The Production of Information Services: A Firm-Level Analysis of Information Systems Budgets

Abstract

Previous research has demonstrated that the production of information services can be characterized at the aggregate economy-wide level by the Cobb-Douglas production function. However, the underlying production process at the firm level has not yet been ascertained. The objective of this paper is to determine the form of the production process for information systems services at the firm level by conducting an empirical analysis of IS budget data. The production of information services is modeled using a production function with two inputs, hardware and personnel. We estimate various econometric specifications to determine several characteristics of the provision of information services, including the allocation of the information systems budget to its two largest components—hardware and personnel—and its implications for the form of the production function. After controlling for industry sector, we find that the ratio of personnel to hardware is independent of scale, which indicates a homothetic production function. We also find that the ratio of factor shares is constant with time, consistent with the Cobb-Douglas production function.We conclude that the underlying form of the production function is the same at the level of both the firm and the economy. Our analysis demonstrates how the application of production theory to the production of information services can yield useful insights from both a theoretical and managerial perspective.