The Effect of Internal Cost Management, Information Systems Integration, and Absorptive Capacity on Interorganizational Cost Management: A Pilot Study

Competition is forcing organizations to collaborate more with their business partners. Interorganizational cost management (IOCM) has been used by organizations to achieve the collaborative management of costs throughout the value chain. Effective management of costs that cross organizational boundaries has the potential to improve the overall performance of each firm in the value chain. It is therefore important to understand what factors may lead to the management of these interorganizational costs and if management of these costs is beneficial. Based on previous research, we model several antecedents that lead to IOCM. Using path analysis, we study several constructs that may affect IOCM and the benefits that result from its use. These constructs are internal cost management, electronic integration, and absorptive capacity. We focus on the interorganizational cost management practices of target costing, kaizen costing, open book accounting, and information sharing. The components of absorptive capacity in our study are the relevant knowledge, the communications network, and the communications climate, which includes trust. Electronic integration in our study refers to the degree that a firm’s information technology (IT) systems are integrated and accessible both internally and externally. Internal cost management refers to the cost system used to analyze costs and manage organizational resources. Our model is tested using a sample of managerial accountants who work for organizations that are part of a supply chain. Electronic integration is found to affect both absorptive capacity and internal cost management practices. We also find that absorptive capacity is a direct antecedent to IOCM practices, and electronic integration impacts IOCM indirectly through internal cost management practices. Furthermore, internal cost management leads to IOCM in the presence of a high degree of electronic integration and dependency. Lastly, our analysis suggests that management accountants do perceive significant benefits from engaging in IOCM techniques. In summary, all of these constructs play a role in the effective use of IOCM in a supply chain.