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Strategic Control and IT Outsourcing

Strategic Control and IT Outsourcing. Detmar Straub, Georgia State University Peter Weill, MIT Kathy Schwaig, Kennesaw State University ICOIS 2007 Heidelberg May, 2007 . Agenda. Motivation and Problem IT Outsourcing and Performance Theoretical Framework The Strategic Control Model

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Strategic Control and IT Outsourcing

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  1. Strategic Control and IT Outsourcing Detmar Straub, Georgia State University Peter Weill, MIT Kathy Schwaig, Kennesaw State University ICOIS 2007 Heidelberg May, 2007

  2. Agenda • Motivation and Problem • IT Outsourcing and Performance • Theoretical Framework • The Strategic Control Model • Research Design • Results • Implications • Questions

  3. Motivation and Problem • Firms have been increasingly outsourcing, and this decision has been dominated by economic considerations • Strategic issues have not always been uppermost in managerial choices to outsource • Core competencies can be lost (Kotabe and Murray 2004; Lee et al. 2004; Linder 2004; Stavros 2004)

  4. Motivation and Problem • Limited amount of scholarly work dealing with the question of strategic evaluations of IT outsourcing (Review of the extensive literature can be found in Dibbern et al. 2004) • Much of it – positivist, qualitative, or interpretivist – categorizes IS as a core business activity or not • Overly simplistic, of course • What tests there are are mixed

  5. IT Outsourcing and Performance • Mixed Results for Strategic IT Outsourcing  Firm Performance • Strongly Positive: e.g., Slaughter and Ang 1996 • Weakly Positive: e.g., Grover et al. 1994 • Insignificant: e.g., Smith et al. 1997 • Negative: e.g., Lacity (et al.)’s work; Teng et al. 1995

  6. Performance IT Outsourcing and Performance • Ang & Straub (1997) studied U.S. banks Surprising!! Benefits to firm were in the wrong direction!!! -.173* + Degree of IS Outsourcing

  7. Performance Benefits to firm were generally not significant!!! IT Outsourcing and Performance • Smith, Mitra and Narasimhan (1997) analyzed the following COMPUSTAT metrics over 5 year windows: SG&A / Sales; Operating expense/ Sales; Sales / Employee; Asset Turnover; Return on Assets; Return on Equity; Operating Margin; Growth Rate; Dividend yield; Dividend / Sales; Market to book ratio; Cash and Equivalent / Sales; Total Liabilities / Sales; Long term debt / Sales; and Current Liabilities / Sales + Major IS Outsourcing

  8. Theoretical Framework • Resource dependency theory (RDT) • The key to organizational survival is the ability to acquire and maintain resources (Pfeffer and Salancik, 1978). • Firms adapt to changes in their environment that impact the flow of resources to the firm. • Adaptation is not passive, but a strategic choice to cope with pressure in the environment (De Wit and Verhoeven, 2000).

  9. Theoretical Framework • Outsourcing is one way to acquire resources • Horizontal & vertical integration • Human resources • Machines & technology • Physical assets, land, facilities • But it also leads to undesirable dependencies • Successful organizations attempt to minimize their dependence on organizations in their environment (Birkinshaw, Toulan, and Arnold, 2001).

  10. Theoretical Framework • The balance that must be achieved is dependency versus control • Organizations interact dynamically as they act strategically to manage their resource dependency on other firms (Pfeffer and Salancik, 1978).

  11. Types of Outsourcing Figure 1: Continuum of Control of the IT Resource Higher Levels of Lower Levels of Total Total Outsourcing Outsourcing Insourcing Outsourcing Locus of Control

  12. Dependence on IT as Strategic Resource Org. Performance Locus of Control: Extent of IT Outsourcing The Strategic Control Model - + Objective Measures Subjective Measures Pricing against Competitors Profits ROI

  13. Research Design: Participating Global Firms ANZ Banking Group; BP (Singapore and Australia); Brash Holdings; Caltex; Carlton and United Breweries (Fosters Brewing Group); Citibank, Asia Pacific; Coles Myer (Target, K-Mart, Department Stores); Commonwealth Bank of Australia; Development Bank of Singapore; Development and Commercial Bank Malaysia; Hoffmann-LaRoche Switzerland; ICI Australia; Johnson and Johnson (USA and Australia); Maybank Malaysia; Metway Bank; Monier/PGH; National Australia Bank; Royal Auto Club of Victoria; Ralston Purina; Southcorp Holdings; Sunlife of Canada; Times Publishing, Asia; Unum; S.G. Warburg, Europe; Woolworths (including Safeway)

  14. Results Table 6. Overall Results of Hypothesis Testing

  15. Practical Implications • Retaining IT assets that are strategic will enable the firm to remain competitive and better capable of responding to future technological uncertainty. • Non-core assets can be taken over by outsourcers with no loss of strategic control.

  16. Limitations • Measure dependencies on strategic versus nonstrategic assets and then the outsourcing of each of these separately • Test other critical outcome variables besides performance: e.g., loss of flexibility or ability to innovate or loss of entre- or intrapreneurial spirit • Consider RBV or dynamic capabilities as other viable theory bases

  17. Questions

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