Lecture 4 Flashcards
Why is ITO important?
- The cost and the hidden cost of IT
- Technology uncertainty
Hidden cost can be IT risk, productivity drain, misalignment of IT with business goals etc.
What are two governance structures in terms of new IT products?
- Buying it from the market
(can range from outsourcing, to buying, contracting etc.) - Build the product inside the company
What are production cost?
The cost of making the product yourself OR the cost for buying the product
What are transaction cost?
Also called governance cost.
The cost for all the processes required to coordinate the work of the primary processes.
Can include: finding suppliers, negotiating prices and contracts, relationship management.
Can also include risk factor for the supplier in case of idiosyncratic products
What theory lies underneath the TCT?
Bounded Reality.
Not all the information you have is complete. That can be because of your own errors or because of non-supply of information. You base your decisions on what you know and you also want to anticipate for the things you don’t know (so you want to add those to your contracts).
This idea opens the potential for increasing transaction cost due to (1) opportunism and (2) maladaption
What are the three dimension in the TCT that drive outsource decisions?
- Asset specificity
- Uncertainty
- Frequency
What is meant by asset specificity?
Degree of uniqueness of the asset.
Can it be replaced easily without sacrificing value?
What is meant by uncertainty?
Environmental: demand, market conditions, technology, etc.
Behavioral: level of information you have, distorted information etc.
What is meant by frequency?
Do you need the asset/activity only once or is there recurrent demand?
What is the main risk of ITO?
Vendor/supplier lock-in (due to bounded rationality) and the consequent shift in power in the relationship.
This can be caused by:
- exclusive supply agreements while the market price is lower
- Renegotiating during the contract and charging more
- exit barriers from the contract
What is meant by Delta C?
delta with a triangle
Internal production cost - market production cost
What is meant by Delta G?
Internal transaction cost - market transaction cost
When do you outsource?
When:
Delta C + Delta G > 0
When do you use internal market?
When:
Delta C + Delta G < 0
What do you do when Delta C + Delta G = 0
You can pick your favorite.
