Information Systems Outsourcing: A Study of Pre-Event Firm Characteristics

Researchers in information systems (IS) propose several reasons why firms outsource their IS, including reducing costs, generating cash, focusing on core competencies, and gaining access to technical expertise. We examine support for these assertions by comparing the financial characteristics of firms that enter into large-scale IS outsourcing agreements with those of other firms in their respective industries prior to outsourcing. A year-by-year comparison around the time of outsourcing indicates that firms that outsource their IS have significantly lower overhead costs, lower cash reserves, and higher debt before the outsourcing event. Analysis of changes in financial characteristics reveals an increase in long-term debt and financial leverage and declining growth rates prior to the outsourcing event. We argue that firms enter into large-scale IS outsourcing agreements primarily to reduce costs and to generate cash. Consequently, they are more likely to outsource when they have lower cash reserves, higher debt, or declining growth. The management objectives stated in the annual reports of these companies at the time of outsourcing corroborate our major findings.