The impact of outsourcing on information technology spending

Information technology outsourcing (ITOS) is a strategy used by many firms to either reduce their total cost of IT or gain access to IT capabilities not available in-house. A proprietary data set of large US firms is used to examine the effect of ITOS on firm-level IT spending over the seven-year period 1999–2005. Prior research suggested that (1) engaging in ITOS would be associated with a lower level of IT spending and (2) the extent of ITOS would be negatively associated with the level of IT spending. The results did not support either hypothesis. IT outsourcing is associated with higher IT spending, presumably reflecting the costs of enhancing IT capabilities. This increase in IT spending is driven by firms that initially outsource a large percentage of their IT activity. This paper makes three contributions to the literature. First, it is the first study to investigate whether the act of engaging in ITOS is associated with an objective, quantitative measure of IT spending in a large sample of firms over time. Second, it investigates whether the extent of ITOS affects IT spending, i.e., whether a higher level of ITOS has a greater impact on IT spending. Third, it examines IT spending at the aggregate firm level rather than the individual IT project level, providing a broader measure of the impact of ITOS on the IT function.