Production and Transaction Economies and IS Outsourcing: A Study of the U.S. Banking Industry.

Author List: Ang, Soon; Straub, Detmar W.;
MIS Quarterly, 1998, Volume 22, Issue 4, Page 535-552.
This paper studies economic determinants of IS outsourcing. It argues that a focus on comparative economic theories and models can improve our ability to explain outsourcing within the larger context of organizational strategy and environment. Specifically, the research constructs of production cost, transaction cost, and financial slack are examined simultaneously to understand what influences the outsourcing decision. To empirically test these relationships, information was gathered from senior IT managers in 243 U.S. banks. Financial indices from the archives of the Federal Reserve Bank were a second important source of data. Results of the study show that IS outsourcing in banks was strongly influenced by production cost advantages offered by vendors. Transaction costs played a role in the outsourcing decision, but they were much smaller than production costs. Finally, financial slack was not found to be a significant explanator, although firm size was a significant control factor. The paper has important implications for research and practice. For researchers, the findings provide evidence that financial criteria can be key factors in outsourcing decisions and compare the relative effects of production and transaction costs. For practitioners, the findings suggest that managerial sourcing strategies need to weigh both costs when hiring systems integrators.
Keywords: financial slack; IS outsourcing; outsourcing measures.; production cost economics; systems integration; transaction cost theory
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#108 0.209 model research data results study using theoretical influence findings theory support implications test collected tested based empirical empirically context paper
#151 0.177 costs cost switching reduce transaction increase benefits time economic production transactions savings reduction impact services reduced affect expected optimal associated
#274 0.125 outsourcing transaction cost partnership information economics relationships outsource large-scale contracts specificity perspective decisions long-term develop requirements economic association factors hypotheses
#47 0.093 outsourcing vendor client sourcing vendors clients relationship firms production mechanisms duration mode outsourced vendor's effort activities in-house managing technology domestic
#200 0.093 banking bank multilevel banks level individual implementation analysis resistance financial suggests modeling group large bank's services levels national data early
#88 0.083 managers managerial manager decisions study middle use important manager's appropriate importance context organizations indicate field experience management major organizational results
#127 0.055 systems information research theory implications practice discussed findings field paper practitioners role general important key grounded researchers domain new identified