Organizations are compelled to develop interorganizational
relationships (IORs) to enable a range of activities such as supplying
goods, research and development (R&D), and outsourcing. The use of
information technology can facilitate a smooth flow of information from
one organization to another using interorganizational systems (IOSs) -
automated information systems shared by more than one organization and
allowing information flow across organizational boundaries. IOSs can
reduce the costs of communications and at the same time extend the
possibilities of coordination. The academic literature that discusses
IOSs is massive and applies many theoretical perspectives to view and
analyze issues regarding the use of IOSs within interorganizational
relationships. The objective of this paper is to provide a brief review
of four widely used theoretical perspectives and the main IOS
literature related to each perspective. The four perspectives are
transaction cost economics, incomplete contracts theory, adoption
theory and resource dependence theory.
The organization of the paper is as follows. Each of the sections two
till five will discuss a theoretical perspective by first providing a
concise review of the theory and consequently the IOS literature that
uses that particular theory. Finally section six will provide a brief
conclusion of the paper.
2. Transaction Cost Economics
Transaction cost economics (TCE) concentrates on the make or buy
decision. The theory argues that it is more efficient for an
organization to buy a standard product externally from a special
supplier who is an expert in producing that product than to produce the
product internally. Nonetheless, buying products on the market can be
less attractive when certain conditions apply such as for example when
the organization needs a specific customized product. The organization
is forced to internalize production under these conditions. TCE
justifies why and predicts when an organization chooses to internalize
the production process or conduct market exchange to acquire the
TCE identifies two types of costs that have to be considered to
determine whether a transaction should take place externally on the
market or internally within the firm: production costs and transaction
costs. On the one hand, acquiring a product on the market is argued to
lower production costs and to raise transaction costs. The production
costs decline due to the economies of scale and specialization
advantages the supplier benefit from. The transaction costs raises due
the required negotiations and monitoring within the market. On the
other hand, producing a product internally increases the production
costs and lowers transaction costs. Hence, the organization will choose
the most attractive alternative that minimizes the total costs.
The amount of transaction costs depends primarily on three factors
. First, the frequency of contracting; active first
within a specific market usually have more knowledge regarding market
conditions, traded products and active suppliers within the market than
markets that do not use the market as often. Second, the degree of
uncertainty; uncertainty can arise from technological changes,
unpredictable changes in consumer preferences or strategic behavior
regarding nondisclosure and distortion of information. Third, the
degree of asset specificity, which is the degree to which assets are
specifically designed for a particular objective. TCE contends that
transactions that are characterized by higher levels of asset
specificity should be produced by organizations internally because such
assets only can be redeployed at a great loss in values resulting in
IOS Literature Using The TCE Theory
IOS Research applying the TCE has tried to investigate the impact of
IOS on the transaction structure. Malone  proposed the
‘electronic markets hypothesis, which argues that information
technology will reduce the information coordination costs and this will
encourage the use of electronic markets. He contends that eventually
electronic markets will obtain the preference above electronic
hierarchies for coordinating economic activities. Clemons et al 
disagreed and proposed the ‘move to the middle hypothesis, where they
argue that information technology in the form of IOS will reduce
coordination costs, operation risks and opportunism risks. Because of
these reductions, it will be more efficient to create long-term
relationships with a smaller number of suppliers. Gurbaxani and Whang
 focused on three types of costs: external and internal
coordination costs and operating costs. They argue that information
technology has shrunk external and internal coordination costs and
improve the operational efficiency. Consequently, the use of both
electronic markets and electronic hierarchies will be increased.
Moreover, they content that the general impact of information
technology will largely depend on the factors specific to the
organization and the industry.
TCE has enabled scholars to justify the formation of many IORs and the
use of IOSs within these relationships. The limited focus of TCE on
short term cost minimization results in the ignorance to consider other
important criteria such as social issues and learning within the
relationship. These criteria can have a significant impact on the
3. Incomplete Contracts
A complete contract is a contractual agreement between economic agents
that specifies the responsibilities of each party in every possible
situation or contingency. Williamson [36,37] and Maskin and Tirole 
reason that contracts are almost never complete. As discussed
earlier, Williamson  argues that the cost of contracting and
subsequently enforcing these contracts depends on the chosen governance
structure, i.e. market or hierarchical. Grossman and Hart 
contend that each governance structure involve a different type of
contractual rights: specific and residual rights. If it is too costly
to stipulate all the specific rights in the contract, then all the
rights will be transferred excluding few rights that are mentioned in
the contracts. Therefore, ownership is important in the incomplete
contract theory. Ownership dictates the destiny of an asset in
contingencies not described in the contract, that is to say ownership
is the purchase of the residual rights of control [3, 13]. Because
contracts are almost never
complete, owners have a relatively stronger position compared with
non-owners because they mostly acquire the residual income streams due
to their strong negotiating position.
There are several reasons that compel contracts to be incomplete. Hart
and Moore  argue that some contractual terms are unverifiable
because they are not commonly observable by all parties or more
specifically the party that is responsible for enforcing the contract
(e.g. the court). Second, Grossman and Hart  contend that is
impossible to incorporate every potential contingency in the contract.
Because the parties cannot identify ex ante all possible ex post
contingencies, they are constrain to an incomplete contract they does
not enclose all contingencies. Third, even though some contingencies
can be predicted, discussing and writing them into a contract may not
take place. Maskin and Tirole  point out that this can be due to
the high transaction costs of describing the possible states of nature.
As a result of these three reasons, there will be some possible
contingency not included in the contract making the contract incomplete.
IOS Literature Using The Incomplete Contracts Theory
Incomplete contracts theory has considerable relevance to IOS theories.
IOS contracts are inherently incomplete as all three earlier discussed
reasons that cause contracts to be incomplete are present . First,
the use of an IOS necessitates asset-specific investments
in IT assets such as hardware, software and also complementary
investments in assets such as expertise and training. These investments
can be hard to observe by the other participants involved and perhaps
impossible to verify by a third party. Second, the various applications
of IOS for different activities make it difficult to foresee all the
contingencies. Due to the high speed of environmental change,
organizations need to react frequently and change their strategies to
adapt to the environmental change. This can be even exacerbated when
the value of the IOS increases with the number of organizations
employing the IOS. This is the case for electronic market places.
Finally, some future contingencies can be foreseen and nevertheless,
organizations may choose not to put them in the contract. This is
observed when organizations create partnerships. Organizations choose
to enter long-term relationships without specifying all contingencies
and instead relying on the interorganizational trust present within the
The failure to attain complete contracts underlines the importance of
IOS ownership as portrayed by the case of the Airline Computer
Reservation Systems (CRS’s). The CRS’s were traditionally owned by the
individual airlines and American Airways and United Airlines were
leading and affecting the market. Smaller airlines contended that
American and United should divest their CRS’s to create independent
intermediaries. This ownership structure would serve competition better
and encourage higher levels of investment, and eventually higher
The incomplete contract theory was used by Bakos and Brynjolfsson 
to determine the optimal strategy for buying organizations that
use IOS. They argue that buying organization can maximize their profits
by reducing their bargaining power through limiting commitments to a
small number of suppliers. Even though this is apparently inconsistent,
the reduction in the number of suppliers is required to persuade
suppliers to conduct noncontractible investments. This is explained by
the rationale that when a suppliers perceive a particular buyer to be
dependent and willing to enter a long term relationship, then the
supplier will be more willing to conduct asset specific investments.
Another IOS related application of incomplete contracts theory is
regarding the ownership structures in electronic networks. Bakos and
Nault  argue that if there are one or more essential assets for
the functioning of the IOS, then all the assets of the IOS should be
owned together. Hence, common ownership by all participants is optimal
when an IOS requires essential assets, such as a common IT
infrastructure. Furthermore, they argue that when essential assets and
indispensable participants are absent, sole ownership will not be the
optimal ownership structure. Therefore, if IOS partners want to prevent
any single party from controlling the IOS, then they should make
certain that the IOS doesn’t need any essential assets and if there are
such assets, then they should be owned by everyone.
Banker, Kalvenes and Patterson  argue, contrary to the
mainstream, that IT increases contract completeness. They contend that
the progress in communication technologies will reduce monitoring
costs. It will be possible to increase monitoring and some parts of the
contract will be converted from non-contractible to contractible. The
buyer may then choose to enter more terms in the contract to decrease
his risk and make the contract more complete. Due to these additional
contractual terms, the cost of monitoring for that particular supplier
will increase. Banker, Kalvenes and Patterson  contend that the
decrease of transaction costs generated by IT will be cancelled and
surpassed by the increase in contractual terms and monitoring costs per
supplier, leading to a reduction in the optimal number of suppliers.
This shows that the claims of Bakos and Brynjolfsson  and Clemons
et al  hold under the more general conditions of Banker, Kalvenes
and Patterson .
4. Adoption Theory
Adoption generally refers to the decision of any individual or
organization to make use of an innovation . IOS adoption research
has been influenced by the broad
organizational adoption approach  significantly [6, 27]. This
approach emphasizes that
adoption can be based on the perceived characteristics of the
innovation. Rogers  identified five characteristics that can
either facilitate or impede the adoption of an innovation. First,
relative advantage is the extent to which the innovation is perceived
better than that it is replacing. Second, compatibility is the
perceived consistency of the values, needs, and experiences of
potential adopters with the innovation. Third, complexity is the extent
to which an innovation is difficult to understand. Fourth, triability
refers to the extent to which an innovation can be experimented on
before a full commitment must be made. Finally, observability is the
degree to which the benefits of the proposed innovation are visible.
These characteristics are primarily based on individual-level adoption
Framback and Schillewaert  argued that features of the adopting
organization can affect the adoption process and they pointed out to
three main organizational features. First, the size of the organization
is argued to be positively or negatively related to innovation
adoption. On the one hand, larger organizations are under higher
pressure to adopt innovations to support and improve their performance
. On the other hand, smaller organizations are more
flexible and have enhanced receptiveness towards new innovations. This
apparent inconsistency can be accredited to the relationship of
organization size with other organizational features, such as
structure, strategy and culture. Organizational structure is the second
feature argued to influence organizational adoption. Organizational
structure is shaped by multiple attributes, which can have diverse
impacts on adoption. High levels of centralization and formalization
have a tendency to encourage the implementation of adoption decision,
while low interconnectedness have a tendency to inhibit the information
flow and consequently the implementation of the adoption. Finally, the
degree of organizational innovativeness influences the adoption
propensity. For example, Hurley and Hult  point out that
organizational cultures that call attention to learning, development
and participative decision-making produce higher levels of innovation.
IOS Literature Using The Adoption Theory
The IOS literature has identified three main groups of factors that
influence the adoption of IOS: nature of the technology adopted, the
adopting organization, and the interorganizational relationships or
more generally the external environment .
The nature of the adopted technology may create difficulties for the
adopting organizations. Important factors regarding the technology that
effect IOS adoption comprise network security, system integration, data
conversion and the compatibility of software and hardware . The
security is a key issue as IT do not always fulfill
the transaction safety requirements of organizations . Moreover,
the adoption of an IOS may generate complex and
expensive integration issues. The integration of the IOS with the
internal IS can involve rigorous technical efforts involving activities
such as the conversion of program codes, databases and the validation
of data formats .
The second group of factors that influence IOS adoption consists of
organizational factors. Organizations participate in IOSs or adopt new
innovations in general only when they offer better benefits compared
with the previous situation . IOS benefits can range from
modest gains such as reduced communication costs and improved customer
service [14, 30] to
transformative advantages that enhance competitive advantage ,
enable business process reengineering and
support industry value chain integration . Besides
the benefits, the compatibility of the IOS with existing organizational
policies, procedures, values, and systems and top management support
are mostly perceived as relevant aspects of IOS innovation and adoption
[6, 21, 27].
The third group of factors consists of the stimulators and barriers
that other organizations set on the focal organization to enhance or
inhibit the adoption of IOS. Competitive pressure and exercised power
have been found to influence EDI adoption . Hart and Saunders found
both power and trust are important issue
for adoption and use. Powerful organizations can manipulate their
partners in two ways. The powerful organization can induce its partners
to adopt the new technology by providing rewards and benefits or it can
force them to adopt it with the threat of abandoning the partner if it
rejects. Trust is also identified as an important factor as its
presence can provide monitoring and transaction cost reductions and its
abuse will initiate a vicious cycle and impede constructive
5. Resource Dependence Theory
The roots of resource dependence theory (RDT) can be found in an
article by Emerson in 1962 where he illustrated the analogy between
power and dependence across all forms of social relationships .
Emerson argued that the dependence of a party B on party A is a
function of availability and motivational investment and is directly
comparative to the power of A over B. In economic expressions, this is
known as supply and demand. The theory of Emerson was later applied by
Pfeffer and Salancik  to analyze the relationship between the
organization and its external environment. They distinguished between
general structural characteristics that describe the entire environment
and particular relationships among identifiable social actors. The
three most elemental structural characteristics of the environment are
concentration, munificence, and interconnectedness. Concentration is
the level of diffusion of power and authority within the environment,
munificence is the level of availability or shortage of critical
resources, and interconnectedness is the number and configuration of
connections between organizations. These three structural
characteristics shape the general relationships between social actors.
On an individual level, the degree of dependence that an individual
organization faces is determined by the importance of the externally
controlled resources to the success of the focal organization, the
degree of discretion that the external environment has over the
resource allocation of that resource and finally the number of
alternatives to that particular resource.
The RDT acknowledges that a single organization can not produce or own
all the required resources for its operations. The organization is
forced to acquire these resources from several other actors and
organizations in its environment. Therefore, a successful organization
is an organization that is able to satisfy the demands of the various
stakeholders such as employees, customers and shareholders. To realize
this, the organization can choose between three alternative types of
action to deal with the demands of the external environment: it can
avoid them, comply with them or try to modify them to acquire a better
set of demands, which can be fulfilled easier. The third alternative is
the main focus of RDT. The theory contends that organizations conduct
actions to reduce their dependence on other organizations and the risk
that is emanating from these dependencies. The dependencies can be
modified using two strategies. The first strategy is the
ownership-alteration strategy, which implies that the needed external
resource should be purchased. This can result in vertical integration,
horizontal integration and diversification. The second strategy entails
creating a quasi-hierarchical relationship to govern the uncertainty
within the relationship. Examples of quasi-hierarchical relations are
joint ventures, interlocking boards of directors, associations and
cartels. The purpose of both strategies is to create stability by
achieving better planning and more accurate forecasting. Basically, the
organization will try to reduce its dependence on the environment by
constantly balancing two contradictory forces: certainty and autonomy
IOS Literature Using The Resource Dependence Theory
The interdependence between organizations is the focus of IOS
literature that uses the resource dependence theory. Various authors
found that more effective use of IOS can be related to the level of
integration between the interorganizational IT infrastructure and the
internal IT infrastructure of each organization [5, 8, 17]. This high
integration results in higher interdependence between the organizations
[10, 17]. Therefore, intensive use of
interorganizational systems results in a shift in the relationship
between organizations to a reciprocal interdependence, that is the
outputs of each organization become inputs for one or more of the other
organizations. Thompson argued that reciprocal interdependence has to
be kept low in the organization structure . Consequently
a potential disadvantage of interorganizational systems is that they
can make entire organizations reciprocally interdependent on each
other. The impact of this interdependence under future unexpected
results is unknown; this can decrease the flexibility of organizations
and produce new uncertainties. Furthermore, it illustrates the argument
of Pfeffer and Salancik  that organizations react to the
uncertainty problems by intensifying their interconnectedness by
coordinating their behaviors in ways predictable to each other. This
will produce higher interorganizational interdependence and new
uncertainties that where not present in the initial situation.
Furthermore, the use of IOS is argued to influence the power and
control structures within interorganizational relationships [1, 17].
The propositions on how IOSs influence the
power and control are divided along two directions. Some literature,
mostly earlier published, argued that the use of IOS’s is exclusive to
selected organizations that fulfilled the demands and rigorous criteria
to join. They mostly referred to EDI systems that needed high set up
costs. The technology restricted the IOS to organizations that
possessed the required resources. Recent literature contends that the
use of modern IOS leads to more just relationsips between organizations
[1, 34]. Angeles  argued that
I-EDI modifies the power structure by transfer the power from large hub
organizations to smaller and mid-sized organizations. The large
organizations used previously their central position to dictate the
terms of relationships and they exploited this by utilizing power to
their favor. The progress of IT has and the emergence of standards,
such as XML and ebXML, has enabled small and mid-sized organizations to
have a broader choice of trading partners.
IOSs are used in various ways to facilitate interorganizational
relationships. This paper has provided a concise review of four
theoretical perspectives that are used within the IOS literature. TCE
has received significant attention within IOS literature as it focuses
on how organizations should organize their boundary-spanning activities
so as to minimize the sum of its production and transaction costs.
Information technology has major affects on interorganizational
communications and coordination and consequently TCE has been used to
study the impact of IOS on production and transaction costs. The second
perspective discussed was incomplete contracts theory. This perspective
is relevant to the study of IOSs as IOS contracts are inherently
incomplete in the three perspectives; the IOS requires asset specific
investments that are hard to observe by other parties involved, it is
difficult to foresee all contingencies related to IOSs as they can be
involved in many complex activities and even some contingencies that
are foreseen are not included in the contract. The third perspective
discussed is adoption theory. Theories using this perspective have
illustrated that the adoption and use of an IOS is dependent on three
main groups of factors; the nature of IOS technology being adopted as
some technologies can create difficulties that inhibit successful
adoption, the adopting organization as it is mainly the organization
that need to initiate and execute the adoption and the relationship
with other organizations as the use of the IOS’s can have a major
impact on the IORs. Finally, the resource dependence theory was
discussed and how it is used to analyze the impact of IOSs on the
interdependence within IORs. IORs are found to influence the power
structure within IORs as they can eliminate the power of big
organizations that operated as hubs and forced small organizations to
follow their regulations.
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