On the Emergence of Shadow IT - a Transaction Cost-Based Approach

Information Technology (IT) used for business processes is not only provided by the organization’s IT department. Business departments and users autonomously implement IT solutions, which are not embedded in the organizational IT service management. This increasingly occurring phenomenon is called Shadow IT. The various opportunities and risks of Shadow IT challenge organizations and call for approaches to manage the phenomenon. An initial point to achieve measurable indications for the management is to explain why Shadow IT emerges. Therefore, this paper explores the business decision to implement Shadow IT. Based on existing research we derive that Shadow IT is created after a make-or-buy decision, which is substantiated in the Transaction Cost Theory. We deploy a triangulation approach using the methods expert interviews and multiple-case study to investigate Shadow IT emergence. Our findings identify prohibitive transaction costs in the exchange relation between business and IT departments, influenced by misalignment, as the main explanation. We conclude that the principles of Transaction Cost Theory may be applied to develop governance structures for managing Shadow IT. This strengthens the link between IT Governance and Business IT Alignment and expands the understanding of business integration within the IT domains of an organization.