What determines whether decisions happen on the bottom, middle, or top

rung of the corporate ladder? New research from professor Raffaella Sadun
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.
01 NOV 2010 RESEARCH & IDEAS
How IT Shapes Top-Down
and Bottom-Up Decision
Making
by Carmen Nobel
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."
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RAFFAELLA SADUN
Raffaella Sadun is an
assistant professor in the
Strategy unit.
CONTACT
Send an email

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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" departmentwhich 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 howand whymanagers 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 technologythe
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."
ABOUT THE AUTHOR
Carmen Nobel is senior editor of HBS Working Knowledge.
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COMMENTS
AMIR PARSSIAN PROFESSOR, IE BUSINESS SCHOOL
I guess first and the foremost we need to make a clear distinction between information technology
(IT) and information systems (IS) since they are not the same thing albeit used interchangeably. IT
is merely concerned with technologies while IS is about people factor and their adoption and
interaction with IT.
Second, it may be more clear if we define what types of decisions we are considering here.
Operations and line managers make tactical decisions while higher rank managers make
strategic decisions. Although ERP systems are very useful to operations managers, they are less
useful to middle and top rank managers who often use business intelligence (BI) systems to
communicate and monitor the execution of their decisions.
Third, the dependence of lower rank managers on their superiors is usually not a matter of what IT
they use but rather the corporate culture they cultivate. I would hypothesis that with or without
technologies in place these hierarchies function as they do now.


HEINZ-PETER SEBREGONDI
Over more than 30 years working for IT companies with headquarters outside Germany I
experienced all phases: No fax and extremely expensive international phone calls over land lines
only, some fax, some fax and some email, some fax and more email and some mobile phones up
to today's 24/7 always on. I can clearly confirm the results of Prof. Sadun. There is much more
micro-managing today which is mostly just waste. Still, there is an additional key element that
often goes unnoticed: The product/service maturity life cycle. With the global commoditization and
standardization of products and services you need more and more a military-like command and
control organization: Some people plan and decide centrally and the field just executes locally and
is monitored centrally again. On the other hand, when your business model is delivering locally
highly customized high margin services such as the big System Integrators (SIs, e.g. Accenture
etc.) do, you need decentralized decision making to get the best results. Maybe there is a cultural
reason why SIs headquarterd in countries with a rigid top-down decision making are not among
the globally leading SIs.


ANONYMOUS
Prof. Parssian brings up a interesting hypothesis about corporate culture driving the choices in
information and communications technology.
On several occassions, I've observed that family-owned or dominated enterprises in Asia are not
willing to implement integrated systems. Instead, these families prefer to collate the information
manually in order to get an overall view of how their companies are doing.
Much of this behavior seems to emanate from the preference to keep the true picture of corporate
performance only in the hands of a select family members.


ARMIN PEARN BEES2B
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Why should bottom up decision making not also involve strategic decisions? Why should the CEO
not focus mainly on establishing/strengthening the culture and the trust inside the company
resulting in good decision making by her co-workers at the front line? Raffaella describes the big
opportunity to shift a much higher percentage of decisions in an enterprise to bottom up decision
making, which are - provided there is a strong shared culture and easy access to reliable
information - faster and more effective. As companies learn to unlock the power of bottom up
decision making I would expect a rather massive impact on hierarchie as suggested by Raffaella.


HEINZ-PETER SEBREGONDI
Legal aspects that have changed over the last 10 years in America also put a huge constraint on
communication and decision making in public companies. Still 10 years ago every manager could
very openly discuss in detail financial performance data and people didn't worry about information
leagage to the public.
But nowadays companies need to make sure that all investors get the same information at the
same time. As a result only the Executive Committee has all data and publishes them internally
and externally very cautiously and selectively from a PR perspective and how it could impact the
share price. Particularly info about bad news and info outside your narrow silo is rare. As a result
as a manager or employee you are wondering sometimes whether you really get all relevant
performance data to do your job in the best interest of the company.


ALEXANDER MARX MANNHEIM BUSINESS SCHOOL
Having a decade of working experience formerly employed at the largest IT company in the world
advising CIOs, I can only concur with Prof. Sadun. I would consider myself as still one of the
"younger" generations that is able to grasp the sheer variety of communication tools, but for
corporations this is a burden at times causing "jitter" up the reporting line. Information Filtering is,
at times, very difficult and does not "scale" (here technical terms: too much information to
process; at least for a human being). On the same line, especially in the areas of Business
Software, like SAP, there has been a shift towards "accelerated" Business Intelligence, giving
real-time information on a business. Again, here the communication, or better, representation of
the data is critical for corporate managers to benefit from. Real-time business intelligence could
(in the future: will) govern a business' success, thus cannot be ignored. It is going to be
interesting though how company will adopt to these challenges in the next decade. My prediction
is that a good IT strategy, influenced by an excellent CIO, can bring an enterprise to the next level
of business success. Combination of Technology and business is the key.


GRENVILLE LANNON UNIVERSITY OF NOTTINGHAM BUSINESS SCHOOL
This looks like another exploration of the 'determininsm' debate - does the technology determine
the nature of its use, or does the organisation determine the way in which technology is used?
One could equally argue that corporations with particular decision making cultures adopt
information technologies which reaffirm those cultural norms. I'm personally not convinced that
technology acts so independently of pre-existing organisational factors that it creates these
decision-making patterns itself. Interesting piece of research though!


KAPIL KUMAR SOPORY COMPANY SECRETARY, SMEC(INDIA) PRIVATE LIMITED
IT is a decision making enabler in view of its role to employ techniques leading to quicker
dissemination of information required for decision making. Chief Information Officer (CIO) plays key
role and helps in making available the strategically important information to the decision makers.
For this, it is necessary to have technology suited to the operational requirements of the company.
We must keep pace with the improved technologies in the market and deploy the latest versions
particularly by those involved in taking decisions on matters of crucial concern. All decision
making cannot be top-down only though most would be these. Depending on an action, IT
resources appropriate to it need be provided.


NARENDAR SINGH PROFESSOR AND CONSULTANT, FREELANCER
The environment for business has undergone a chnage world over especially in India. The legal
aspect and necessity has compelled industry and corpote world to provide information to all share
holders at the same time. The denial of information leads to depriviation of one of the staek
holders. This has a very negative impact on the company. However, technology provides edge.
Hence the IT. The IT use is determined by necessity and vice a versa. Information with stake
holders provides the necessary levage to the company. Hence, here the technology is being used
by comapny to levarage its image.


DR NIKHIL ZAVERI DIRECTOR, SEMCOM INSTITUTE, VALLABH VIDYANAGAR, GUJARAT, INDIA
IT, now, cannot be viewed in isolation. The entire firms's decision-making pattern will decide the
flow of information. Firms need to distinguish between 'Tactical' vs 'Strategic' decisions. The more
autonomy to Middle and lower levels for decision-making, the more time to the Top for planning.
Hence, diligent use of IT is imperative.


WAHIB FARAH GROUP EXECUTIVE DIRECTOR, CEDARCOM GROUP
I totally agree with you regarding the importance of trust in any decision making process whereby
the most effective approach is using decentralized decisions... This trust will empower middle
management and let them take daring and calculated risks decisions... Any CEO should promote,
trust and nurture other potential talented leaders within his own company...


MARTIN CAWTHORNE-NUGENT CONSULTANT, INDEPENDENT








Isn't this about two dimensions? 1) Access to information whose structure is appropriate to the
decisions to be made and the timescales available. 2) Cultural encouragement to take decisions
where the information is structured appropriately for the decision that is to be made.
The technology aspect influences the sheer volume of information and the speed with which it can
be structured. The traditional "information systems" view focuses on pre-defined models and rules
to structure information so that the technology can deliver capability in the time available - ERP,
CAD, CAM. More recent developments shift much of the modelling and rules closer to run time -
internet search engines for example or complex event processors that fire rules as data streams
in (rather than after it has been structured and stored).
Perhaps this is as much about the definitions of structured/unstructured information and decision
making. The really interesting bit is the impact of social networking (Rafaella's instant
messaging?) and the capability to distribute unstructured information independent of the
organizational hierarchy and user access permissions (see "HBS Faculty on 2010's Biggest
Business Developments" elsewhere http://hbswk.hbs.edu/item/6596.html ).
If middle managers have no role in structuring information, then decision-making will have to
gravitate either to the top or to the bottom of the organization.


NALIN KUMAR PROGRAM MANAGER, MICROSOFT
Having worked in two major corporates (Microsoft and Infosys), I feel top-rung ladder provides the
framework and the bottom line is left with utmost freedom to unleash the full potential within
defined framework.
I believe top-down decision making is neccessary if an enterprise is looking for new business
development. Also, it is needed where the business is mature for realizing full potential even if one
applies the simple principle of PDCA (Plan, Do Check, Act). At the same time, fostering an
environment of bottom-up decision making is neccessary to bring the best out of the talent pool
employed and keeping them motivated.
Hence, I would rather suggest best mix of both decision making styles is the key. Again the best
mix (described above) can depend on factors such as industry maturity, cultural differences and
employee's skill set.


ANONYMOUS
I can never get enough information. I'm not certain how we got where we are without the IT skills
over the last 25 years. Nalin Kumar is correct a balance of information and knowledge is the best
mix.


RICKY FORMOSO MANAGEMENT CONSULTANT, PROMODEL - PHILIPPINES
Simulation-based enterprise wide decision making is increasingly becoming more and more
popular, even in emerging economies like the Philippines.
But the degree of its usefulness however is dictated to the extent that frontline managers, who have the better information of a company's available resources, are being drawn into the dynamics of an enterprise' strategic decision-making process. And this is essential in today's business environment considering intensified competition with globalization.
Unfortunately, this is where the disconnect begins: strategic managers' time frame, by the nature of their functions, are inherently long-term (capacity projection, etc). Frontline executives, for their part are on the shorter-term (production schedules, etc).
Blending together the two different realities is therefore the most desirable scenario. And the success rate is obviously higher when the two "worlds" come together in the planning table. But we know this is impossible when the executive office is miles away from the factory and distribution offices.
Truly, this is where technology differentiates between the market leader and the market follower. The fast-response organizations, and the laggards. And the market has the best way of rewarding one over the other.