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Spring 2010

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What is the relationship between environmental uncertainty and IT infrastructure governance?

THE QUESTION:

Gautam Ray, assistant professor, Department of Information and Decision Sciences is the coauthor of “Environmental Uncertainty and IT Infrastructure Governance: A Curvilinear Relationship,” which has been accepted for publication by Information Systems Research. This study provides a more refined understanding of the relationship between environmental uncertainty—the dynamism, munificence, and complexity faced by a firm, along with IT infrastructure governance—and the pattern of decision-making regarding IT infrastructure.

        Prior research considers the IT governance decision to be a trade-off between the cost-efficiency of centralized information processing and the responsiveness provided by local information processing. Environmental uncertainty plays a major role in this trade-off. In uncertain environments, the need for local information processing dominates the cost-efficiency available from centralization, leading to decentralization in IT governance.

THE FINDINGS:

Prior research of the impact of environmental uncertainty on IT governance overlooked the presence of the moral hazard associated with local decisions. Using a moral hazard model, Ray and his coauthors show that while environmental uncertainty makes decentralization more valuable by enhancing responsiveness to local information, it also exaggerates the moral hazard problem, as it is hard for headquarters to monitor business units’ decisions.

        Ray’s paper shows that there is an inverted U-shaped relationship between environmental uncertainty and decentralization in IT governance. When the information asymmetry between headquarters and a business unit is high, an increase in environmental uncertainty first increases and then decreases the likelihood of adopting decentralized IT governance.

        The implication from this study is that given the level of environmental uncertainty, managers need to trade off the benefits of local responsiveness provided by decentralization with the benefits of control and coordination provided by centralization.

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