1. Strategy and IT Outsourcing: A Test of the Strategic Control Model
Kathy Stewart Schwaig
Co-authors:
Detmar Straub
Peter Weil
February 13, 2004

2. Information Technology Outsourcing Defined
The handing over to a third party of the development, management and/or operation of an organization's IT assets and activities.
History of IT Outsourcing

3. Stats Outlived the five-year period of a typical management fad
Between , growth rate was 15-20% per year
In 2003, large organizations spent 30-35% of their IT budgets on outsourcing
In 2003, IT Outsourcing was a $70 billion dollar market. IDC estimates that it will grow at a rate of 7.7% per year and by 2007, will be a $100 Billion market.

4. Why Outsource IT? Cost vs. value Access to technical expertise
Change fixed cost to variable cost
Improve financial position
Focus on core competency

5. Lacity, Willcocks, Feeny, 1996
Successful organizations carefully select which IT activities to outsource, rigorously evaluate vendors, tailor the terms of the contract and carefully manage the vendor.
Lots of anecdotal evidence to support the idea of selective outsourcing.

6. Selective Outsourcing
IT Outsourcing Decision and Outcomes (Lacity and Willcocks, 2000)
Decision
Success
Failure
Mixed
Unable to determine
TOTAL
Total Outsourcing 11
33% 10
30% 8
24% 4
12% 33
Total
Insourcing 13
68%
21% 0% 2
11% 19
Selective Outsourcing
(by 2000, 82% US, 75% UK) 43
67%
17% 3%
13% 64 67
58% 25
22% 9% 14
116

7. Contribution to Competitive
Strategic IT Sourcing Analysis (Lacity Willcocks and Feeny, 1996).
Qualifiers
(Best-source: In-House/Partner)
Order Winners
(in-house/buy-in)
Necessary Evils
(Outsource)
Distractions
(Migrate or eliminate)
Critical
Contribution to
Business Operations
Useful
Commodity
Differentiator
Contribution to Competitive
Positioning

8. Theoretical Background
Resource Based View of the Firm (RBV)
Asserts that managers create above-average returns and superior value by developing and deploying unique and costly-to-imitate resource bundles to exploit environmental opportunities or to neutralize threats (Barney, 1991).
Characteristics:
Valuable, rare, inimitable, nonsubstitutable
Core Competency (Quinn and Hilmer 1994; Tsang, 2000).

9. Fundamental Argument
Firms need to own, nurture, have exclusive access to and thus control those resources that will lead to competitive superiority. Conversely, it is not necessary for firms to control those assets that are not integral to their distinctive competence.
Control=Selective Sourcing

10. Strategic Control Model

11. Hypothesis Hypothesis 1a (H1a): Hypothesis 1b (H1b):
The more the firm invests strategically in IT, the greater the control of the IT resource (and, hence, the less the outsourcing of these resources).
Hypothesis 1b (H1b):
The more the firm views itself as employing IT strategically, the greater the control of the IT resource (and, hence, the less the outsourcing of these resources).

12. Downstream Effects: IT Outsourcing and Business Unit Performance
Hypothesis 2 (H2): The greater the control of the IT resource (more selective sourcing), the better the performance.

13. Strategic Control Model

14. Research Methods Study Design & Sampling
54 Business Units in 27 Firms
Finance, Retail and Manufacturing
7 countries (USA, Canada, Malaysia, Singapore, Australia, UK, Switzerland)
Firm level & Business Unit
Minimum of 4 participants per organization
CIO
IS executives from BU
Corporate Executive (CE)
Survey, interviews, examination of documents

15. Constructs and Measures
Code
Description of Measure
IT as a Strategic Resource: Objective Measures (CIO)
RESOURCE1
% of strategic IT investment in prior year
RESOURCE2
% of strategic IT investment - average % change over previous 5 years
IT as a Strategic Resource: Subjective Measures (CIO)
RESOURCE3
The extent that BU managers consider IT in their strategic decision-making
RESOURCE4
The extent that IT infrastructure has a role in BU decision-making
RESOURCE5
Senior managers see IT as providing competitive advantage
RESOURCE6
IT enables new business strategies
Control of IT Resource:
(Selective Sourcing) (BU)
CONTROL1
Average of rankings of the extent to which IT is outsourced by the BUs in each of 15 functional areas
 (CE)
CONTROL2
% of IT investment spent on services outside the firm-- average % change over past 5 years
CONTROL3
% of IT investment spent on services outside the firm over last two years
Performance: (CE)
PERF1-2
Profits per employee ($)
Business Units
PERF3
Pricing against competitors (index)
PERF4
Return on assets

16. Instrument Validation
Cronbach’s Alpha
PLS Loadings
Convergent and discriminate validity confirmed
All measures were acceptable

17. Descriptive Statistics
Firms varied in the level of their strategic IT investment from 0% to 70% of their portfolios, with the average strategic IT investment being 27% of IT portfolio
Over the five year period, the change in investment in strategic IT ranged from a 100% decrease to a 75% increase with an average increase of 2%.
All firms engaged in making decisions about which IT functions to outsource.
No firm or business unit completely outsourced all IT activities.
Firms outsourced an average of 8.44% of their IT investment over the last two years with a range from 0% to 50%
The average change over the five years was a positive 3.7%, suggesting that firms were gradually outsourcing more IT activities over time.

18. Descriptive Statistics
Construct
Scale Items/Code
(Rank) Mean
S.D.
Range
Max
Min
IT as a Strategic
RESOURCE1
26.88
23.11
NM* 70
Resource: Objective Measures
RESOURCE2
1.78
27.37 NM 75
-100
RESOURCE3
2.85
1.53
1-5 5 1
Resource:
RESOURCE4
4.00
1.21 2
Subjective Measures
RESOURCE5
3.89
1.42
RESOURCE6
3.72
1.32
Control of IT Resource
CONTROL1
1.47
1-3
2.13
1.0
(Selective Sourcing)
CONTROL2
3.70
22.07
63.36
-33.15
CONTROL3
8.44
12.18
50.00
Performance
PERF1
94109
12216
553000
PERF2
54048
8531
446760
PERF3
79.07
45.17
126.2
PERF4
12.22
20.94
110.43
-23.24

19. Data Analysis
PLS was used to analyze the variables and relationship posited for explaining the IT outsourcing environment
Path coefficients and their T-statistics and the explained variances for the model components are shown. The model explains 25% and 23% of the variance in the dependent variables

20. Data Analysis H1a (coefficient =.483; p-value<.05) supported
The finding suggests that firms that invest in IT as a strategic asset are less likely to outsource, and supports the proposition that strategic or core competencies should be retained within the organization and not be outsourced (Prahalad, 1993).
H1b (coefficient =-.048; p-value>.05) not supported.
The CIO’s view of whether or not the BU managers perceived IT as strategic did not lead to more strategic control.
H2, (coefficient = .477, p-value < .05) supported.
The extent of selective IT outsourcing has a significant relationship with the performance variables in the predicted direction

21. Main PLS Results

22. Results of Hypothesis Testing#
Hypothesis
Supported 1a
The more the firm invests strategically in IT, the greater the control of the IT resource.
Yes 1b
The more the firm views itself as investing strategically in IT, the greater the control of the IT resource. No 2
The greater the control of the IT resource (more selective sourcing), the better the performance.

23. Qualitative Analysis
A senior manager of a financial services firm, which is a low-end user of outsourcing, explains the strategic role of IT in cross-selling:
IT is critical to the successful operations of our business. The basis of the organization is the databases of customers and from that flows opportunities to sell a wide range of (other) products and services.
Similarly, another light user of outsourcing, a senior manager in a manufacturing firm, states their approach:
We want to position our IT capabilities and resources in a manner that will ensure competitive readiness.
 By way of contrast, the senior manager of a different manufacturing firm, which is a heavier user of outsourcing, explains the transactional role of IT:
On the whole our systems are not considered strategic and the use of IT is largely transactional and functional.
A senior executive of a manufacturing firm that is a heavier user of outsourcing illustrates their focus no costs:
IT investments have been aimed at reducing costs and taking advantage of economies of scale. There is no input from IT into the strategic direction of the firm and the central IS function plays a reactive role within the organization.

24. Conclusions
The strategic control thesis was supported in H1a and H2. Firms that invest at significant levels in strategic systems are sensitive to when they should retain control of core assets and this sensitivity leads to better performance.
Sustained IT competitive advantage requires continuous innovation, environmental scanning. Hard to cultivate if we hand IT over to an integrator.

25. Limitations and Future Research
Further studies in different settings and locales
Further development of measures
Asking whether an IT activity is strategic or core and then asking in the same instrument whether it was outsourced has a built-in methods bias.
While two of the three hypothesis were supported, the view of CIOs were not related to resource control. Empirical work is need to probe more deeply this result.

26. Contribution
This study raises interesting questions about the worldwide trend of increasing IT outsourcing
The results of this study strongly support a selective approach to outsourcing based on strategic control of key IT assets and the core competencies of the organization.
Strategic control should be the purpose of outsourcing, rather than any arbitrary attribution of value to IT outsourcing in its own right.
Managers in the position to influence key outsourcing decisions should think about the need to strategically control each IT activity and make their decisions accordingly.