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HD28
.M414
ALFRED
P.
WORKING PAPER
SLOAN SCHOOL OF MANAGEMENT
DETERMINANTS OF INFORMATION TECHNOLOGY
OUTSOLUCING: A CROSS-SECTIONAL ANALYSIS
Lawrence Loh
and
N. Venkatraman
Working Paper No. 3382-92BPS
February 1992
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
DETERMINANTS OF INFORMATION TECHNOLOGY
OUTSOURCING: A CROSS-SECTIONAL ANALYSIS
Lawrence Loh
and
N. Venkatraman
Working Paper No. 3382-92BPS
February 1992
M.I.T.
FEB
LIBRARIES
2
1
1992
RFCc.vcL)
Determinants of Information Technology Outsourcing:
A Cross-Sectional Analysis
Lawrence Loh
Massachusetts Institute of Technology
and
National University of Singapore
N. Venkatraman
Massachusetts Institute of Technology
August 1991
Final Version: January 1992
Authors are
listed alphabetically. Please
address
all
correspondence
to Professor
N.
Venkatraman at Sloan School of Management, Massachusetts Institute of Technology, 50
Memorial Drive E52-537, Cambridge, MA 02139; Phone: (617) 253-5044; Bitnet: NVENKATR
@ SLOAN. This project was supported by the research consortium on Managing
Information Technology in the Next Era (MITNE) of the Center for Information Systems
Research (CISR) at the Massachusetts Institute of Technology. We thank John Rockart,
Judith Quillard, three journal reviewers, and the editor for comments on earlier versions of
the paper.
Forthcoming in the Journal of Management Information Systems
Determinants of IT Outsourctni;
Determinants of Information Technology Outsourcing:
A Cross-Sectional Analysis
Abstract
This paper develops and tests a model of the determinants of information
technology
Specifically,
(IT)
we
outsourcing by integrating both business and IT perspectives.
attempt
to explain the
IT competences as represented
Additionally,
we
by
degree of IT outsourcing using business and
their cost structures
posit that outsourcing
particularly financial leverage. Based
on
is
dependent on business governance,
factor analyses
using data from 55 major U.S. corporations,
outsourcing
is
we
and multiple regressions
we observed
positively related to both business
established that the degree of IT outsourcing
Finally,
and economic performances.
is
and IT
that the degree of IT
cost structures.
We
also
negatively related to IT performance.
conclude with implications and future research directions.
Keywords: Information technology outsourcing; information technology strategy.
Deicrmir.ar.ts o^ IT
Outsouran^
Introduction
It is
truism that information technology
a
administrative support function and has
(IT)
has transcended
moved toward
its
estabUshed
playing a more central role
of business operations (see for instance, [14, 18, 25, 35]). Within this tradition,
research efforts have focused on the use of IT to influence the boundaries of a firm
with
its
and other intermediaries
suppliers, buyers
[6, 8, 21].
There
is,
however, a
glaring lack of research emphasis on the role of IT infrastructure as a component of
the firm
boundary
mechanism
In other
itself.
words, while IT has been considered a
of multi-organizational business relationships, the research stream has
treated the governance of IT infrastructure to be within
Such an approach
fails to
Under
one single firm's hierarchy.
recognize the recent trend towards managing a firm's IT
infrastructure through a variety of governance
mechanisms with other
'hierarchical'
mode toward
microcomputer operations
to Digital
hand over
its
to Businessland,
entire data center to
and
many
it
its
IBM
is
a fifth of
IBM,
its
a classic illustration [43, 45].
is
becoming a serious
The Yankee Group estimated
would evaluate outsourcing, and
a
telecommunications and data
appears that IT outsourcing
firms.
away from
The well-publicized
of governance.
Equipment Corporation and
Beside this particular case,
strategic option for
mode
a 'market'
decision by Eastman Kodak to
firms
firms.
contractual arrangements popularly termed as 'outsourcing,' firms are
increasingly shifting specific components of their IT infrastructure
networks
critical
that all Fortune 500
them would sign outsourcing deals
during the 1990s and that the outsourcing market would increase from $29 billion
1990 to $49.5 billion in 1994
in
[7].
IT outsourcing can be dependent on several factors across multiple levels. At
the level of the
economy, the temporal
firms to rationalize the
like outsourcing.
management
At an industry
effects of trends
and cycles may motivate
of the IT infrastructure through arrangements
level,
competitive pressures
may induce
firms to
Determinants of IT Outsourcing
establish 'partnership-based' relationships with key IT vendors. At the firm level,
the quest for competitive advantage
may
serve as a
critical
impetus
outsourcing decision. Within the firm, the decision to outsource
on several managerial
For instance, managers
factors.
accumulating control over corporate resources
Further, the association of information with
[27]
power
may
to the IT
may
be dependent
like to build
empires by
such as the IT infrastructure.
[17]
may
inhibit the outsourcing
decision.
The
practice of IT outsourcing has been extensively
documented
scant attention provided to articulate
business periodicals, but there
is
determinants. In other words,
we know
the
phenomenon
some
in
paper
is
to
its
we do
detail but
not fully grasp the set of factors leading to the outsourcing decision.
this
in the
Our
objective in
develop a research model on the determinants of IT outsourcing.
recognize the complex array of factors discussed above; but as a
establishing an empirical model,
we
first
attempt
We
at
focus on factors at the firm-level with
appropriate controls for industry sector
effects.
Frameworks of IT Outsourcing
Outsourcing can be framed as a 'make-versus-buy' decision facing
its
generic form,
it
has been studied in several settings such
a firm. In
the manufacturing of
as:
parts in the automobile industry [30, 40]; the sales function in the electronic industry
[1];
the procurement of components or services in the naval shipbuilding industry
[23],
and the distribution of equipment, components, and supplies across
a
broad
set
of industrial firms [16].
Within the IT profession, the term "outsourcing"
buzzword
that
is
confusing and often misunderstood
as the significant contribution
by external vendors
is
[44].
often viewed as a
We
define IT outsourcing
in the physical
and/or human
resources associated with the entire or specific components of the IT infrastructure
D€tcrrjnKi2Kt> of IT Outsourcing
in the
user organization. This definition
is
consistent with the conceptualization of
and resources
the IT infrastructure in terms of "the internal organization of people
devoted
staff
to
computer-based systems...
[involving]...
and applications and the intangible organization, methods and
u^hich the organization maintains
user. Alternatively, the
ability to
its
In the context of IT sourcing,
ownership
vendors
of certain
1,
we
may
assets of the user
utilize their
may
may
personnel
to
be
provide
be employed by the vendor. In
central to our definition: (1) the degree of internalization of
physical resources by the user;
user.
[22, p. 148].
depict the distinction between outsourcing and insourcing based on the
two dimensions
by the
by
contribute computer assets for the
computer
the required services, or existing staff of the user
Figure
policies
provide system services"
may
transferred to the vendor. Similarly, vendors
the
both the tangible equipment,
By
internalization,
employment
of the
(2)
the degree of internalization of
we mean
the
human
ownership of the computer
resources
assets or
system personnel. Several modes of the IT infrastructure
have been commonly outsourced by
firms.
These include applications
development, data center, systems integration, systems design/planning,
telecommunications /network, and timesharing. The modes of IT outsourcing vary
through the different levels of contribution of physical and
user and the vendor. In Figure
1,
of outsourcing in the definitional
we
within the corporation.
mode
framework.
1
here
of IT outsourcing also differ in the
Domain
resources by the
also illustrate the typical location of each
Insert Figure
The various modes
human
domain
of influence refers to the extent in
of influence
which IT
is
inherent in the business processes as well as the administrative and functional
coordination of the organization. For instance, an application development
Determinants of IT Outsourcing;;
outsourcing arrangement ordinarily affects a specific domain of the firm, while a
telecommunications /network outsourcing arrangement
domain
mode
(i.e.,
may
may
differs in
a
more general
terms of the
and the vendor
as
systems design/planning outsourcing
be project-based, while a data center operations outsourcing contract
be period-based. In Figure
illustrate the
affect a
the type of relationship between the user
governed by the agreement). For example,
contract
arrangement
of the firm. Further, an outsourcing
contractual
may
modes
various
2,
we show
the characteristics
of IT outsourcing along the
framework and
two above dimensions.
Insert Figure 2 here
TJie
In this paper,
a particular
contexts.
we develop
Research Model
model
a
of the determinants of IT outsourcing, with
emphasis on economic constructs from both the business and the IT
Our framework
is
based on an argument that management should
constantly reassess the scope of those activities that should be carried out with a
firm's hierarchy
and those
performed by external parmers including IT
that are best
vendors. The guiding considerations for such make-versus-buy decisions include:
relative cost advantage,
an IT vendor
cases,
economies of scale and scope. Thus,
may be
infrastructure than the firm
specialist
skills,
~
a
more appropriate
itself.
is
and capacity can be pooled across
scale,
manage
likely that in
To
some
the firm's IT
because an outsourcing vendor
serves multiple users simultaneously.
economies of
—
being a
the extent that the knowledge,
different customers, there can be benefits of
which are otherwise absent when single users perform the same
tasks. In addition, the
wide variety
the reaping of economies of scope.
arise
This
entity to
it is
of IT projects undertaken
The lower
by the vendors permits
costs attributable to the
vendor also
from the enhanced IT competence and experience, both of which are absolutely
Dt'tcryntnants of IT Outuiurcin>^
crucial in
managing
the IT infrastructure in the
complex and rapidly changing
information era.
We
follow Henderson and Venkatraman's [12] model of aligning business
and IT domains
to derive the specific constructs of the research
model. Thus
business and IT strategies are viewed as involving the dimensions of competence and
we
governance. Thus,
posit that IT
governance
(specifically,
outsourcing)
is
dependent on the structural characteristics of the user organization, especially
business competence, business governance, and IT competence.
We
elaborate our
rationale below.
Business Competence
Business Cost Structure.
economics literature
is
A
well-accepted axiom in the strategy and
that a firm's business cost structure (the entire
costs directly associated with the actual production
product
line) is a significant
their
and coordination of the firm's
source of business competence given
explaining business profitability (see for instance,
spectrum of
[5, 32]).
its
role in
Thus, firms try to produce
output below the average cost and are constantly under pressure
in a
competitive marketplace to reduce the relative cost of business operations. Given
the ubiquitous nature of IT that pervades the entire process of transforming inputs
into outputs [33], the costs associated with a particular IT
direct technology cost
and the
governance include the
indirect cost of supporting the administration of the
enterprise. Thus, a firm in a situation of high relative cost will seriously consider
the available options to reduce
positioning of
its
Therefore
its
business cost structure including reassessing the
IT infrastructure within the scope of the firm's hierarchy.
we
hypothesize that a firm's business cost structure
is
a crucial
determinant of IT outsourcing:
Hypothesis
1:
The firm's business cost structure
degree of IT outsourcing.
will be positively related to the
Determinants
oHT
Outsourcing^
Business Performance. Another component of business competence
by the
reflected
"Reduced
margins"
[9, p.
performance. As noted in a trade periodical:
level of business
profits. ..are
89]
causing
management
Under conditions
everywhere
to look
view of IT operations
rapidly giving
infrastructure
way
is
performance. In
redeploying assets
business
is
no longer
having
as an investment center or a service center
off-limits to the top
"much
of
what
to restructure to
does not perform well vis-a-vis
traditional
[10].
The
is
an emergent notion of a profit center. Thus, the IT
to
fact,
to increase
of poor business performance, firms often seek
to streamline their operations, including selling-off or
traditional
is
its
governance modes of
arena becomes even greater.
We
is
management team seeking superior
fanning the
fire for... outsourcing is that
remain competitive"
[9, p. 90].
When
the firm
competition, the need to re-evaluate the
all its
major spheres of operations, including the IT
thus seek to
test:
Hypothesis
2: The firm's business performance will be negatively related to the
degree of IT outsourcing.
Business Governance
Financial Leverage. The need to reduce reliance on debt financing has been
one of the key impetus
amongst
to
outsource the IT infrastructure. Indeed, as widely cited
practitioners, increased debt "has
been
a
major reason
the IS area, thus supporting the use of outsourcing...."
of an imperfect corporate financing environment
result in
[15].
problems relating
to financial distress or
(cf.
[9, p. 90].
for cutting costs in
Within the context
[28]), financial
bankruptcy
[3]
leverage can
as well as agency
Further, the cost of equity capital increases with financial leverage [13].
Debt and equity have been argued
to
be more than alternative financial
instruments: they are different business governance structures
[47].
Accordingly,
it is
posited that the choice between debt and equity depends on the characteristics of the
assets in
which the funds are used. Debt governance
is
more appropriate
for
Determinants of IT Out?ourdn<^
financing redeployable assets, while equity governance
Due
redeplovable assets.
applications,
may be
and
limited.
A
governance.
staff,
to the
suitable for non-
complex and customized nature of systems,
the degree of redeployability of an installed IT infrastructure
Thus debt governance
is
not the optimal form of business
high level of debt hence results
redeployable assets which then gives
we
more
is
in a
need
to
reduce the non-
rise to a greater level of IT
outsourcing. Thus
test:
Hypothesis
3:
The firm's financial leverage
will be positively related to the degree of
IT outsourcing.
IT Competence
IT Cost Structure. Investments
no where
importance
is
$190 billion
in the
less
economy;
capital expenditures [18].
to IT. In line
just
with
evident than
has recently escalated, and
its
Due
to the
this notion, IT
it
its
dramatic increase from $55 billion
in fact, IT accounts for
have found
infrastructure, firms
in IT
about half of most large firms'
enormous outlay associated with
the IT
necessary to adopt a better cost control approach
must be
treated as a capital investment
an overhead of the firm. Firms have been plagued by the astronomic
expenditure in
many
to
specific IT areas that are necessary to
instance, in the area of application development, a critical
and not
rise of IT
run the business. For
problem has been the
control of the cost of internally conceived software [11]. Consequently, corporations
are rationalizing their capital outlay
the traditional inhouse
of IT infrastructure.
capital tied
An
up
mode
of IT
As Weizer and
in data center
on
IT.
Where
governance
it:
"Outsourcing can free
hardware and save operating
infrastructure to value-added vendors
IT. In
undertaken to trim the high costs
Associates [42] put
extremely attractive option available
and operating the
is
possible, drastic restructuring of
who
are
costs...."
to firms is to
more
outsource their IT
efficient in
terms of managing
three often-cited early cases of IT outsourcing, American
Determinants
oHT
Outsourcing
10
Standard reportedly saved $2 million per year for
Copperweld cut
slashed
its
its
its
systems budget from $8 million
data processing costs by 17%
to
and payroll operations,
financial
$4 million, and Foodmaker
Other recent cases are Wabco and
[36].
American Ultramar, which trimmed their annual processing costs from $3 million to
$1.8 million,
and from $3 million
to $1.5 million respectively [46].
We
thus seek to
verify:
Hypothesis
The firm's IT cost structure
4:
IT
will be positively related to the degree of
outsourcing.
IT Performance. With the elevation of the role of IT from the 'backroom'
the 'frontline' of business operations, firms are
making IT
direct contribution to the overall corporate profitability.
directly accountable for
The
economic returns. With the escalating
the IT infrastructure in
manner
[38].
ways
that
As IT expenditure
surprising that managers are
make
it
over the
IT.
As
management
efficiency of organizing
natural that there
is
it
decade
[41],
it is
not
when economic
immense need
profits falls in relation
to re-evaluate the role of
mode
of governance,
from the usual inhouse management
it is
to external
has been the view within the practicing and consulting IT
that "outsourcing
improve return on equity"
Hypothesis
last
tied intimately to the
a greater shift
involvement. Indeed,
communities
faces an
is
to reconfigure
stringent than ever before in assessing the
productivity of their IT infrastructure. Thus,
to IT investments,
need
possible to ascertain the benefits in a clear
rises rapidly
more
a
is
to result
investments needed to
level of IT
support business in the contemporary marketplace, there
its
profit-oriented posture
imposed on the IT infrastructure puts intense pressure on the technology
in tangible
to
[31].
is
a
key strategy that enable [companies
Therefore,
we
to]
....
test:
5: The firm's IT performance will be negatively related
IT outsourcing.
to the
degree of
Figure 3
is
a
schematic representation of the research model with the five
hypotheses.
Insert Figure 3 here
Methods
Sample
We
began with
a
sample from the
U.S. corporations carried out
IT outsourcing
[24].
We
the
list
of companies in a study of 200 major
Research, Inc. that
some
of our
their level of
independent constructs. Data availability
two variables limited our study sample
of companies).
provided data on
also required that the level of total IT expenditure be
available for operationalizing
across these
by G2
list
We
to
57 firms (see Appendix
collected corresponding data
A
for
on the independent
constructs pertaining to each firm in our sample for the fiscal year 1989 from
Standard and Poor's Compustat
II
and
Lotus' CD/Corporate
on CD-ROM.
^
Thus, our
data represents the use of both primary and secondary sources. During discussions
wath the managers of G2 Research,
expenditure
is
we
ascertained that the data on outsourcing
an integral part of their professional service
overall assessment
is
that their
method
of data collection
to their clients.
and
Our
verification meets the
standards of our research purposes. Further, the integrity of the secondary data
sources for the independent constructs
is
widely accepted within accounting,
economics, and finance research.
^The final sample size is 55 due to missing data in Compustat and CD/Corporate. Our sample
comprises a rough split between industrial and service firms (about 40-60). The selection is limited
by the availability of data across multiple sources. It is possible that the primary data regarding
IT expenditures may have been skewed, since our sources surveyed only large corporate users of IT
(e.g., firms within the Fortune 500 and Fortune Service 500 categories). In our sample, the level of IT
expenditures as a percentage of revenue is 1.8%. This is compared with another survey [20] that
obtained figures for 10 different industries ranging from 0.9% to 4.2%. Although the set of companies
used is not a random sample of the entire population of firms in the economy, we believe that our
choice of data sources allows us to include a sample that is representative of the set of major users of
IT
(i.e.,
large firms).
Determinants
o'-'
IT Outsourcing;
12
Operationalization
We
need
to operationalize four
we developed
(Y),
a ratio of IT
outsourcing expenditure to
so that the level of IT outsourcing
structure (Xi)
general,
was computed
key constructs. For the degree of outsourcing
is
as the
normalized by firm
sum
of the cost of
and administrative expenses, divided by net
total assets for
size.
The business
goods sold and the
sales
and
each firm
cost
selling,
total assets. ^
performance (X2) was captured by return of assets and earnings per share
Business
(fully
diluted and excluding extraordinary items), representing the economic efficiency of
the entire business as
we
measured by
its
assets or equity. For financing leverage (X3),
took the ratios of long-term debt as well as of total
liabilities
with shareholder
equity.
Operationalization of constructs in the IT context
is
more
difficult
given the
paucity of prior research. The metric used to evaluate the effectiveness of IT has
evolved from code analytic (1970-1978), through design analytic (1978-1984) and
function analytic (1984-1990), to the current business directed (1990-present)
measures
[37]. In short,
the criteria used
is
shifting
from metrics that focus on IT
output to those that focus on the economic outcomes of IT
activities. Further,
it
has
been argued that the economic benefit of information systems can be best evaluated
by measurements pertaining
opposed
cost structure (X4),
we used
property, and equipment
(i.e.,
necessary to
and service firms
(i.e.,
sum
these
two
sample.
[4].
Thus
for IT
before depreciation) and net plant, property, and
after depreciation),
in the
level, as
the ratio of IT expenditure with both gross plant,
physical infrastructure of the firm
^It is
company's entire IT expenditure
economic benefits derived from individual systems
to the
equipment
to the
'costs'
is
which
is
analogous
to the extent in
which the
represented by the IT infrastructure. IT
as the accounting treatment
is
not consistent for industrial
)
Determwant?< of IT Outsourcing
]^
performance (X5) was measured by net income and
which corresponds
In addition,
we
another for industry
binarv
dummy
economic
to the
The
(X7).
variables
by IT expenditure,
efficiency of the IT assets.
two control
specified
sales divided
variables,
one
for business size (Xg)
size variables included net sales
were formed
for service
and
and
total assets,
and
while
industrial sectors.
Analysis
Due
to the possibility of multicollinearity
we performed
a factor analysis
varimax rotation
among our independent measures,
using the principal components method and a
to discern the factor pattern inherent in the data structure. This
procedure ensures that the independent constructs used for our subsequent
regression are orthogonal.
We
obtained the corresponding scores associated with a
pre-specified set of the four factors for the business context
context. In our multiple regression,
to total assets as the
we used
variables.
Y=
where
e
The econometric
Po + Pi Xi +
represents the
(32
set of factor scores for the business
dummy
variable as the independent
specification for our analysis
X2+
p3
random
factors for the IT
the ratio of IT outsourcing expenditure
dependent variable and the
and the IT contexts and the industry sector
and two
is
as follows:
X3 + P4 X4 + P5X5 + PeXe + P7X7 +
e
( 1
error.
Results
Descriptive Statistics and Factor Structure
Table
1
summarizes the means and standard deviations
for all the individual
indicators, while Table 2 provides the matrix of zero-order correlations. In Table
we
3,
depict the results of factor analysis for the business and IT contexts. With a
varimax
rotation, four factors in the business context can be interpreted: (1) business
performance;
(2)
business cost structure;
(3)
business size; and
(4)
financing leverage.
^
Deter minants of IT Outscurcini;
Two
and
14
factors are extracted for the IT context can be interpreted as: (1) IT cost structure;
IT performance.
(2)
Insert Tables
1
to 3
here
Test of Hypotheses
The
results of estimating equation (1) are
model has
is
a F- value of 2.10 (p<0.06),
shown
structure
is
4.
The
overall
accept
HI
number
of independent
since the coefficient for business cost
significant at the 0.05 level with the expected sign. In the IT context,
H4 and H5
accept
we
Table
and explains about 24% of the variance, which
acceptable for an exploratory research and a limited
variables. In the business context,
in
since the coefficients for IT cost structure
significant at the 0.1
and
we
and IT performance are
0.05 levels respectively. In contrast, the other
two
hypotheses (H2 and H3) relating to business performance and financial leverage in
the business context are not supported. Further, the
emerge
two control variables did not
as significant.
Insert Table 4 here
Discussions
The empirical
results provide general support for
HI was accepted implying
IT outsourcing.
review
its
as plant
A
that the business cost structure
high level of business cost structure
overall cost structure reflected in
and equipment) including
its
its
its
is
may
First,
a critical determinant of
motivate a firm to
costs of physical infrastructure (such
IT infrastructure. Such restructuring
signal to the capital markets the strong
improve
our research model.
commitment
of corporate
may
management
to
business efficiency. Further, as IT pervades the entire value chain of the
business, the adoption of IT outsourcing
may
result in a superior control of the
3
Determinants of IT Outsourcing!
J
business through the 'variable costing' of IT outsourcing, as opposed to the
traditional 'fixed costing' of inhouse governance.
Second,
H4 which
posited a positive relationship between IT cost structure
and outsourcing was empirically supported. As noted
"Outsourcing
is
being seriously considered
in
in a trade periodical,
more and more organizations
potential solution to rising IS [information systems] costs"
effectively in the
to
modern information
support and propel a corporation in
particular, the
"In
some
is
its
cases, outsourcing
to
vendors have promised
30% savings
are
To compete
costly systems are required
quest for competitive advantage. In
key compelling force driving companies
50%, although 15%
finding
complex and
era,
[9, p. 89].
as a
to
more common"
to
outsource
is
reduce annual
[7, p. 47].
cost savings:
IS outlays
by
Thus, our empirical
consistent with the prevailing view regarding the need to rationalize the
IT cost structure in order to stay competitive in the market.
Third,
H5 which
specified a negative relationship
between IT performance
and outsourcing was also empirically supported. Low economic returns on IT
investment appear to affect the propensity of firms
infrastructure to vendors.
to
be
The present dilemma
facing
a justification of investing in a IT infrastructure
Although there are several possible metrics
reliability, quality, timeliness etc.,
to
outsource more of
to
many
its
IT
IT executives appears
based on
its
productivity.
gauge the performance of IT such as
our results suggest that economic measures are
valid indices to evaluate the productivity of IT in terms of the adoption of a efficient
mode
of IT governance.
Fourth,
we
did not find empirical support for
relationship between business performance
specified a positive relationship
between
may
be too
far
removed
specified a negative
and outsourcing and H3 — which
financial leverage
general implication from these two results
financial leverage
H2 ~ which
is
in
that business
and outsourcing. The
performance and
terms of influencing the level of IT
DeteT'v'.n ants of
IT Outsourcing
If
outsourcing directly. Although
empirically supported,
we urge
we
specified direct effects,
which were not
that future research consider indirect effects (for
example, through business and /or IT cost structures) or moderator
Finally,
emerge
effects.
both business size and industry sector as control variables did not
as significant determinants.
The implication
is
that our results are generally
robust and valid across firms differing in sizes (within the spectrum covered by the
sample) as well as industry versus service categorization.
Toward
a Comprehensive
Model
of IT Governance
While we have provided some empirical support
wisdom regarding
our model.
future.
We
recognize the limited scope of
suggest a set of directions for refining
As we move away from
neoclassical
we
IT outsourcing in this paper,
for a set of conventional
this line of
inquirv in the
the consideration of a firm-level focus using a
economic perspective, we identify three avenues of future research:
an organizational economic model of IT outsourcing;
and
of IT outsourcing;
(c)
(b) a diffusion
(a)
process model
an organizational process model of IT outsourcing.
An Organizational Economic Model
of IT Outsourcing. Research in the
general arena of make-versus-buy (including outsourcing) has been anchored
within an organizational economic perspective
(for a
review, see
constructs such
[48]). In
as:
especially transaction cost theory
addition, agency theory with particular emphasis on
goal alignment, incentive payment, and monitoring [15] has the
potential to provide insights
be appropriate to
[2],
reflect
on the governance
of IT outsourcing. Moreover,
it
may
refinements such as the articulation of bargaining and
influence costs [26] in the governance of IT infrastructure. For instance, constructs
relevant to bargaining costs
may
involve coordination failure and information
acquisition/asymmetry, and those related to influence costs
facilitation
may
include exchange
and competition foreclosure. While the present dataset did not allow us
to operationalize constructs
from an organizational economic perspective,
a
Determinants of !T Outsourcin'^
research design involving primary data from organizational informants
allow us
done
We
to better
would
understand and predict not only the degree of IT outsourcing
in the present study),
but also the
mode
of outsourcing (see Figures
1
and
(as
2).
are in the midst of such a study.
A
Diffusion Process
developed
view
a 'variance'
Model
model
that an IT outsourcing
[19, 39].
Such
as an
argument
of IT Outsourcing. In this paper,
explaining IT outsourcing.
[29] for
we have
We
can adopt the
arrangement constitutes an administrative innovation
is
based on the emergent departure of
many
firms
from an established hierarchical mode of governing the IT infrastructure toward a
market mode. Outsourcing fundamentally transforms the traditional requirements
of
managing IT from those rooted on an adversarial 'arms-length' approach
to those
structured on a cooperative 'partnership-based' relationship. Using a macro-
organizational level of analysis, the diffusion model will specifically examine the
underlying force that motivates firms
we
to
adopt IT outsourcing. With
this
approach,
can analyze whether the diffusion of IT outsourcing can be explained by
imitative behavior.
The findings are
Kodak-IBM outsourcing contract
interesting in
that purportedly
seriously consider such a governance option [34].
view
of the
prominence of the
encouraged many other firms
We
to
are currently pursuing this
diffusion-of-innovation study of IT outsourcing.
An Organizational
Process Model of IT Outsourcing. Another
complementary extension would be
underlying the management of
to focus
this IT
mode
on the organizational routines
of governance
by developing
a
way
organizational process model. Such a research initiative
would go
enhancing our understanding of the new phenomenon
in the marketplace.
process model
may
incorporate
new
structures
(e.g.,
a
long
in
The
shared authority; responsibility;
property rights; and risk-bearing), management processes
(e.g.,
allocation
and
coordination of resources; performance assessment; and joint planning), and
Determinants of IT Outsourcing
managerial roles
(e.g., liaison;
decision-making; and leadership) that are required to
effectively derive the benefits
from
this
mechanism.
Conclusion
US
Based on data from large
important determinants
outsourcing. Thus,
assertions
and
also identified
we
—
corporations,,
reflecting both IT
we
empirically identified a set of
and business contexts — of IT
offer the first empirical assessment of a set of widely-held
beliefs as to
why
some important
reflecting an organizational
organizational process view.
emergent phenomenon
firms outsource their IT infrastructure.
We
directions for extending this line of inquiry
economic view,
We
hope
have
~
a diffusion-of-innovation view,
and an
that our attempt at empirical testing this
will stimulate others to look at this
important strategic
challenge facing firms from a rigorous theoretical perspective. Such research
initiatives will
allow us not only to better understand this complex
phenomenon
but also derive useful management prescriptions grounded on systematic theory-
based research.
Determinant? of IT Outsourciri'i;
79
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Handbook
Petermmants o'/T Outsourcing;
APPENDIX:
List of
Companies
Aetna Life and Casualty Co
Air Products and Chemicals
Amax
Inc
Armco Inc
Ashland Oil Inc
Atlantic Richfield
Baxter International Inc
International
Chrysler Corp
Champion
Harrier Inc
Homefed Corp
Illinois Power Co
Ingersoll Rand Co
Lincoln National Corp
Mack Trucks
Inc
Manufacturers Hanover Corp
NCR
Corp
Consolidated Rail Corp
Continental Bank Corp
Control Data Corp
Corning Inc
CSX Corp
Dow Chemical Co
E I Du Pont De Nemours and Co
Duke Power Co
Eastman Kodak Co
Entergy Corp
Bank System Inc
Fleming Cos Inc
Geico Corp
General Dynamics Corp
General Electric Co
General Re Corp
Great Western Financial Corp
GTE Corp
Sample
Keycorp
Co
Bank of Boston Corp
Bankamerica Corp
First
in the
Corp
Norfolk Southern Corp
PNC
Corp
Financial
Quantum Chemical Corp
Reynolds Metals Co
Rockwell International Corp
Rohm and Haas Co
SCECorp
Security Pacific
Sun Co Inc
Texaco Inc
Textron Inc
Travelers Corp
Corp
UAL
Corp
Union Carbide Corp
Unisys Corp
United Technologies Corp
U
S Air Group Inc
Valley National Corp
Westinghouse
Electric
Corp
Determinants of IT Outsourcing
24
TABLE
1
Means and Standard Deviations
Description
Determinants of FT Outscurcim
>
19
"^
c
5.2
< ^
u
u
O
u
Determinants
of
IT Outsourcing;
26
TABLE
3
Factor Analysis Results
3(a) Factor Structure for
Business Context
Deter'Tiinants o* IT Outsourcing
TABLE
4
Multiple Regression Results
Dete^'v:nur,t>
o'
!T Ou'.sou^r.r^
2,«
FIGURE
1
Outsourcing versus Insourcing
High
INSOURCING
Data
Processing
Systems
Internalization
of
Integration
Human
Resources
Sy stems
Desig
?sign/
Plainning
OUTSOURCING
^
J
Telecoms/
Network
/
Data
Center
Application
Development
Low
Low
High
Internalization
of Physical
Resources
L't.e
f
'rur..
FIGURE
2
Characteristics of Different IT Outsourcing
General
Systems Design/
Planning
Modes
Telecoms/
Network
/
\
Data
Center
Corporate
Domain
Systems Integration
V
r
/
N
Data
Processmg
Application Development
Specific
\
Project-Based
/
Perioci-Based
Contractual
Mode
Determir.ar.ts o^ FT Outsourcin';;
FIGURE
3
The Research Framework
Business Governance
Business
IT
Competence
Competence
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