An Industry-level Examination of Information Technology Outsourcing in Services and Manufacturing

Abstract:This study provides evidence of differential productivity impacts between the outsourcing of ongoing IT operations and the outsourcing of IT design and build activities. Additionally, this study finds differential productivity impacts between manufacturing and service sectors. Evidence shows that a large portion of IT budgets are dedicated to ongoing operations, yet ongoing operations is seldom researched. This study differentiates the impact of spending IT outsourcing related to ongoing IT operations versus spending on IT outsourcing to build new systems. Using industry-level data from twenty-five service industries and nineteen manufacturing industries for the years 1998 to 2004,1 examine the impact on outsourcing ongoing operations from the design of new systems and I compare the effects in manufacturing and services. This study shows that outsourcing IT design services positively contributes to productivity, while outsourcing IT operations does not. Furthermore, this study shows that the positive impact of IT design is greater for manufacturing industries.Keywords: IT outsourcing; business value of IT; industry-level; IT operations(ProQuest: ... denotes formulae omitted.)INTRODUCTIONCIOs are faced with the question of how much of an IT budget to spend on developing new systems and how much to spend supporting existing IT systems. Recent commentary (Butler and Gray 2006) in the IS literature has begun to acknowledge that the IS community has not investigated the role of IT operations, but rather has focused on issues surrounding the building of new IT systems. According to recent Bureau of Economic Analysis (BEA) data, spending IT operations accounted for 55 percent of all expenditures on outsourced IT for the period from 1998- 2004. Research into the economic impacts of IT has typically focused on either (A) aggregate levels of IT expenditure or (B) levels of IT capital. Increasingly researchers have tried to address issues such as under what conditions IT spending result in what performance does and what investments are complimentary to investment in IT. Using Industry-level BEA data, this study compares the economic impact of outsourcing IT operations versus the impact of outsourcing the design of IT systems. Furthermore, the study compares the impact in manufacturing to impacts in services. Recent research has also investigated what the economic impact of outsourcing IT operations is. This study addresses the following research questions:Does the productivity impact of outsourcing IT operations differ from the productivity impact of design/build activities?If so, do these effects vary between manufacturing and service sectors?These questions are important because (1) spending on IT operations is a substantial portion of the IT budget, (2) this can provide insight as to what functions to outsource, (3) this can provide further insight into what the industry- level impacts of IT spending are, and (4) this can provide insight as to what sectors benefit from what type of outsourcing.CONCEPT DEVELOPMENTThe purpose of this study is to compare the impacts of outsourcing of IT operations and outsourcing IT design in both services and manufacturing. It is important to understand the current state of industry-level analysis, how manufacturing and services differ, and how IT operations differ from building IT systems.Industry-level AnalysisThis paper uses IT investment at the industry-level; therefore, an overview of industry-level studies should be included. IT operations have been researched indirectly through survey research on the impact of reliable systems (Butler and Gray 2006). The author was unable to find any study on the economic impact of spending on IT operations. IT outsourcing research conducted at the industry level (Han et al. 2005) and at the firm-level have shown IT outsourcing to have positive contributions to productivity (Chang and Gurbaxani 2005b). …