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 Introduction

With nearly one-half of U.S. corporate capital being invested in information technology (Keen 1991) and IS expenditures representing the third largest corporate expense (Benko 1992), the IS function has become the prime target for outsourcing. The outsourcing of IS is so popular among communications companies, computer vendors, and semiconductor firms that an industry report notes that the "computerless computer company will soon dominate the industry" (Rappaport and Halevi 1991). Several organizations are considering outsourcing as one of the key options for improving information systems performance (Due 1992). Similar developments suggest increased relevance of IS outsourcing and outsourcing policies to IS research as well as IS practice.

IS outsourcing policies define the criteria that organizations utilize to decide upon the scope [of specific capabilities and degree of reliance for each capability] of their dependence upon external sources for meeting their IS needs. There is an ongoing debate on the pros and cons of the information systems outsourcing policies being pursued by different organizations and the rationale for those policies (Bettis, Bradley & Hamel 1992, Davis 1992, Due 1992, Lacity and Hirschheim 1993a, Sharp 1993). Among several factors responsible for firms' increased drive toward outsourcing of IS, financial considerations and business strategy have been discussed as the two major reasons (Hopper 1990, Huber 1993, Quinn and Hilmer 1994, Sue 1992, Thames 1992). Most controversy on outsourcing of the IS functions has revolved around the issue of increasing the productivity of the information systems (Brynjolfsson 1993, Due 1994, King 1994). In this context, the study of the interrelationships between IS outsourcing policy, the business and financial strategy considerations and IS productivity, is increasingly relevant for providing a more balanced perspective to the ongoing debate.

The conceptual framework proposed here is expected to facilitate the two primary objectives of this study: (i) to assess the influence of business strategy and financial conditions on IS outsourcing policy, (ii) to evaluate the relative importance of financial considerations and IS outsourcing policy as determinants of IS productivity.

This following section provides a detailed perspective of the IS outsourcing policy decisions with specific focus on the financial considerations and business strategy. Section 1 delineates the conceptual framework used for the study, the structural form of the model and the operationalization of the constructs used for the study. Section 2 discusses the factor analysis results used for determining the factors underlying the variables used in the study. An overview of the various regression analyses used for determining the structural equation parameters and the solutions of those equations is provided in section 3. The concluding section includes a discussion regarding the operationalization of the study, an analysis of the findings and their limitations, and implications for future IS research and practice.