IT Outsourcing and Firm Characteristics: Empirical Evidence from Survey Data

IT Outsourcing and Firm Characteristics: Empirical Evidence from Survey Data

Ludivine Martin (CEPS/INSTEAD, Esch-sur-Alzette, Luxembourg) and Nicolas Poussing (CEPS/INSTEAD, Esch-sur-Alzette, Luxembourg)
Copyright: © 2014 |Pages: 18
DOI: 10.4018/ijthi.2014010101
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Abstract

This paper seeks to identify the characteristics of firms that choose to transfer all or at least part of the fulfilment of their information technology needs to an outside party. The authors focus both on outsourcing and on offshoring. With a statistical approach, based on a large and nationally representative data set at the firm unit level, the authors look at the profiles of firms that have decided to outsource and/or offshore at least part of their ICT activities. The authors show that the firms with the most specific ICT needs choose to acquire these services from external suppliers or firms located abroad. The firms with the highest level of ICT investment are also the firms that choose to resort to outsourcing to a great extent.
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Introduction

IT outsourcing has emerged as a key method for managing information systems, especially since the report about Eastman Kodak and IBM’s outsourcing partnership in 1989 (Loh & Venkatraman, 1992). IT outsourcing practices cover many different situations, from delivering all the information services to providing specific services (Elitzur, Gavious, & Wensley, 2012). With technological changes, the compatibility and tradability of many services across the world have become easier (Abramovsky, Griffith, & Sako, 2004; Goodman & Steadman, 2002). At the end of the 1990s, the offshoring phenomenon spread from the manufacturing to the service sector (Stringfellow, Teagarden, & Nie, 2008), in particular in IT, banking, and financial services. For most firms, IT does not belong to their core competencies and they obtain IT resources and capabilities from IT outsourcing (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). Therefore, the phenomena of outsourcing and/or offshoring have grown during the last decade: 44% of enterprises in the European Union (the EU with 27 countries) used external suppliers to perform IT functions fully or partly during 2006 (Eurostat, 2007). The Economist (2004) has published a survey on outsourcing, which points out the growing development of IT outsourcing, especially in Asia.

A broad literature focuses on the outsourcing and offshoring of activities (Gonzalez, Gasco, & Lopis, 2006; Grossman & Helpman, 2005; Marin & Verdier, 2003). Although some researchers find negative impacts of outsourcing on organizational competencies (Aubert, Patry, & Rivard, 1998), on the strategic direction of companies (Gupta & Gupta, 1992), or on security and control (Fink, 1994), it is recognized that outsourcing has a positive effect on companies: cost savings, technical efficiency, the development of alliances, and the expansion of the IT infrastructure (Tjader, May, Shang, Vargas, & Gao, 2014). Conversely, it is largely considered that offshoring has negative societal impacts (Doh, 2005). Particularly for developed countries, offshoring affects the bargaining power and the level of wages (Bronfenbrenner, 2000) and induces job destruction. In the US, 830,000 jobs in the service sector moved to foreign countries in 2005 (Geewax, 2004). Because outsourcing and offshoring have direct and different implications for public policies (Doh, 2005), this contribution proposes to identify companies that will resort to outsourcing and offshoring based on their features (size, sector, technological investments, belonging to a group, etc.).

To achieve this goal, as Olsen (2006) suggested, this study focuses on the outsourcing of IT services and distinguishes “offshoring” from “outsourcing”. We also investigate different IT services (the management of the information and communication technology (ICT) system, the development of software, the database, the website, and the administration of the internal and external communication networks) and use a statistical approach to look at the profiles of firms that have decided to outsource and/or offshore at least part of their IT activities.

The paper is organized in three sections: firstly, we present both the theoretical and the empirical literature concerning the outsourcing and offshoring of IT services in order to formulate our research hypotheses; secondly, we present the methodological aspects; and lastly, we present our statistical evidence and discuss the main findings.

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