Computing services supply management: Incentives, information, and communication

Abstract The management of computing resources and the choice of the organizational form used to govern them is an intricate problem for several reasons. First, the technology itself is subject to externalities, both positive and negative. Delay costs in particular are a significant issue, both from the standpoint of the internal cost-minimizing use of the resources, and the growing importance of time-based competition which requires responsive information systems. Second, the relationship between the IS department and central management is likely to be characterized by a combination of incentive conflicts, asymmetric information in the form of specialized IS knowledge that cannot be readily and fully transmitted to central management (limited communication). Existing principal-agent models do not incorporate this combination of features. Hence in this paper we develop a general, yet tractable, microeconomic model to study the control of an organization's computing resources that incorporates all of these features. Because the model is new, the paper is primarily theoretical. Limited communication is modeled by a finite message space which must be used to communicate a real-valued parameter. A mechanism design approach is then used in this setting to derive the optimal centralized control structure. Limited and costly communication implies that the optimal centralized mechanism need not dominate a decentralized mechanism such as a profit center, in contrast to the result with full and costless communication. A numerical example is also presented, which suggests that it is costs of communication rather than limited communication itself that is most likely to degrade the performance of a centralized control structure.