Information Technology Outsourcing, Knowledge Transfer, and Firm Productivity: An Empirical Analysis

Abstract

Firms are increasingly sourcing internal information systems functions from external service providers. However, there is limited empirical evidence of the economic impact of this delivery option and, more specifically, of the productivity gains accruing to firms that have outsourced. Moreover, there is little evidence of the role and contributions of the individual mechanisms by which service providers create value for client firms. We are particularly interested in whether client firms benefit from the accumulated knowledge held by information technology (IT) service firms. In this paper, we examine the impact of IT outsourcing on the productivity of firms that choose this mode of services delivery focusing, on the role of IT-related knowledge. Since firms selfselect into their optimal sourcing mode, we use a variety of econometric techniques including propensity scorebased matching and switching regression to control for potential bias arising from endogenously determined sourcing modes. We demonstrate that IT outsourcing does lead to productivity gains for firms that select this mode of service delivery. Our results also suggest that IT-related knowledge held by IT services vendors enables these productivity gains, the magnitude of which is moderated by a firm's IT intensity. Moreover, the value of outsourcing to a client firm increases with its propensity for outsourcing, which in turn depends on firm-specific attributes including efficiency level, financial leverage, and variability in business conditions. Our analyses also show that firms that outsource have been able to achieve additional productivity gains from contracting out compared with their counterfactuals.

Toward a smarter enterprise

“…Outsourcing and offshoring of IT functions, leading the way for disintegration of firm value chain, offer the prime support for the economic benefits of disaggregation. Studies report that firms have gained not only cost advantages but also accomplished productivity gains, learning and knowledge transfers and innovations through decoupling and externalizing IT services from the core functions (Chang and Gurbaxani, 2012;Weeks and Feeny, 2008). Similar successes are being reported in other knowledge-based services such as consulting, legal services, computers and electronic components.…”

Business models for foreign firms offering construction-related consultancy services in China

“…Outsourcing production information to other countries has also been found to reduce cost and increase productivity (Chang and Gurbaxani, 2012).…”

Augmenting Conflict Resolution with Informational Response: A Holistic View of Governance Choice in Business Process Outsourcing

“…A structured questionnaire was developed based on comprehensive reviews of the literature and initial interviews with twenty BPO experts. 10 These exploratory interviews were conducted with the underlying objective of assessing the applicability of our theoretical model to governance choice in BPO relationships and obtaining more clarity of perspective on desirable sample characteristics. They also influenced questionnaire design and component items, especially those that were being adapted to the BPO context.…”

“…Industry and academic research studies (e.g., [28]) have noted that with technological advances rendering business capabilities portable, even strategic processes like R&D, marketing, and financial planning are moving outside traditional boundaries and changing the way firms' value chain decisions shape their competitive position. The increased diversity of outsourcing objectives has been accompanied by an increase in the variety of contractual structures used to realize these objectives, emphasizing the multitude of complex choices that firms face in governing BPO relationships [10,28,46]. Thus, the key determinants of BPO governance structures constitute an important research question.…”