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4. Conclusion

Discussion

The paper defined the concept of IS outsourcing policy based upon the decision-making criteria used by the organizations. This definition was followed by a brief review of the existing debate about the strategic versus financial basis of the outsourcing decisions. To provide a resolution to this contention, a conceptual framework that included both decision-making criteria was proposed. Specifically, this framework was devised to study and compare the influence of business strategy and financial considerations on the IS outsourcing policy. This comparison was deemed necessary to understand the relative impact of the two [apparently] disparate decision-making criteria. Existing controversy suggests that proponents of business strategy as the determinant of IS outsourcing attribute the long-term problems of outsourcing to decisions based on short-term financial gains. However, most corporate decisions regarding the outsourcing of IS have been primarily led by prospects of financial savings or cost-cuttings; in several cases these decisions were based predominately on imitative behavior (Loh and Venkatraman, 1992b). The proposed framework also aimed to assess the relative importance of financial considerations and IS outsourcing policy as determinants of IS productivity. It was one of the objectives of this study to find if IS performance was predominantly influenced by financial considerations or by IS outsourcing policy.

For the analysis of the proposed conceptual model, the set of one hundred companies considered to be the most effective users of information technology [by Computerworld Premier 100 survey for 1994] was chosen. Since the objective of the study is to determine the relationship of the business strategy and financial considerations to IS productivity, this set of companies represents an admissible sample. The data on both endogenous and exogenous variables was extracted from secondary sources, specifically from the Computerworld survey data , the Compact Disclosure electronic database, and companies' annual reports. Since, the survey data was based on the same [public domain] annual reports of the companies, data integrity was ensured. A structural equation model was created to represent the proposed conceptual framework. To satisfy the condition of identifiability, reduced form model was generated. For operationalization of the model represented by the structural equations, it was deemed necessary to determine the underlying factors of the variables. Factor analysis was used to combine the underlying indices of the variables into separate factors. The factor scores for these factors were used in the structural equations which were then solved by stepwise regression analyses.

Analysis of the Results of the Study

The results of this study show the relative importance of financial considerations in determining the IS outsourcing policy and the firm's IS productivity. Surprisingly, business strategy considerations do not seem to influence IS outsourcing policy. Further, IS outsourcing policy does not seem to have any direct influence on IS productivity. The empirical findings of the study are summarized below.

a). The evidence in table 3 suggests that only financial considerations are important in influencing the percentage of IS budget spent outside IS department. Of the financial considerations, performance seems to positively influence the IS outsourcing decisions, while higher business cost structure has a negative effect. Business strategy doesn't contribute significantly to the explanation of the variance in IS outsourcing policy. The internal position of IS or the competitive resource investment apparently do not influence the IS outsourcing policy.

b). The results in table 4 show that financial considerations are the primary determinant of IS productivity. IS outsourcing, apparently, has negligible contribution in explaining the variance of IS productivity. Of the financial considerations, business cost structure and short-term effects of IS investments on financial performance seem to have a negative influence on IS productivity. A higher ratio of net income or sales to the IT expenditures does not appear to influence IS productivity.

For the sample included in the study, we infer that financial considerations have a predominant role in influencing the IS outsourcing policy as well as IS productivity. Business strategy indicators seem to have negligible influence on IS outsourcing policy. IS outsourcing policy appears to have negligible influence on IS productivity.

The results from this study discount the role of business strategy and IS outsourcing policy in determining IS productivity. Only financial considerations appear to be the relevant criteria that influence IS outsourcing decision as well as IS productivity. However, these results could have been influenced by the limitations inherent in this kind of study.

Limitations of this study

Considering the fact that this is the first study of its kind which is based on data that is available for only one year, several limitations must be observed. Firstly, there could have been interactions between the constructs of business strategy and financial considerations. Such interactions were ignored within the scope of the present study. Similarly, the study did not take into account the interactions between financial considerations and IS outsourcing policy in the determining their influence on IS productivity. Secondly, this study is based on a cross-sectional sample of the hundred most effective users of IT. Since, data for only one year [with the new Computerworld measure of IS performance, i.e., IPI] was available at the time of this study, a longitudinal study could not be done. For further research it is recommended that a longitudinal sample be considered along with the cross-sectional sample. Thirdly, within the scope of this study, the data for IS budget spent outside IS department was used as a surrogate for the IS outsourcing policy. This decision was based on the premise that we were trying to measure the dependence of the internal IS department on all suppliers - internal or external to the organization. Further, it was assumed that the percent budget spent outside IS department was an adequate measure for denoting this dependence on external units. The motivation for choosing this variable was its presence in the same dataset as that for the other variables considered in the study. Hence, even though it may not be the most reliable measure, still it represents a measure that is consistent with other measures. Further, this data was reported for the same year as that for other variables in the study and may not represent annual data for the preceding years. However, there could be a delay between the allocation of IS budget [internally or externally] and the resulting effect on IS performance. Within the scope of this study, this variation was not taken into account. Moreover, it is difficult to ascertain the generalizability of this study to companies that were not in the Computerworld Premier 100 list. Future research should take these issue into consideration.

Implications for IS Research and IS Practice

The results of the study are interesting in several respects. Firstly, it can be argued that the results are a reflection of the measurement process used for estimating IS productivity. Since only financial measures are used for determining the index for IS productivity (IPI), only financial parameters appear to be significant in the overall analysis. One explanation for this argument is that even the new measure of IS performance used by Computerworld, although intended to give due emphasis to management of IS [that could be argued to have positive correlation with IS strategy], has not sufficiently succeeded in its objective. Another interesting revelation from the study is regarding inconsequential significance of the internal position of IS function and the budget allocation to IS function in influencing IS performance. This finding can be explained on the basis of the indirect influence of IS investment on the organizational IS performance measures such as IPI. Since, we are trying to determine the influence of the investment in IS on the overall organizational measures, it might be difficult to establish this relationship unless some mediating variables are considered. Such mediating variables could relate to a process-level or function-level contribution of the IS function instead of the overall organizational level contribution. Another approach for determining the value added by investments in IT could compare the market value of the IS function [determined by the value that the IS function has in the free market] with alternative [internal or external] options available to the organization for supporting its information infrastructure. Further research in IS outsourcing can reveal more reliable and valid findings by taking into consideration the findings of this study and the limitations mentioned herein.