Returns to Information Technology Outsourcing



This study evaluates the contributions of IT outsourcing to economic growth by using a production function framework and a panel data set from 60 industries in the United States over the 1998 to 2006 period. Our results demonstrate that IT outsourcing has made a positive and significant contribution to the growth of both industry output labor productivity, implying that it has not only helped industries produce more output but also made their labor more productive. The high returns we find for IT outsourcing also suggest that firms may be under investing in IT outsourcing. Moreover, our analysis of split data samples reveals systematic differences between high- and low-IT-intensity industries in terms of the degree and impact of IT outsourcing. Our results indicate that high-IT-intensity industries use more IT outsourcing as a percentage of output but less as a percentage of own IT capital, and achieve higher returns from IT outsourcing. This suggests that to reap greater value from IT outsourcing, firms need to develop IT capabilities by intensively investing in IT themselves. By comparing results from sub-periods and analyzing a separate data set for an earlier period (1987 – 1999), we conclude that the value of IT outsourcing have been stable from 1998 to 2006 and consistent over the past two decades.
Robert J. Kauffman is the W.P. Carey Chair in Information Systems at the W.P. Carey School of Business, Arizona State University, where he has joint appointments in IS, Finance and Supply Chain Management, and the School of Computing and Informatics. His degrees are from the University of Colorado at Boulder (B.A.), Cornell University (M.A.) and Carnegie Mellon (M.S., Ph.D.). He has served on the faculty at New York University, the University of Minnesota, and the University of Rochester, and worked in international banking and finance in New York City. He is also a past department chair of Information and Decision Sciences of the Carlson School of Management, and director of the MIS Research Center at the University of Minnesota. His research interests span the economics of IS, financial markets, technology adoption, competitive strategy and technology, IT value, strategic pricing and technology, supply chain management, and theory development and empirical methods for IS research. He has won numerous research awards, including the 2006 outstanding research contribution award for modeling and strategic decision making research on embedded standards in technology-based products from the IEEE International Society for Engineering Management, and the 2007 best research award from the Journal of the Association of Information Systems for theory-building research in the area of product and market transparency made possible by information technology. His recent paper on the diffusion of multiple generations of wireless mobile phones also was nominated for a best research award at the 2008 International Conference on Information Systems. His publications appear in Information Systems Research, MIS Quarterly, Management Science, the Journal of Management Information Systems, Organization Science, and other leading journals.
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Eric van Heck