| This study explores the determinants of firm IT (Information Technology) outsourcing, builds on the methodology of a limited number of other studies in this area, and examines outsourcing in general from a political-economic standpoint. As with the rise of the multi-divisional form of corporate governance instituted by Alfred Sloan at General Motors in the 1920s and 30s, firms today are experimenting with outsourcing as a means to operate more effectively in a dynamic marketplace. In effect they are stripping away many in-house functions and exposing them to market forces. Since within-industry wage rates are comparatively homogeneous, wage rates across functions, but within industries, tend to be out of equilibrium with the market (Feenstra 1996). This in turn can cause firms to have above-average costs and thus impede their competitiveness. Outsourcing is one of the tools firms have chosen to employ to bring wage rates and costs into equilibrium.; The study examines questions centering on why firms outsource using a data gathered from the 1990 to 1999 timeframe. The dataset consists of 299 outsourcing events which have been combined with financial data reported prior to the event. Several conclusions can be drawn from the analysis.; First, the evidence strongly suggests that IT outsourcing by firms has increased substantially during the past decade. More importantly, firms engage in outsourcing as a way to decrease overhead costs (sales, general and administrative—often referred to in corporate parlance as cost centers). Smaller firms outsource more than do larger firms, although the effect—while highly significant—is modest. Also, two industry groups, banking/financial services and transportation firms have higher outsourcing intensity than firms in other industries, probably as a function of their use of centralized systems, which are generally easier to outsource than distributed information systems.; In addition, there is strong evidence to indicate that firms are entering into IT outsourcing contracts for shorter periods of time, apparently to avoid becoming hostage to outsourcers and to maintain an atmosphere of competition with regard to their suppliers.; A preliminary look at the effects of outsourcing on firm performance using the available subset of the 299 companies in the original dataset is inconclusive. There is no clear evidence that IT outsourcing alone impacts firm performance as measured by revenue per employee, asset efficiency, return on investment, return on sales, market-to-book ratios or revenue growth. As additional data are accumulated on outsourcing by research firms such as INPUT, more research should be performed in this area in order to gauge whether outsourcing is delivering on its promise. |
