiaowei, 2011. "A Stackelberg model of pricing of complementary goods under information asymmetry," International Journal of Production Economics, Elsevier, vol. 134(2), pages 424-433, December.
    3. Myatt, David P. & Wallace, Chris, 2015. "Cournot competition and the social value of information," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 466-506.
    4. Haiyang Xia, 2021. "Price and quantity competition in a differentiated duopoly with heterogeneous beliefs," Manchester School, University of Manchester, vol. 89(1), pages 46-69, January.
    5. Bourreau, Marc & Jullien, Bruno, 2018. "Mergers, investments and demand expansion," Economics Letters, Elsevier, vol. 167(C), pages 136-141.
    6. Wang, E. T. G., 2000. "Information and incentives in computing services supply: The effect of limited system choices," European Journal of Operational Research, Elsevier, vol. 125(3), pages 503-518, September.
    7. Fabian Herweg & Daniel Müller, 2014. "Price Discrimination in Input Markets: Quantity Discounts and Private Information," Economic Journal, Royal Economic Society, vol. 124(577), pages 776-804, June.
    8. Hao-Chang Sung & Chunsheng Yuan, 2017. "Biased Voluntary Disclosure, Earnings Target, And Product Market Competition," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(03), pages 1-20, September.
    9. Carolyn M. Callahan & E. Ann Gabriel, 1998. "The Differential Impact of Accurate Product Cost Information in Imperfectly Competitive Markets: A Theoretical and Empirical Investigation," Contemporary Accounting Research, John Wiley & Sons, vol. 15(4), pages 419-455, December.
    10. Ming Chung Chang & Hsiao‐Ping Peng, 2009. "Structure Regulation, Price Structure, Cross‐Subsidization And Marginal Cost Of Public Funds," Manchester School, University of Manchester, vol. 77(6), pages 675-698, December.
    11. Guido Candela & Roberto Cellini, 2006. "Investment in Tourism Market: A Dynamic Model of Differentiated Oligopoly," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 35(1), pages 41-58, September.
    12. Camille Cornand & Rodolphe Dos Santos Ferreira, 2020. "The social value of information and the competition motive: price versus quantity games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(4), pages 1101-1137, November.
    13. Hattori Keisuke & Lin Ming-Hsin, 2011. "Alliance Partner Choice in Markets with Vertical and Horizontal Externalities," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-27, June.
    14. Fan, Cuihong & Jun, Byoung Heon & Wolfstetter, Elmar G., 2016. "Optimal bid disclosure in patent license auctions under alternative modes of competition," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 1-32.
    15. Yue, Xiaohang & Mukhopadhyay, Samar K. & Zhu, Xiaowei, 2006. "A Bertrand model of pricing of complementary goods under information asymmetry," Journal of Business Research, Elsevier, vol. 59(10-11), pages 1182-1192, October.
    16. Ghosh, Arghya & Kato, Takao & Morita, Hodaka, 2017. "Incremental innovation and competitive pressure in the presence of discrete innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 1-14.
    17. Matsui, Kenji, 2021. "Buyer’s strategic demand information sharing with an upstream echelon for entry promotion," International Journal of Production Economics, Elsevier, vol. 242(C).
    18. Jean J. Gabszewicz & Jacques-François Thisse, 2000. "Microeconomic theories of imperfect competition," Cahiers d'Économie Politique, Programme National Persée, vol. 37(1), pages 47-99.
    19. Ming Chang & Yan-Ching Ho, 2014. "Comparing Cournot and Bertrand equilibria in an asymmetric duopoly with product R&D," Journal of Economics, Springer, vol. 113(2), pages 133-174, October.
    20. Parenti, Mathieu & Ushchev, Philip & Thisse, Jacques-François, 2017. "Toward a theory of monopolistic competition," Journal of Economic Theory, Elsevier, vol. 167(C), pages 86-115.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:infosf:v:24:y:2022:i:6:d:10.1007_s10796-021-10214-9. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.