Abstract

In business, information technology (IT) outsourcing is the practice of purchasing information systems equipment or services from a vendor external to the firm. In businesses where information technology is key to business processes or products, issues concerning outsourcing are quite controversial. Does outsourcing allow firms to reduce high overhead costs and thus improve overall performance? Or does purchasing information systems services from the market weaken the business's position to use the technology either to innovate strategic uses or to keep up with competitors' innovations? A great deal of print has been dedicated to this debate in practitioners' professional and trade journals (see, for example, Halper's 1993 works) as well as in high-profile case studies (Huber 1993, and Loh and Venkatraman 1992b). Yet little deliberate research has been conducted to date (a notable exception is Loh and Venkatraman, 1992a). In a 1994-95 study on IT infrastructure flexibility in the insurance industry, data on outsourcing behavior was collected from 82 firms to determine whether it affected infrastructure flexibility. Preliminary analysis of the data has resulted in evidence that in the insurance industry, outsourcing is negatively correlated with certain characteristics of infrastructure flexibility. This paper summarizes the theoretic grounds for both attitudes about outsourcing, briefly describes the study conducted, and explains the nature of the early findings.

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