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Costs, Transaction-Specific Investments and Vendor Dominance of the Marketplace: The Economics of IS Outsourcing

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Information Systems Outsourcing

Summary

This paper studies determinants of information systems (IS) outsourcing. It argues that a focus on comparative economic theories and models can improve our ability to explain outsourcing within the larger context of organizational strategy and environment. Specifically, the research constructs of production cost, transaction cost, financial slack, and firm size are examined to understand what influences the outsourcing decision. To empirically test these relationships, a field study gathering information from senior IT managers in 243 U S. banks was conducted. Financial indices from the archives of the Federal Reserve Bank were a second important source of data. Results of the study showed that IS outsourcing in banks were influenced by production economies, transaction economies, and firm size. The paper has important implications for research and practice. For researchers, the findings suggest that some financial criteria are key factors in outsourcing decisions, but not all. Recapitalizing the IT investment, for example, is a short term strategy that managers may not and, probably, should not be adopting. For practitioners, the findings suggest that sourcing strategies need to weigh both direct and indirect costs when hiring systems integrators. Small firms need to consider whether they have sufficient economies of scale to justify internal provisioning.

Another version of this paper appeared as: Ang, Soon and Detmar Straub. “Production and Transaction Economies and IS Outsourcing: A Study of the U.S. Banking Industry,” MIS Quarterly, Vol. 22, No. 4 (December, 1998), pp. 535–552. The current, related-but-different version appears with permission of MIS Quarterly.

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Authors and Affiliations

  1. School of Accountancy and Business, Nanyang Technological University, Nanyang Avenue 2263, Republic of Singapore

    Soon Ang

  2. Robinson College of Business, Computer Information Systems Department, Georgia State University, University Plaza, Atlanta, GA, 30303-4012, USA

    Detmar Straub

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  1. Soon Ang
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  1. Bauer College of Business, University of Houston, 77204-6282, Houston, TX, USA

    Rudy Hirschheim

  2. Universität Bayreuth, Universitätsstraße 30, 95440, Bayreuth, Germany

    Armin Heinzl  & Jens Dibbern  & 

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Ang, S., Straub, D. (2002). Costs, Transaction-Specific Investments and Vendor Dominance of the Marketplace: The Economics of IS Outsourcing. In: Hirschheim, R., Heinzl, A., Dibbern, J. (eds) Information Systems Outsourcing. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-04754-5_3

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  • DOI: https://doi.org/10.1007/978-3-662-04754-5_3

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