Note: An Economic Analysis of IS Budgets

Abstract

This paper conducts an empirical analysis of information systems budget data focusing on the implications for the efficient production of information services. We use a model of the production of information services based on the economic theory of production to develop testable hypotheses for budget behavior. In particular, we focus on two important issues: (1) the allocation of the information systems budget to its two largest components—personnel and hardware, and (2) the existence of scale economies in the provision of information services. These issues are examined using budget data collected through a survey of information systems managers in Fortune 500 corporations. We find that the optimal ratio of personnel to hardware expenditures is independent of the scale of the information systems organization for a given set of prices, and that there are no measurable economies of scale in the provision of information services. The implications of the analysis for the management of information services are discussed.