Delegation in Multi‐Establishment Firms: Evidence from I.T. Purchasing

• DOI: http://doi.org/10.1111/jems.12054
• Published date: 01 June 2014
• Author: Kristina McElheran
• Date: 01 June 2014

Delegation in Multi-Establishment Firms: Evidence

from I.T. Purchasing

KRISTINA MCELHERAN

Harvard Business School

Boston, MA 02163

kmcelheran@hbs.edu

Recent contributions to a growing theory literature have focused on the tradeoff between adap-

tation and coordination in determining delegation within firms. Empirical evidence, however, is

limited. Using establishment-level data on decision rights over information technology invest-

ments, 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.

1. Introduction

Longstanding interest in the economic determinants of firms’ organizational structures

has led recently to a rise in the number and sophistication of models predicting when

firms are more or less likely to be decentralized. Yet empirical evidence lags behind.

This is due, in part, to a lack of large-scale data on the locus of authority within firms

combined with limited information on theoretically relevant establishment and firm

characteristics. This paper overcomes several measurement challenges to empirically

investigate delegation in multi-establishment firms and document a set of novel facts

concerning firms’ organizational design choices.

The context for this study is the allocation of authority over information technol-

ogy (IT) investments within multi-establishment U.S. manufacturing firms. This setting

is useful for studying how decision rights, more generally, are allocated within firms

because tradeoffs featured in many economic models figure prominently in determining

the decision-making structure for this activity. In particular, the tension between adap-

tation and coordination in influential team-theory treatments of organizational design

Thanks are due to Chris Forman, Bob Gibbons, Shane Greenstein, Oliver Hart, William Kerr, Andrew King,

Mara Lederman, Niko Matouschek, Raffaella Sadun, Scott Stern, Catherine Thomas, Heidi Williams, two

anonymous referees and co-editor, and seminar participants at the ASSA meetings, Harvard, MIT, NBER

Summer Institute and Productivity Lunch, and the Workshop on Information Systems and Economics. I am

grateful to Guy Arie and Jin WooChang for helpful research assistance and to Jim Davis and Lynn Riggs of the

U.S. Census Bureau for their unstinting support. Harte Hanks, Inc. provided essential proprietary data. The

researchin this paper was conducted while the author was a Special Sworn Status researcher of the U.S. Census

Bureau at the Chicago and Boston Census Research Data Centers. Any opinions and conclusions expressed

herein are those of the author,and do not necessarily represent the view of the U.S. Census Bureau. All results

have been reviewed to ensure that no confidential information is disclosed. Support for this research fromthe

NSF (awards no. SES-0004335 and ITR-0427889), the Census Bureau’s Dissertation Fellowship program, and

the State Farm Companies Foundation Dissertation Awardis also gratefully acknowledged. All errors remain

my own.

C2014 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume23, Number 2, Summer 2014, 225–258

226 Journal of Economics & Management Strategy

(e.g., Dessein and Santos, 2006; Dewatripont, 2006; Alonso et al., 2008; Rantakari, 2008)

manifests strongly in the case of IT investment—with significant consequences.

Tellingly, although one-half of all equipment investment by U.S. businesses is in

information processing equipment and software,1firms often do not realize the returns

they anticipate from these investments.2Many industry experts believe that a lack of

centralization has led to unacceptably high costs of technology ownership. They further

blame decentralization for IT coordination failures such as Airbus’ use of incompatible

versions of CATIA design software in two plants, which resulted in a two-year delay in

the development of its A380 mega jet and $6.1 billion in lost profits (Matlack, 2006).

Yet evidence suggests that centrally directed IT solutions often fail to address the

full range of needs within multi-divisional firms. A poor alignment between features of

the technology and local business needs can force business units to reengineer their pro-

cesses to fit the IT—commonly at the expense of the overall success of the project (Hong

and Kim, 2002)—or abandon the technology in favor of manual workarounds (Gattiker

and Goodhue, 2004). The challenge of achieving firm-wide coordination through IT in-

tegration across a large, distributed organization has actually been credited with the

demise of companies such as FoxMeyer and TriValley Growers in the late 1990s (Koch,

2004).

A goal of this paper is to explore how and to what extent these conflicting demands

for adaptation and coordination appear to influence the allocation of authority within

multi-divisional firms. By investigating whether observed delegation patterns may be

explained by leading models of organizational design—or alternative explanations—

this paper aims to contribute new facts to a body of work that has been overwhelmingly

theoretical to date.

I begin by applying considerations from the team theory literature to the IT pur-

chasing setting in order to generate a series of propositions. For instance, delegation

ought to be more likely when the value of well-adapted IT at a given establishment

is high relative to other organizational objectives. Delegation is also more likely when

communication will be less effective for achieving well-adapted IT solutions: for in-

stance, when a local establishment has significant information advantages vis-`

a-vis

headquarters or when central managers’ information-processing burden is too high.

In contrast, centralization is expected when the value of coordination within the firm

outweighs adaptation and information-processing concerns. Although I consider other

mechanisms highlighted elsewhere in the theory literature (in particular, agency costs),

I focus primarily on potential determinants of delegation that have been largely missing

from prior empirical work and to which my data are particularly well suited. I also con-

sider influences, such as economies of scale and technology “co-invention” costs that

are potentially salient in this setting but absent from the core theory.

To see whether observed empirical patterns conform to these predictions, I exploit

a large and representative proprietary data set with establishment-level information on

IT purchasing authority as well as rich establishment- and firm-level information along

important dimensions such as size and number of establishments. A surprising fact that

emerges from the raw data is that, in addition to widespread heterogeneity among firms

in their organizational structures, significant heterogeneity exists among establishments

1. This amounted to over $522 billion in 2009 even in the midst of economic recession (Bureau of Economic

Analysis [BEA], 2009).

2. See, for example, Davenport (1998). Failures of large technology implementations in firms have been

estimated to run between 40% and 75% (Griffith et al., 1999).

Delegation in Multi-Establishment Firms 227

0510 15 20 25 30

% of Unmatched IT Data Sample

0 10 20 30 40 50 60 70 80 90 100

% of Firm Establishments with Local IT Purchasing Authority

Excluding Headquarters

FIGURE 1. DISTRIBUTION OF IT SYSTEMS PURCHASING DELEGATION AMONG

U.S. MANUFACTURING FIRMS IN 1998

belonging to the same corporate parent. Most firms are neither fully centralized nor fully

decentralized, but have a mix of establishments with and without local IT purchasing

authority. (Figures 1 and 2 show the distributions for manufacturing firms from the full

proprietary IT data set, although the pattern is quite general across sectors).

In order to understand potential drivers of this heterogeneity, I match the IT del-

egation data with establishment-level data from the U.S. Census of Manufactures. This

narrows the range of industries but overcomes data constraints that have hindered test-

ing of several theoretically important—and distinct—features of both establishments

and firms. For instance, the comprehensive Census data make it possible to accurately

characterize each plant’s parent firm, permitting measurement of the relative impor-

tance of the plant within the firm separately from its absolute size. Thus, it is possible to

disentangle the value of adaptation at that from plant-level economies of scale. It also

provides estimates of the importance of firm-wide coordination—generating some of

the first evidence on how variation in the demand for coordination is associated with

delegation. Rich controls for skill mix, age, acquisition status, industry context, and mea-

sures of specific types of IT adoption also strengthen the empirical results and enable

comparisons with prior empirical work.

Robust conditional correlations—based on roughly 6,700 plants belonging to more

than 3,000 firms throughout the U.S. manufacturing sector—are largely consistent with

the theoretical propositions. At establishments with relatively largecontributions to firm

sales—that is, where locally adapted decisions will be most important for overall firm

value—the likelihood of delegation is quite high. Plants within firms that produce a