Analyzing Cost-Effectiveness of Organizations: The Impact of Information Technology Spending SABYASACHIMITRA AND ANTOINE KARIM CHAYA SABYASACHI MITRA is an Assistant Professor at the Dupree School of Management at the Georgia Institute of Technology. His research interests include strategic infor- mation systems, the economic impacts of information technology, software outsotirc- ing, and telecommunications. His education includes a Ph.D in infonnation systems from the University of Iowa, and a B.Tech. in mechanical engineering from the Indian Institute of Technology, India. ANTOINE KARIM CHAYA is a Ph.D candidate at the Dupree School ofManagement at the Georgia Institute of Technology. His education includes an M.S. in management from Georgia Tech, and a B.S. in civil engineering from the American University of Beirut. His research interests are focused on the economic impacts of information technology, justification of information technology expenditures, and strategic infor- mation systems. ABSTRACT: The performance impacts of infonnation technology (IT) investments in organizations have received considerable attention in recent years. In this research, data set containi ng the information technology budgets of over 4 0 0 large and medium- sized U.S. corporations. We find that higher IT investments are associated with lower average production costs, lower average total costs, and higher average overhead costs. We also fmd that larger companies spend more on information technology as a that infonnation technology reduces labor costs in organizations. We explain our findings, which are often counterintuitive but interesting, using basic microeconomic theory ofthe firm. KEY WORDS AND PHRASES: business value of information technology, impact of infor mation technology, information technology investments, information technology payoff. THE LAST TEN YEARS HAVE WITNESSED A DRAMATIC INCREASE in investments in information technology (IT) by U.S. busin esses . Brynjolfsson [8] reports a tenfold Acknowledgments: We would like to thank Computerworld for making their database of IT budgets availa ble to us. W e would also like to thank two anonymous ref erees and the guest editors of th e special section for their valuable comments about an earlier draft of this paper. Both authors contributed equally to the project. Joumat of Management Information Systems I Fall 1996, Vol. 13, No. 2, pp. 2 9-57 Copyright © 1996 M.E. Sharpe, Inc.