IT in the 1990s: Managing Organizational Interdependence

FOR THE PAST TWO DECADES, the question of what impact information technology (IT) will have on business organizations has continued to puzzle academics and practitioners alike. Indeed, in an era when the business press has widely disseminated the idea that IT is changing the way businesses operate and the way they relate to customers and suppliers, the question of technology’s impact on the organization itself has gained renewed urgency.

The literature suggests four major classes of impact. First, there is the view that technology changes many facets of the organization’s internal structure, affecting roles, power, and hierarchy. A second body of literature focuses on the emergence of team-based, problem-focused, often-changing work groups, supported by electronic communications, as the primary organizational form.

Third, there is the view that organizations today are “disintegrating” — their borders punctured by the steadily decreasing costs of electronic interconnection among firms, suppliers, and customers. Companies, it is believed, will gradually shift to more market-based organizational forms, with specialized firms taking over many functions formerly performed within the hierarchical firm.

Finally, a fourth view of organizational change arises from a technical perspective. Here, it is argued that today’s improved communications capability and data accessibility will lead to systems integration within the business. This, in turn, will lead to vasdy improved group communications and, more important, the integration of business processes across traditional functional, product, or geographic lines.

While each of these four “IT impact” perspectives offers important insights, there are significant and unresolved questions about each. To shed additional light on this issue, the Center for Information Systems Research (CISR) at the MIT Sloan School of Management recently conducted a fourteen-month study of sixteen major companies. Emerging from this study is the strong belief that the current “IT impacts” picture is incomplete. There is clear evidence for a fifth viewpoint that draws on and expands these perspectives, providing a more integrated, managerial view with important implications for today’s executives.

We will argue here that information technology provides a new approach to one of management’s oldest organizational problems: that of effectively managing interdependence. Our fundamental thesis is that a firm’s ability to continuously improve the effectiveness of managing interdependence is the critical element in responding to new and pressing competitive forces. Unlike in previous eras, managerial strategies based on optimizing operations within functional departments, product lines, or geographical organizations simply will not be adequate in the future.

By “effective management of interdependence,” we mean a firm’s ability to achieve concurrence of effort along multiple dimensions of the organization.1 Companies have historically been divided into subunits along several dimensions such as functional departments, product lines, and geographic units. It has long been understood that the activities in each of these dimensions, and in each of the subunits within these dimensions (e.g., branch offices, manufacturing locations), are far from independent. Many approaches have been devised to manage this evident interdependence. Each approach has the goal of producing the concurrence of effort necessary to allow the organization to compete effectively in the marketplace. Information technology has now been added to these approaches — and it is in this role that it will have its major impact on the firm.

Competitive Forces Driving the Need to Manage Interdependence

The need to effectively coordinate the activities of individual organizational subunits is vastly greater in 1989 than it was even a few years ago. Competitive pressures are now forcing almost all major firms to become global in scope, to decrease time to market, and to redouble their efforts to manage risk, service, and cost on a truly international scale (see Figure 1).

Globalization.

In a world linked by international communication networks and television, global competition stresses the firm’s ability to innovate, to capture global levels of manufacturing efficiency, and to understand international marketing and the diversity of the world’s markets. All require increasing knowledge and coordination of the firm’s operations throughout geographically dispersed subunits.

Time to Market.

Black & Decker now brings new products to market in half the time it took before 1985. Xerox and Ford have claimed similar improvements in key product lines. “Time to market” refers to the firm’s ability to develop new products quickly and to deliver existing products effectively. In either case, compressing time to market requires increased integration of effort among functional departments such as design, engineering, manufacturing, purchasing, distribution, and service.

Risk Management.

Market volatility and competitive pressures can easily overwhelm a firm’s ability to track and manage its risk. In one highly publicized incident, Merrill Lynch lost more than $250 million when it failed to adequately oversee an employee trading a complex form of mortgage backed securities.2 Whatever the industry, the globalization of markets and global market volatility increase the need for effective risk management across once independently managed operations.

Service.

“The excellent companies really are close to their customers,” Peters and Waterman wrote in The Search for Excellence. “Other companies talk about it; the excellent companies do it.”3 Of course, service is based not only on the effectiveness of a single repairperson, but also on management’s ability to have organizationwide knowledge of customer’s and equipment’s status and problems.

Cost.

For nearly all organizations, cost reduction is always a concern. In industries where foreign competitors are becoming dominant, reductions in workforce are an increasing reality.

In sum, global competition, risk, service, and cost today require firms to tightly couple their core internal and external business processes. As firms begin to draw these processes together, slack resources (e.g., inventory, redundant personnel) are being reduced.

It is here that information technology plays a major role. Vastly improved communications capability and more cost-effective computer hardware and software enable the “wiring” together of individuals and suborganizations within the single firm, and of firms to each other. It is this multifunctional, multilevel, multiorganizational, coordinative aspect of current technology that provides managers with a new approach to managing interdependence effectively.

Technology’s Major Impacts on the Organization

Several decades of work have produced conflicting perspectives on technology’s impacts on the organization. Here we briefly review the four approaches noted above.

Major Changes in Managerial Structure, Roles, and Processes

In an early, celebrated article, Leavitt and Whisler argued that information technology would lead to a general restructuring of the organization, ultimately eliminating middle management.4 In their view, IT moved middle managers out of traditional roles, and allowed top managers to take on an even larger portion of the innovating, planning, and other “creative” functions required to run the business.

Others were quick to comment on these predictions. Some speculated that IT would lead to greater organizational centralization, greater decentralization, reduced layers of middle or upper management, greater centralization of managerial power, or, alternatively, decentralization of managerial power.5 Others developed contingency-based models of organizational impact.6 While it is clear that IT has affected organizations in many ways, it is also clear that this often conflicting literature has produced very little insight into how managers should plan for IT-enabled role or structural changes within their firms. Three newer perspectives begin to address this issue.

“The Team as Hero”

According to this second view, teams and other ad hoc decision-making structures will provide the basis for a permanent organizational form. Reich, for example, argues that a “collective entrepreneurship” with few middle-level managers and only modest differences between senior managers and junior employees, is developing.7 Drucker speculates that the symphony orchestra or hospital may be models of future team-based organizations.8

The relationship between teams and technology in much of this work appears based on a technical dimension. On the one hand, this view stresses technology’s role in enabling geographically dispersed groups to better coordinate their activities through enhanced electronic communications.9 On the other hand, some authors stress the importance of “groupware” in facilitating teamwork through better decision-making aids and project and problem management.10

Unfortunately, the team-based literature to date is highly speculative. As a general model of organizational structure, it leaves many questions unanswered. Primary among these are the long-term implications of organizing in a manner that moves primary reporting relationships away from the more usual hierarchical functional, geographic, or product structures. These structures work to immerse employees in pools of “front line,” continually renewed expertise. Team members separated too long from these bases tend to lose this expertise.11

Corporate “Disintegration”: More Markets and Less Hierarchy

A third perspective argues that today’s hierarchical organizations are steadily disintegrating — their borders punctured by the combined effects of electronic communication (greatly increased flows of information), electronic brokerage (technology’s ability to connect many different buyers and suppliers instantaneously through a central database), and electronic integration (tighter coupling between interorganizational processes). In this view, the main effect of technology on organizations is not in how tasks are performed (faster, better, cheaper, etc.), but rather in how firms organize the flow of goods and services through value-added chains.

There are two major threads to this argument. Malone, Yates, and Benjamin state that new information technologies will allow closer integration of adjacent steps in the value-added chain through the development of electronic markets and electronic hierarchies.12 Johnston and Lawrence argue that IT-enabled value-adding partnerships (VAPs) are rapidly emerging.13 Typified by McKesson Corporation’s “Economist” drug distribution service, VAPs are groups of small companies that share information freely and view the whole value-added chain — not just part of it — as one competitive unit.

These proposals, however, are very recent and have only small amounts of sample data to support them. And the opposite case — the case for increased, vertical integration of firms — is also being strongly propounded.14

Systems Integration: Common Systems and Data Architecture

A fourth, more technically oriented view is that business integration is supported by systems and data integration. Here the concept of IT-enabled organizational integration is presented as a natural outgrowth of two IT properties: improved inter-connection and improved shared data accessibility.15 In this view, “integration” refers to integration of data, of organizational communications (with emphasis on groups), and of business processes across functional, geographic, or product lines.

The Need to Manage Interdependence

While each of these four approaches offers important insights, there is a need for a fifth perspective that expands these views into a more active managerial framework. Our research suggests that the concept of “managing interdependence” most clearly reflects what managers actually do in today’s business organizations.

Managers, of course, oversee innumerable large and small interdependencies. What happens in one function affects another. Although companies maintain “independent” product lines, success or failure in one product line casts a long shadow on the others. Individual specialists are also highly interdependent. Surgeons, for example, cannot operate without nurses, technicians, and anesthetists. And even the simplest of manufacturing processes requires the precise interconnection of hundreds of steps. Other examples:

• Production engineers rely on product designers to design parts that can be easily and quickly fabricated. Conversely, designers depend on product engineers to implement design concepts faithfully.
• Sales representatives for a nationwide or a worldwide company are also interdependent. The same large customer may be served by many sales offices throughout the world. Common discounts, contract terms, and service procedures must be maintained. Feedback can be important.
• Companies themselves rely on other companies to supply parts or services. The current shortage of memory chips, and the resulting shortage of some types of computer hardware, is a good example of intra-company interdependence.

In sum, interdependence is a fact of organizational life. What is different today, however, is the increasing need to manage interdependence, as well as technology’s role in providing tools to help meet this need.

How do companies today manage interdependence? Several approaches have been proposed: Mintzberg, for example, argued that firms coordinate work through five basic mechanisms: mutual adjustment, direct supervision, standardization of work process, standardization of work output, and standardization of worker skills.16 Lawrence and Lorsch found that successful companies differentiated themselves into suborganizations to allow accumulation of expertise and simpler management processes driven by shared goals and objectives.17 Conversely, these same successful firms adopted integrating mechanisms to coordinate work activity across suborganizations. Lawrence and Lorsch postulated five mechanisms to manage the needed integration: integrative departments, whose primary activity was to coordinate effort among functional departments; permanent and/or temporary cross-functional teams; reliance on direct management contact at all levels of the firm; integration through the formal hierarchy; and integration via a “paper-based system” of information exchange.

Galbraith later expanded the intellectual under-standing of managing integration through people-oriented mechanisms.18 He noted that direct contact, liaison roles, task forces, and teams were used primarily for lateral relations, permitting companies to make more decisions and process more information without overloading hierarchical communication channels. He also introduced the concept of computer-based information systems as a vertical integrator within the firm.

Five Examples of Managing Interdependence

Today, Galbraith’s vision of computer-based information systems as a vertical integrator appears prescient, if incomplete. Given pressures from the “drivers” noted earlier, major aspects of information technology (networks, for example; see Figure 1) serve increasingly as mechanisms for both horizontal and vertical integration. In particular, our work has uncovered six organizational contexts where IT-enabled integration efforts strikingly improved a company’s ability to manage its functional, product, or geographic subunits. We focus here on five of the six contexts, as illustrated in Figure 2. (A sixth area of interest, interorganizational integration, is well documented in the literature, and can be viewed as carrying intra-organizational integration into the multifirm context.19)

Value-Chain Integration

Lawrence and Lorsch noted the use of “human integrators” to manage concurrence of effort between adjacent functions in the value-added chain (e.g., between manufacturing, distribution, and sales) more than twenty years ago. Today this integration is performed increasingly by using electronic networks, computers, and databases. Firms attempt between-function integration for at least one of three reasons: to increase their capacity to respond quickly and effectively to market forces; to improve the quality of conformance to customer requirements; or to reduce costs.20

We have found that successful between-function integration collapses the multistage value-added chain into three major segments: developing new products, delivering products to customers, and managing customer relationships (see Figure 3).21 In manufacturing companies, for example, it is clear that interdependence revolves around these three macro-organizational activities. In the insurance industry, discussions with five major companies revealed that the same three segments were targets for functional integration.

Turning to the two “ends” of the modified value-added chain — the product design segment on the one end, and the customer service segment on the other — the effects of technology-enabled integration are clear. To speed product development, companies such as Xerox, Lockheed, and Digital are introducing CAD/CAM and other design aids that provide integrated support to product designers, product engineers, materials purchasing, and manufacturing personnel involved in the design-to-production process. This compression has resulted in joint “buy-in” on new product designs, eliminating a lengthy iterative development process (which occurred because designers did not take the needs and capabilities of other departments into account). Dramatically shortened product development time has been the consequence of this buy-in.

At the customer service end of the chain, Otis Elevator, Digital, and Xerox have developed service strategies and new service markets based on electronic networks, an integrated database of customer and service history, and fault signaling that goes directly from the damaged equipment to the supplier’s maintenance-monitoring computer. The advantages of Otis’s centrally coordinated electronic service system have been well publicized.22 Perhaps the most important advantage is senior management’s ability to view the status of maintenance efforts nationwide and to direct sales and service attention where needed. In addition, it is now feasible to provide the company’s design, engineering, and manufacturing personnel with direct access to fault data.

In many ways the most interesting stage of the collapsed value chain is product delivery, which requires integrating several different information systems: order entry, purchasing, materials resources planning, and distribution management. The critical business issues are to provide customers with information about when orders will be completed, and to forecast and manage outside supplier, product manufacturer, and product distribution processes.

No company has yet acomplished the large-scale integration of functions and systems required to fully manage product delivery. A division of the Norton Company, however, pioneered efforts in this direction in the mid-1980s. Norton initiated a set of major IT projects, ranging from the “Norton Connection” (a computer-based telecommunications link between the company and its distributors), to a more effective order-processing system, to a series of manufacturing technologies targeted at flexible manufacturing and automated materials control.23 More recently, Westinghouse initiated a product delivery integration process in several segments of the company. And at General Foods a series of task forces has been charged with developing a similar approach.

Most efforts, however, are more limited in scope. British Petroleum Company’s chemical business has developed an integrated order management process spanning thirteen divisions. Baxter Healthcare Corporation is working to enhance its well-known ASAP order entry system to provide customers with full product line visibility to their 125,000-plus products. And a host of manufacturing integration projects have been initiated at Digital Equipment Corporation, Ford Motor, IBM, General Motors, Hewlett-Packard, and Texas Instruments, to name just a few.

Functional Integration

Many companies are also recognizing the interdependence of multiple units within the same function. This recognition has led to several actions designed to improve coordination across subunits — for example, centralization of functions, central management of geographically separate units, and (in some firms) the development of common systems and/or standard data definitions to facilitate coordinating organizational units.

At Sun Refining and Marketing Company, for example, senior management identified crude oil trading as one of the most critical business activities in the firm three years ago. At that point Sun’s traders were dispersed worldwide, each acting relatively autonomously. Sun began developing a centralized, on-line trading function supported by integrated market information from Reuters and other trade data sources. Today Sun recognizes the importance of its integrated trading function in managing risk exposure and in developing effective pricing strategies for the volatile crude market.

At Chemical Bank in New York, foreign ex-change trading has become the largest profit generator. To improve management of its worldwide trading operations, Chemical’s information technology efforts have ranged from advanced trader workstations to more effective integration of the “front end” (booking a transaction) with the back office (transaction clearance and settlement). The bank has also improved capital markets auditing through the use of expert systems support.

And finally, while OTISLINE can be viewed as an application enabling integration across stages of the value-added chain, it is also an integrating mechanism within the field maintenance organization itself. Customers with difficult problems can immediately be directed to a specialist, not left to the limited resources of a remote branch office. Frequent trouble from a specific type of elevator can be observed as the pattern develops, and corrective action taken on a nationwide basis. In addition, the quality of telephone responsiveness to anxious customers can be closely monitored.

Similarly, a number of other companies are working aggressively to coordinate the efforts of subunits within a single function, whether it be manufacturing, maintenance, purchasing, sales and marketing, or others. Kodak has developed an executive support system to assist in the worldwide scheduling of manufacturing plants. Digital is installing common MRP systems throughout all of its manufacturing plants. And so it goes. The business drivers underscoring each of these efforts range from service to cost to time-to-market to global responsiveness — but they all recognize that no single unit in a major function is truly independent.

IT-Enabled Team Support

Ken Olsen, chairman of Digital Equipment Corporation, believes that the ability to bring teams together electronically is one of the most important features of the company’s IT capability. Ford Motor has claimed that the “Team Taurus” approach, much of it IT-enabled, shaved more than a year off the time needed to develop, build, and bring to market the new Taurus/Sable model line. In the future, as Drucker points out, many tasks will be done primarily by teams.24

Teamwork, of course, is not a new way to coordinate interdependent activities among separate units in an organization. What is new is that electronic mail, computer conferencing, and videoconferencing now facilitate this process. Today it is feasible for team members to coordinate asynchronously (across time zones) and geographically (across remote locations) more easily than ever before.

The development and use of computer software to support teams is also moving into an explosive phase. There is a growing body of software labeled “groupware,” a generic name for specialized computer aids designed to support collaborative work groups. As Bullen and Johansen point out, “Group-ware is not a thing. Rather it is a perspective on computing that emphasizes collaboration — rather than individual use.”25 Several companies, including Xerox, General Motors, Digital, Eastman Kodak, IBM, and AT&T, are experimenting with state-of-the-art meeting and conferencing aids in addition to more “routine” communications systems such as electronic mail or voice mail systems.

Planning and Control

For the past two or three decades, the managerial control process has looked much the same across major companies.26 Before a new fiscal year begins, an intense planning process culminates with an extended presentation to senior management of each small business unit’s (SBU’s) proposed activities. Agreed upon plans are then monitored on a monthly basis. Parallel to this formal control process is an informal system of “keeping in touch,” by which senior management assures itself that “all is going well” in key areas of the business in the interim between formal reports.

Volatility in the business environment, coupled with technology’s ability to provide management with efficient communication and information, is radically changing this traditional planning and control scenario. The major issue is how best to use IT for coordination and control of the firm’s activities.

At Xerox, chairman David Kearns and president Paul Allaire have implemented an executive support system that now makes the annual planning and control process a more on-line, team-based, communication- and coordination-based process. The system requires all of Xerox’s thirty-four business units to submit their plans over an electronic network in a particular format. Doing this allows the staff to critique the plans more effectively and to reintegrate these plans when looking for factors such as competitive threats across all SBUs, penetration into particular industries by all SBUs, and so forth.

More important, each SBU’s plans can be reviewed not only by senior executives and corporate staff but also by other top officers in the firm. Each officer receiving an SBU’s plans is encouraged to send corporate headquarters an electronic message raising the issues he or she sees in the plan. The officer may also be asked to attend the review meeting. There is no “upfront” presentation at this meeting. Only the issues raised by the executives, the staff, or the other officers are discussed.

In short, Allaire’s planning and control process is a computer-age process. Through the network, it draws on the entire executive team for input. Understanding of the important issues facing each SBU is deeper and its activities are therefore sometimes subtly, sometimes more precisely, coordinated with those of the other SBUs.

A team-based, network-linked approach to the senior executive job of managing the business is also in evidence at Phillips Petroleum Company’s Products and Chemicals Group. There, executive vice president Robert Wallace is linked to his other top nine executives through an executive support system that provides on-line access not only to one another, but also to varying levels of daily sales, refinery, and financial data. External news summaries relevant to the business are entered into the system three times a day. Unlike Allaire, who limits his input to planning and review meetings, Wallace has used the system to take operating command of a few critical decisions for the business. In the volatile petroleum pricing arena, Wallace believes that he and his top executive team can confer with the advantage of data access and can make better pricing decisions than those further down the line. He cites increased profits in the tens of millions as a result of the system.

By far the majority of senior executives today do not use their systems in nearly as dramatic a manner as Allaire and Wallace do.27 Yet the technology provides the capability for better coordination at the senior management level. It also provides opportunities to move decisions either up or down in the organization. Team decision making is a growing reality, as geographically separated executives can concurrently access and assess data and communicate in “real time.” Vertical on-line access to lower levels of data and text, however, violates some established management practices. Yet informal telephone-based systems have always provided some of this information. In an era where management is seen more as a cooperative, coaching activity than as an iron-fisted one, vertical as well as horizontal networking may come of age.

Within the IT Organization Itself

Line managers and information technology managers are also finding themselves more mutually dependent than ever before. Today, there is a small but rapidly growing number of senior line and staff executives who are taking responsibility for significant strategic projects centered on computer and communication technologies in their companies, divisions, or departments. We have described else-where the full extent and importance of “the line taking the leadership.”28

As the line role is growing with regard to innovative systems, the role of the information systems group is becoming more complex, more demanding, and more integrated into the business. Our sample of companies included several firms whose IT planning efforts involved significant degrees of partnership between the line businesses and their IT organizations in designing and implementing new systems.29 This necessary degree of partnership places four major demands on the IT organization.

First, with regard to systems development, even those systems in which the line is heavily involved require greater competence and skills on the part of the IT organization. The technical design, programming, and operation of business-critical, complex systems present a far greater challenge than do systems of previous eras. Today’s integrated, cross-functional product delivery systems require database, project management, telecommunications, and other skills not previously demanded of IT personnel.

Second, today’s new systems require the development and implementation of a general, and eventually “seamless,” information technology infrastructure (computers, telecommunications, software, and data). The challenge to IT management is to provide leadership for this vital set of “roads and high-ways” in a volatile competitive environment.

Third, there is a need for IT management to help educate line management to its new responsibilities. And fourth, IT executives must educate themselves and their staffs in all significant aspects of the business. Only if this happens will IT personnel be able to knowledgeably assist line management in creating effective, strategy-enhancing systems.

The concomitant demand on line management is twofold: the need to learn enough about the technology to incorporate its capabilities into business plans, and the need to select effective information technology personnel and to work closely with them.

The New Managerial Agenda: Think Interdependence

Tomorrow’s successful corporations will require increasingly effective management of interdependence. IT-enabled changes in cross-functional integration, in the use of teams, or in within-function integration will force individual managers’ agendas to change as well. In short, what managers do now and what they will do in the future is in the process of important change.

Dimensions of Change

What areas of emphasis for senior managers stem from the increasing interdependence of organizations? In our view, there are five.

Increased Role Complexity.

The typical manager’s job is getting harder. One dimension of this difficulty is in the increased pace of organizational change. As companies seek new business opportunities by aggressively defining and executing “new ways of doing things — for example, new strategies, new products and services, new customers-managers must adjust more rapidly and frequently to new situations. Similarly, companies must also respond to heightened competitive pressures by improving internal processes. Again, managers must respond quickly to these new situations.

A second dimension of increased role complexity is the manager’s need to cope with unclear lines of authority and decision making. As interdependence increases, sharing of tasks, roles, and decision making increases. Managers will be faced with making the difficult calls between what is local to their function and what is global to the business. Moreover, as planning and control systems change, line managers must work more effectively with a wider range of people in the firm.

Teamwork.

Teams are real. A vastly increased number of space- and time-spanning, problem-focused, task-oriented teams are becoming the norm. This growth in peer-to-peer (as opposed to hierarchical) activities requires new managerial skills and role definitions.

A Changing Measurement Process.

Measurement systems are also changing. Measuring individual, team, or suborganizational success is difficult in an environment where cooperative work is increasingly necessary. New measurement approaches will have to be devised. A transitional period, during which people will need to adjust both to a changing work mode and to a changing measurement process, will result. As new measurement systems evolve, they will almost surely lag behind the changed organizational reality.

A Changing Planning Process.

Information technology is enabling the new planning approaches required to meet new competitive conditions. Our research underscores two major new capabilities. First, better information access and information management allow firms to target what is most critical to the organization. Second, organizations now have the ability to conduct “real-time,” stimulus-driven planning at all levels — in short, to bring key issues to the surface and react to them quickly. The technology provides both the conduit for moving critical data to all relevant decision makers and, more important, the capability to disseminate changes in direction to all parts of the firm.

Creating an Effective Information Technology Infrastructure.

People-intensive, integrative mechanisms are limited in what they can accomplish. Accessible, well-defined data and a transparent network are, therefore, the keys to effective integration in the coming years. Developing these resources, however, is not easy. Justifying organization-spanning networks whose benefits are uncertain and will occur in the future, and whose costs cannot be attributed clearly to any specific suborganization, is in part an act of faith. Developing common coding systems and data definitions is a herculean job. This task increases short-term costs for long-term gain — a practice not encouraged by most of today’s measurement systems.