Information Systems Outsourcing: A Study of Pre-Event Firm Characteristics

Abstract:

Researchers in information systems (IS) propose several reasons why firms outsource their IS, including reducing costs, generating cash, focusing on core competencies, and gaining access to technical expertise. We examine support for these assertions by comparing the financial characteristics of firms that enter into large-scale IS outsourcing agreements with those of other firms in their respective industries prior to outsourcing. A year-by-year comparison around the time of outsourcing indicates that firms that outsource their IS have significantly lower overhead costs, lower cash reserves, and higher debt before the outsourcing event. Analysis of changes in financial characteristics reveals an increase in long-term debt and financial leverage and declining growth rates prior to the outsourcing event. We argue that firms enter into large-scale IS outsourcing agreements primarily to reduce costs and to generate cash. Consequently, they are more likely to outsource when they have lower cash reserves, higher debt, or declining growth. The management objectives stated in the annual reports of these companies at the time of outsourcing corroborate our major findings.

Key Words and Phrases:

• information systems governance
• information systems outsourcing
• information technology outsourcing

Additional information

Notes on contributors

Michael Alan Smith

Michael Alan Smith is a Ph.D. candidate in infonnation technology management at the DuPree College of Management at the Georgia Institute of Technology in Atlanta. Prior to entering graduate school, he received a B.S. in infonnation and computer science from Georgia Tech (June 1985) and worked for several years as a contract programmer/analyst and consultant, principally in production planning and inventory control in the textiles and apparel industries. His research has appeared in Information and Management. His research interests include IS management, the use of IS in education, international use of IS, and data warehousing issues.

Sabyasachi Mitra

Sabyasachi Mitra is an Assistant Professor in the Dupree College of Management at Georgia Tech. He holds a bachelor of technology degree in mechanical engineering from the Indian Institute of Technology in Kanpur, India, and a Ph.D. from the University of Iowa. His research has appeared in IEEE Transactions on Knowledge and Data Engineering, INFORMS Journal on Computing, Journal of Management Information Systems, Decision Support Systems, Telecommunications Systems Journal, and Information and Management, among others. His research interests focus on the economic impact of IT, IT strategy, IT outsourcing, and data communications.

Sridhar Narasimhan

Sridhar Narasimhan is an Associate Professor of Infonnation Technology Management in the DuPree College of Management at the Georgia Institute of Technology in Atlanta. He received his Ph.D. from Ohio State University. He has published in IIE Transactions, Decision Sciences, Computers and Operations Research, IEEE Transactions on Communications, Computer Networks and ISDN Systems, and Naval Research Logistics. His research interests include topological design of computer networks and distributed database systems.