Economic Contributions of
IT Outsourcing:
An Industry-Level Analysis
Kunsoo Han
Carlson School of Management
University of Minnesota
April 7, 2006
Background: IT Outsourcing
Definition
> Purchase of IT services such as systems design/development/
management, hardware/facilities management, and data
processing services from third-party vendors
IT outsourcing on the rise
> Worldwide spending in IT outsourcing will rise from $191 billion
in 2004 to $267 billion by 2009 (Gartner Group, 2005)
> Growth of offshore outsourcing
Reasons for IT outsourcing (ITtoolbox, 2004)
> Cost savings (37.9%)
> Need for special skills/services/equipment (20.9%)
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Value of IT Outsourcing?
IT outsourcing can create value
> Reduced costs, effective use of staff, access to
advanced technologies (Rao, et al., 1996)
> Vendors’ efficiency based on complementary core
competences (Levina and Ross, 2003)
However…
> Hidden transaction costs associated with transition to
and management of IT outsourcing (Aubert et al., 1998)
> The quality of outsourced services may be lower
(Gorg, et al., 2004)
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Research Questions
How can we conceptualize and measure IT
outsourcing at the industry level?
Has IT outsourcing made positive
contributions to US industries?
Are there any systematic differences between
industries with respect to the use and
economic impact of IT outsourcing?
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Production Function Framework
Industry production function
output = f( capital, labor, intermediate inputs )
IT capital
non-IT capital
IT services
(IT outsourcing)
non-IT services
intermediate inputs
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Data and Summary Statistics
New data for 61 U.S. private industries from US Bureau of
Economic Analysis for the 1998-2004 period
IT outsourcing: services purchased from the two
IT services industries
> Computer Systems Design and Related Services
> Information and Data Processing Services
On the average, a US industry spent US$2 billion per year
in IT outsourcing over the period
There is huge variation in the spending in IT outsourcing
(from $20 million to over $10 billion per year)
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IT Outsourcing Trend (1998-2004)
140,000
130,000
Millions of 2000 USD
120,000
110,000
Computer Systems Design and
Related Services
Information and Data Processing
Services
Total IT Services
100,000
90,000
80,000
70,000
60,000
50,000
40,000
1998
1999
2000
2001
2002
2003
2004
Year
Dot com crash
911 terrorist attack
Y2K
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Contributions of IT Outsourcing:
Full Sample
Total Output Contribution (Output Elasticity)
0.700
Marginal Contribution (Gross Marginal Product)
9
0.600
8
0.500
7
6
0.400
5
0.300
4
0.200
3
0.100
2
1
0.000
IT capital
Non-IT capital
Labor
IT outsourcing
other
intermediate
inputs
0
IT capital
Non-IT capital
IT outsourcing
other intermediate
inputs
IT outsourcing has made a positive and significant
contribution to industry output growth in the U.S.
For a dollar spent in IT outsourcing, an industry earned
about $8 on the average.
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Contributions of IT Outsourcing:
Goods vs. Services Industries
Output Contribution Comparison
0.700
0.600
0.500
0.400
0.300
0.200
Goods
0.100
Services
other intermediate
inputs
IT outsourcing
Labor
Non-IT capital
IT capital
0.000
Services-producing industries use more IT outsourcing
than goods-producing industries
Contributions from IT outsourcing are greater in servicesproducing industries
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