David E. Pingry

Managing the knowledge supply chain: an organizational learning model of information technology offshore outsourcing

In this paper, we present an economic learning model that helps to formalize the complex relationships among an offshoring firms knowledge levels, production costs, and coordination costs. Specifically, we model a domestic firms use of a selective offshore strategy (i.e., offshoring only a portion of its information technology activities) to exploit, through IT investments or contractual provisions, the foreign vendors large, scale-driven repository of production knowledge. We illustrate the conditions under which knowledge transfers during offshoring may reduce a domestic firms in-house production costs, leading to total cost savings in both the short term and the long term. Alternatively, when knowledge transfers are not sufficiently large, some short-lived offshoring projects may generate substantial cost savings to the domestic firm; however, long-lived offshoring projects may cause a disruption in the knowledge supply chain, resulting in substantial losses in the later stages of the project. A firm that fails to realize the costs associated with such a disruption soon enough in the project life may find itself locked into a disadvantageous offshoring agreement without any recourse. However, a domestic firm may be able to overcome a disruption in its knowledge supply chain by exploiting the learning-by-doing production knowledge generated by the foreign vendors economies of scale. The managerial implications derived from our learning model may help guide firms as they consider the impacts of offshore contracts and knowledge management investments on firm knowledge, production costs, and coordination costs.

An Economic Model of Product Quality and IT Value

We use an economic model to formalize the complex relationships among IT investments, intermediate performance measures (e.g., product quality and output levels), and economic performance (e.g., productivity, profits, and consumer surplus). We demonstrate that a profit-maximizing monopolist invests in IT (modeled as changes in parametric characteristics of the firm) to design a better-quality product and charge a higher price. While this profit-maximizing adjustment generates more consumer surplus, it also increases production costs in a way that adversely affects productivity. In contrast, a simple model extension shows that when a firm is unwilling or unable to improve product quality, then IT investments result in suboptimal improvements in profits, an increase in consumer surplus, and an increase in productivity. Together, these models highlight the way in which product quality moderates the relationship between IT investments and economic performance. We also demonstrate that these relationships are robust to the socially optimal case in which a social planner chooses price and quality to maximize social welfare. In addition, we demonstrate that the results of the monopoly model hold when considering the design and development of products offered free of charge (e.g., free online content), but that provide indirect benefits to the firm (e.g., more advertising revenues).

Understanding the Business Value of Information Technology Investments: Theoretical Evidence from Alternative Market and Cost Structures

This paper develops a series of two-stage duopoly models of quality- price competition and a series of monopoly models of quality-price choice in order to examine the impact of information technology (IT) investments on firm profit, firm productivity, and consumer welfare. We solve the duopoly and monopoly models for four cost functions, where each function makes a different assumption about the form of the marginal cost of production. These models are used to conduct a two-by-four comparison [(monopoly, duopoly) × (four cost functions)] of the impact of IT investments on economic performance. The analysis reveals that together market structure and cost structure play a critical role in determining the form of the relationship between IT investment and economic measures. Specifically, moving from monopoly to duopoly and moving from zero marginal cost to marginal cost as a function of quality increase the number of economic measures for which the directional effects of IT investment are ambiguous, or depend on model parameter values.

Modeling the IT value paradox

Assessing the value of IT investments has stumped managers and academics for years. If viewed as a commodity input, however, IT should be measured in the context in which the investment takes place.

A Learning Model of Information Technology Outsourcing: Normative Implications

We use an economic learning model to examine how knowledge parameters characterizing a sourcing relationship between a vendor and a client interact with production costs and coordination costs to affect the business value of alternative outsourcing strategies. This information is then used to determine a firms optimal rate of information technology (IT) outsourcing. We find that the optimal outsourcing rate is dependent on the ability of the outsourcing client to acquire production knowledge from its outsourcing vendor and to retain its internal coordination knowledge despite losses of fundamental production skills due to outsourcing. Specifically, when the client is unable to acquire sufficient production knowledge from the external vendor, the clients optimal outsourcing decision is to engage in either one of two extreme strategies—total insourcing or total outsourcing—depending on the rate at which the clients coordination knowledge depreciates. On the other hand, when the client is able to acquire a substantial amount of production knowledge from the external vendor, the firms optimal decision is to outsource only a portion of its IT services, where the proportion depends on the rate at which the clients coordination knowledge depreciates.

The intelligent organization: some observations and alternative views

Recent papers by G.P. Huber (1984) and by G.P. Huber and R. McDaniel (1986) have provided an excellent discussion of the forces that will determine the characteristics of the surviving firms in what is becoming known as the postindustrial age. Their picture of the organization of the future defines what has come to be known as the intelligent organization. The authors analyze and expand this concept of the intelligent organization. They utilize the framework developed in the Huber-McDaniel papers in combination with the traditional models of microeconomics to make several observations that they fell clarify some of the interactions between the design characteristics of a firm and its environment.<<ETX>>

Theory of decision support systems portfolio evaluation

Abstract A theory is developed for the evaluation of Decision Support System portfolios in a for-profit firm. The critical relationship captured in this theory is between what Decision Support Systems do (increase the efficiency and effectiveness of search for structures for unstructured problems) and what they accomplish for the firm (solve unstructured problems). The resulting theory is used to develop testable hypotheses, some of which are counterintuitive. For example, we suggest that increasing the effectiveness of a DSS should lower its use, but increasing the efficiency of DSS should increase its use. A solution technique for finding a profit maximizing portfolio of Decision Support Systems is proposed. The solution technique is used to solve an example problem, which illustrates the important relationship between scope and scale in the evaluation of Decision Support Systems.

End user—IS design professional interaction—information exchange for firm profit or end user satisfaction?

Abstract In the present paper we argue that the interaction between the end user and IS design professional directly impacts the firms profitability. A goal-driven (profit maximization) IS design strategy is set out and its implications for the end user-IS design professional interaction are detailed. It is shown that a structured information exchange between the two is necessary if the required searches are to be completed and profit maximization achieved.

Engineering Production Functions and the Testing of Quantitative Economic Hypotheses

This note addresses two issues concerning the empirical role of engineering production functions: (1) the possibility of deriving typical economic production function forms from underlying engineering relationships, and (2) the appropriate role of engineering production formulations for testing quantitative economic hypotheses. It is argued that much of the importance of engineering production analysis lies in its ability to serve as a basis for nonempirical tests of quantitative economic hypotheses concerning measures such as marginal products and elasticities. Copyright 1986 by The Review of Economic Studies Limited.

[Software patents] The good, the bad, and the messy

The goal of improving patent quality remains elusive both from an economic and process perspective.