Start Date
11-12-2016 12:00 AM
Description
We study how IT outsourcing (ITO) affects the wealth of firm’s shareholders (SHW). The net present value (NPV) approach suggests that ITO can create SHW by increasing firm’s earnings. The real options approach suggests that ITO can create SHW by providing the firm with investment flexibilities. We build on these intuitions and extend them to accommodate two idiosyncratic features of ITO: (a) ITO contracts are non-traded operating contracts (not securities, as the prevailing intuitions implicitly assume), and (b) they provide the flexibility to partially “decouple” the firm’s returns from the home country’s economy. We show that ITO has four interrelated effects on SW: (i) a cash flow effect, (ii) a working capital effect, (iii) an economic decoupling flexibility effect, and (iv) a wealth-creation efficiency effect. The combined SHW implications of the interrelated ITO effects alter the extant intuition. For example, an ITO initiative that increases earnings can potentially destroy SHW.
Recommended Citation
Rao, Ramesh and Tanriverdi, Hüseyin, "Shareholder Wealth Implications of Information Technology Outsourcing" (2016). ICIS 2016 Proceedings. 12.
https://aisel.aisnet.org/icis2016/ISStrategy/Presentations/12
Shareholder Wealth Implications of Information Technology Outsourcing
We study how IT outsourcing (ITO) affects the wealth of firm’s shareholders (SHW). The net present value (NPV) approach suggests that ITO can create SHW by increasing firm’s earnings. The real options approach suggests that ITO can create SHW by providing the firm with investment flexibilities. We build on these intuitions and extend them to accommodate two idiosyncratic features of ITO: (a) ITO contracts are non-traded operating contracts (not securities, as the prevailing intuitions implicitly assume), and (b) they provide the flexibility to partially “decouple” the firm’s returns from the home country’s economy. We show that ITO has four interrelated effects on SW: (i) a cash flow effect, (ii) a working capital effect, (iii) an economic decoupling flexibility effect, and (iv) a wealth-creation efficiency effect. The combined SHW implications of the interrelated ITO effects alter the extant intuition. For example, an ITO initiative that increases earnings can potentially destroy SHW.