Influence of Industry Characteristics on Information Technology Outsourcing

Abstract

Despite the extensive research on information technology (IT) outsourcing, our knowledge and understanding of how industry characteristics impact the use of IT outsourcing remain limited. Drawing upon theories from organization behavior and industrial economics, this study identifies four major industry characteristics (i.e., munificence, dynamism, concentration, and capital intensity) and investigates how each of these factors affects the use of IT outsourcing. Specifically, we postulate that the extent of industry munificence is positively related to the utilization of IT outsourcing. Since timely strategic actions are the crucial aspects of leveraging munificent resources, IT outsourcing, which can be implemented in short periods of time, is considered to be a preferred option in such environments. Furthermore, industry dynamism is also positively associated with IT outsourcing, given that firms in dynamically evolving industries tend to look for flexibility and avoid a large amount of fixed investments (e.g., IT development in-house). In contrast to these hypotheses, we predict that industry concentration is negatively related to IT outsourcing. Firms in concentrated industries are likely to develop their own IT infrastructures, as they are not constrained by institutional pressures or cost-driven strategic actions. Finally, because firms in capital-intensive industries tend to conform to long-standing traditional practices, and do not highly value novel and risky practices, they will be less likely to use IT outsourcing than firms in industries with low capital intensity. The data from the U.S. Bureau of Economic Analysis along with Compustat empirically validated all of the proposed hypotheses; however, only marginal support was found for the association between industry concentration and IT outsourcing. Our findings offer business executives and IT service providers strategic and managerial insights into the dynamics and complexities involved in the diverse aspects of industry environments and IT outsourcing decisions.