Reinterpreting the demise of hierarchy: a case study in IT, empowerment, and incomplete contracts

The goal of this case study is to illustrate the potential of incomplete contract theory in explaining internal incentive structures and governance mechanisms in the emerging wave of organizations characterized by a rich knowledge base, geographical dispersion, or even “loose” and virtual organization structures.

Abstract

This paper presents a case study of the implementation of a sophisticated internal performance monitoring system by the service division of a value-added reseller of Canon products in Denmark. This new control system could not only aid in controlling cost and productivity, but could also monitor customer service and quality levels. Although the new system was implemented with exceptional technical success, it met a very defensive reception among the technicians. In response, management decided to initiate an empowerment program. In order for this program to have a significant impact, management needed to make the requisite shifts from a strictly hierarchical to a team-based organization form, as well as moving from a hierarchical to an interactive control process. It was only after the company completed this type of “organizational realignment” that the real benefits of the system were harvested. This case study explores the implications of the dispersed and empowered organization and the consequent lack of direct process control. In order to fulfill this aim, the discussion is based on the Grossman, Hart, and Moore theories of incomplete contracting and the role of “information assets” and incentive misalignment of the newly “empowered” and highly knowledge-based service organization is examined. Although property rights theories have typically been applied in “boundary of the firm” questions, the goal of this case study is to illustrate the potential of incomplete contract theory in explaining internal incentive structures and governance mechanisms in the emerging wave of organizations characterized by a rich knowledge base, geographical dispersion, or even “loose” and virtual organization structures.