To outsource or not to outsource: Examining the effects of outsourcing IT functions on financial performance in hospitals.

BACKGROUND Outsourcing of information technology (IT) functions is a popular strategy with both potential benefits and risks for hospitals. Anecdotal evidence, based on case studies, suggests that outsourcing may be associated with significant cost savings. However, no generalizable evidence exists to support such assertions. PURPOSE This study examines whether outsourcing IT functions is related to improved financial performance in hospitals. METHODOLOGY Primary survey data on IT outsourcing behavior were combined with secondary data on hospital financial performance. Regression analyses examined the relationship between outsourcing and various measures of financial performance while controlling for bed size, average patient acuity, geographic location, and overall IT adoption. FINDINGS Complete data from a total of 83 Florida hospitals were available for analyses. Findings suggest that the decision to outsource IT functions is not related to any of the hospital financial performance measures that were examined. Specifically, outsourcing of IT functions did not correlate with net inpatient revenue, net patient revenue, hospital expenses, total expenses, cash flow ratio, operating margin, or total margin. PRACTICE IMPLICATIONS In most cases, IT outsourcing is not necessarily a cost-lowering strategy, but instead, a cost-neutral manner in which to accomplish an organizational strategy.