Transaction Cost
Gruppe 7
How to understand information systems:
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Classical perspective:
 Data Flows
 Decision Support
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New approach:
 Transaction Cost
Limits in the conventional models
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Data Flow approach:
 Frequently used
 DFD, ER, OO
 Focus on the data flows in the organizations
 But organizations are complex, social structures
 People is the forgotten entity
Limits in the conventional models
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Decision Support Approach:
 Managers faces complex tasks and a complex environment
 They collect information to reduce uncertainty and support
their decisions
 Focus on reducing uncertainty
 Focus on the decision making of the individual managers
 But managers are not “solo chess players!”
 Assumption: All share a common goal in the organization
 But ignores opportunistic behavior
 And ignores potential conflicts between decision makers
Limits in the conventional models
Transaction Cost
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Ciborra proposes the transaction cost approach to acknowledge
both the economic and social nature of organizations
An attempt at a short summary of the approach:
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An organization is a network of transactions. A transaction is an
exchange of information or something of value from one actor to
another. The resources it takes to facilitate the exchange, cost
something. To reduce the cost, an information system can facilitate
the transactions. The better the “fit” between organization and
system, the lower the cost of the transactions.
Example: if the delegation of a task from the UiO team to the WSU
team takes more time than it would to just do it yourself, the
transaction cost is too high.
Different kinds of costs
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1.
2.
3.
4.
Four types of cost:
Search costs; necessary to set up the minimal social unit for
the exchange
Contracting costs; related to drawing up the contract that
regulates the exchange
Control and Regulation costs; for the implementation of the
contract under conditions of uncertainty
Maintenance costs; costs of resources employed to let the
exchange develop from one phase to the next
Alternative organizations

Market; the existence and
full development of
competition assure that the
transactors about the
equitability of the trade. There
are no barriers in the
marketplace and everybody
can have access to the
relevant information needed
to carry out the trade.
Example of a Market: “Life of
Brain” : Haggling for a beard
Alternative organizations

Bureaucracies; a hierarchical
arrangement of transactions
based on the social
relationship known as
legitimate authority.
Legitimate authority is
implemented in the
contractual form of
employment relations.
Example of a Bureaucracy:
The Ministry of Silly Walks
Alternative organizations

Clan/Team; relies on the high
identification among
members, mutual sharing of
goals and internalization of
norms, values and traditions.
Opportunism is low, and
reliance on trust and sharing
of values and norms must be
adopted.
Example of a clan:
The knights who say “ni”.
Example from Brittain
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Case Study by Nicholson & Sundeep
Brittish Company called Gowing
Tension between management and one group of workers
The workers prefered the clan/team structure
Focus on informal methods, creative work, trust
The management prefereed a bureaucratic structure
Focus on formalism and documentation (routine work)
System types
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Ciborra also divide information systems into types:
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C-form; centralized system
DC-form; decentralized systems
DS-form; distributed systems
CDB-form; centralized databases
DDB-form; distributed databases
Ciborra does not mention groupware systems specifically in
connection to transaction cost as a form of system. However, we
feel that groupware would be especially useful to a clan/team
organization.
The ‘fit’
The project (UiO)
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Transaction cost within UIO sub team
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Transaction cost regarding Virtual Teams
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Search and contracting cost was low
Control cost medium
Maintenance cost medium
Generally higher
Search cost is dependent on finding right tools (E.g. WebCT)
Contracting cost is dependent on tools (VC)
Control cost is high since authority is reduced when not physically
present
Maintenance cost
The usual organizational structure at IFI is teams/clans. This is
ideally to respond to the high uncertainty and the high goal
congruence.
The project (USA)
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Transaction cost with regards to the American sub team
The cost of giving the Americans a task was lower than the
benefit
They were comfortable with the clan/team structure
A common tool was provided to reduce search cost (WebCT)
Contracting costs: Some, because we were initial skeptic to the
American desire to do management
Controlling cost: Medium
Maintenance cost: Medium Much effort required to proceed to
next level of collaboration, and especially staying there.
The project (India)
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Transaction cost with regards to the Indian sub team
Problems in the project with fitting the Indians into the project
The transaction cost of giving the Indians a work task was higher
than the benefit
We expected the Indians to be familiar and comfortable with
working in a team/clan structure
But they were perhaps expecting a more bureaucratic structure.
The relationship was dominated by high uncertainty and medium
goal congruency  That might suggest a clan/team structure
Also  Team/Clan structure is generally best to handle the high
uncertainty factor in this project
Limits of Transaction Cost Model
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No model or perspective is perfect
Economical Viewpoint
Assumes opportunistic behavior
Technological utopianism
Threats ISD as a commodity