ELSEVIER Information & Management 27 (1994) 33-44

Research

A descriptive study on the outsourcing

of information systems functions
Varun Grover *, Myun Joong Cheon, James T.C. Teng
College of Business Administration University of South Carolina, Columbia, SC 29212, USA

Abstract

A few years ago some major outsourcing contracts were signed by large corporations like Eastman Kodak and
General Dynamics. Since then the trade literature in particular has examined the outsourcing of Information
Systems (IS) functions as an important and growing trend. This paper attempts to provide a systematic overview of
the outsourcing phenomenon. IS outsourcing is viewed from a definitional and an evolutionary perspective. It is
argued that outsourcing is not new, but its nature has evolved over decades. An exploratory study of 188 firms is
reported; it provides insight into the types of IS functions being outsourced and the relationship between
outsourcing and certain demographics: size, industry and information intensity. The results suggest that while
system-operations remains the predominant function outsourced, other functions are also being performed by
external service providers. Further, industry and information intensity have some influence on the extent of
outsourcing of certain functions.

Key words: Information systems outsourcing; Demographics; Application development; Systems operations;
Telecommunications; Systems planning; End user support; Technology management

1. Introduction tion, Network World, and Information Week.

Trying to remain competitive and up-to-date is
In recent years, an increasing amount of atten- becoming a financial burden to many organiza-
tion has been paid to outsourcing of information tions. This is true particularly in fields such as
systems (IS) functions. A recent survey of IS banking and financial services, health care, and
senior executives highlights outside services man- manufacturing. Hiring outsiders to handle part or
agement as one of the six strategic management even all of its IS often helps an organization
issues confronting organizations in their manage- provide better services and maintain a competi-
ment of corporate systems [61. Over the last few tive advantage.
years, the new strategic role of outsourcing in Given the increasing pervasiveness of IS out-
business firms has been given much coverage in sourcing, this study seeks to examine the out-
trade publications; e.g., Computerworld, Datama- sourcing phenomenon in a systemic manner.
Specifically, the study explores the nature and
evolution of outsourcing, the extent of IS func-
* Corresponding author. tions being outsourced, and whether this profile

0378.7206/94/$07.00 0 1994 Elsevier Science B.V. All rights reserved

SSDI 0378.7206(94)00006-5
34 V. Grocer et al. /Information & Management 27 (1994) 33-44

is related to size, industry type, and information organizational hierarchy in the management of
intensity. the IT infrastructure”. Further, they argue that a
continuous measure rather than a simple di-
chotomy of “in-house function” versus “outsourc-
2. Outsourcing: definition and background ing” is required to capture the complexity inher-
ent in managing IS functions. Fig. 1 presents a
framework, based on two continuous dimensions,
The term outsourcing refers to the acquisition
that maps the various types of outsourcing.
of services from external service providers. Out-
Here, we broadly define outsourcing of IS
sourcing has been described by Loh and Venka-
functions as the practice of turning over part or
traman [24,25] using two dimensions: (1) the de-
all of an organization’s IS functions to external
gree of internalization of technological resources
service provider(s). This definition includes: ap-
and (2) the degree of internalization of human
plications development and maintenance, systems
resources. They define this internalization as
operation, networks/ telecommunications man-
“ownership by the focal organization which takes
agement, end-user computing support, systems
on full control with profit and loss responsibility.”
planning and management, and purchase of ap-
Based on this, they define outsourcing as “involv-
plication software, but excludes business consult-
ing a significant use of resources - either techno-
ing services, after-sale vendor services, and the
logical and/or human resources - external to the
lease of telephone lines.

2.1. Types of outsourcing

Varun Grover is currently an Assis-

tant Professor of MIS in the Manage-
ment Science Department at the Uni-
versity of South Carolina. He holds a
B. Tech. in Electrical Engineering
from the Indian Institute of Technol-
ogy, an MBA from Southern Illinois
University and a Ph.D. degree in MIS
from the University of Pittsburgh.
Grover has papers published or forth-
coming on reengineering, strategic in-
formation systems, the management
of information systems, telecommunications, and data re-
source management in journals such as MIS Quarterly, Jour-
nal of MIS, Decision Sciences, IEEE Transactions in Engineer-
ing Management, California Management Reliew, Data Base,
Information and Management, Journal of Systems Management,
Communications of the ACM, Long Range Planning, Journal of
Information Systems, Interfaces, Omega, and numerous others.
He is recipient of the Outstanding Achievement Award for
the best application paper from the Decision Sciences Insti-
tute. He is a member of The Institute of Management
ences (TIMS) and the Decision Sciences Institute (DSI).
Myun J. Cheon is an Assistant Professor at Ulsan University
in Korea. He had an M.B.A. from Indiana State University
and a B.B.A. from Keimyung University in Daegu, Korea. He
has papers published in journals such as Information and
Management, Data Base, and Journal of Database Administra-
tion. His primary areas of interest include outsourcing of IS
functions, IS security, and IS research.
Alternative types of outsourcing [ 1,2,24,26] are
as follows:
(1) Complete Outsourcing involves the transfer
of the entire computer and communications cen-
ter, together with the related IS personnel from
the service receiver to the service provider. This
Dr.
is the closest to the “buy” or “market-exchange”
strategy. The service provider is fully in charge of
James ‘T.C. Teng is Associate Profes-
sor at the College of Business Admin-
istration, University of South Car-
olina. He received an MS. in mathe-
matics from the University of Illinois
and a Ph.D. in MIS from the Univer-
sity of Minnesota. His research arti-
Sci-
cles have appeared in California Man-
agement Review, Long Range Plan-
ning, Information and Management,
Omega, Data Base, and numerous
other journals. His research and con-
sulting experience are in the areas of data resource manage-
ment, decision support systems and business process redesign.
In 1992, he received the Outstanding Achievement Award
from the Decision Science Institute.
 1/. Grouer et al. /Information & Management 27 (1994) 33-44 35

all phases of the technological implementation the service receiver is kept to a minimum. The
and takes on the risk of resource ownership. receiver’s IS personnel simply buy computer time
Some examples of this include American Stan- from the service provider in order to perform the
dard, Copperweld, and Dial. relevant tasks. GEICO was a company that pri-
(2) Facilities Management Outsourcing is se- marily provided this kind of service.
lected when there is a shortage of specialized and (5) Other Types of Outsourcing. Rental con-
competent IS staff necessary to operate complex tracts may involve low to medium levels of the
IS data centers. The service provider has a signif- internalization of technological resources and are
icant role in operating the technological re- selected when there is a shortage of specialized
sources of the service receiver. Some examples and advanced technological resources required to
are Ford and Unilever. perform IS activities. Installation/ procurement
(3) Systems Integration Outsourcing involves contracts involve medium levels of internalization
medium levels of internalization of technological and are selected when there is a necessity to
and human resources. It has emerged as a neces- install and procure the information systems.
sity to link up IS both within and across organiza- Maintenance/ programming contracts involve a
tions in order to respond effectively to increased low level of internalization of human resources
competition and globalization of business opera- and are used on a one-time basis to meet a
tions. In many cases, a single service provider - particular system development or maintenance
the systems integrator - is contracted to manage need that cannot be suitably met by the internal
the installation and operation of the integrated IS human resources. These types of contracts are
systems and assumes the overall responsibility for used extensively by US Government organiza-
the quality and performance of the multi-vendor tions.
environment. Some examples include Allegheny
International, American Airlines, and Boeing. 2.2. Outsourcing trends
(4) Time-Sharing Outsourcing was practised in
the late 1950s with mainframe computers. Time- Outsourcing is really not a new phenomenon;
sharing was popular for many companies (e.g., its roots can be traced to the traditional timeshar-
banks and other financial services firms); most of ing and professional services of the late 1950s.
these were small and could not afford mainframe Today outsourcing has become a valid option in
computers to run occasional batch data process- all areas of IS service. For example, certain in-
ing jobs. Ownership of physical IS resources by dustries - like thrift institutions - have long

Rental Complete High

Contract lnhouse Operations
Time-sharing Installation/
Outsourcing Procurement Internalization of
Contracts
Human Resource
Systems Maintenance
Integration Program Contracts
Contracting
Complete Outsourcing Facilities Low
Management
Outsourcing

Low High
Internalization of
Technological Resources
Fig. 1. Alternative types of IS outsourcing (adapted from Loh and Venkatraman, 1991).
36 V. Grol,er et al. /Information & Management 27 (1994) 33-44

purchased timesharing and facilities management ther, the business relationship between the out-
services. Other companies have dismantled their sourcing service receiver and the service provider
data center and have now contracted out all data is increasingly that of a partnership rather than
processing and programming. merely that of customer and vendor [31]. It is
However, the nature of outsourcing has considered as part of the broader context of
evolved. Compared to the 1970’s, current out- “information partnership”, as described by Kon-
sourcing practices differ [3,32]. While smaller synski and McFarlan [23].
companies have often turned to outsourcing as a The key trend of today’s outsourcing strategy
way to obtain IS services not available or feasible is the shift in focus from technology to informa-
internally [22], larger companies with mature IS tion utilization and management. Technology in-
departments are also outsourcing. Larger compa- tensity makes it harder and harder for companies
nies may then improve their IS, because they are to acquire the employees they need. The high
able to accept the separation of data ownership costs of putting together large, perhaps world-
from data processing, acknowledge the technical wide, networks make it harder for them to ac-
sophistication of service providers, and concen- quire capital. From this perspective, outsourcing
trate their resources on efforts to produce high can be seen as the evolution of basic data pro-
added value. Also, as indicated in Fig. 2, applica- cessing services from independent and unique
tions packages, contract programming, and spe- department to a utility-like service, similar to
cific processing services comprised the major por- telephone or electrical services. Rather than
tion of all IS services outsourced in 1970s while spend time and resources building an internal
systems integration, application management, and infrastructure, an organization concentrates its
systems operation are the major IS services out- efforts on the effective use of information and
sourced in 1990s. Current outsourcing practice the creation of new analytical data with which
allows a firm to outsource proactively and thereby they can improve management’s responsiveness
choose specific IS functions to be outsourced to organizational needs [8].
based on need.
Traditionally, outsourcing service providers as-
sumed no management responsibility, even when 3. Making outsourcing decisions
they took over a part of the business. Today
growing ranks of service providers are willing and Since outsourcing presents an alternative way
eager to take on such responsibility 1351 and the of providing IS services, it can be more or less
market is becoming intensely competitive. Fur- attractive, depending on the company’s unique

Type of Product 1970s 1990s

or Service

Applications Application Packages Applications

Software Management

Professional Consulting Systems Integration

Services Contract Programming

Processing Specific Systems Operation

Services Processing Service
Fig. 2. Outsourcing evolution (adapted from Aucoin, 1991).
 K Grover et al. /Information & Management 27 (1494) 33-44 37

needs and circumstances [17,32]. A rational deci- with less resources. This pressure is seen as the
sion to outsource is therefore contingent upon most significant factor driving today’s corporate
careful examination of needs. Both positive and interest. An outsourcing service provider might
negative aspects of outsourcing must be carefully be in a position to exploit economies of scale in
considered. areas of hardware, software, and staff, since it
pools projects from many service receivers. Simi-
3.1. Adcantages of outsourcing larly, the service provider is able to exploit
economies of scope, since a single service provider
The factors contributing to the attractiveness
carries out a variety of IT tasks, a capability that
and growth of outsourcing are classified into three
may not be possible for any one service receiver.
major categories: strategic, economic, and tech-
(b) Cost Containment and Predictability. With
nological [9,16,20,21,28].
the escalating levels of IT investments 133,361,
(1) Strategic Factors there are increasing pressures to move away from
(a> Focus on the Core Business. Since companies a fixed, corporate overhead towards a more di-
are often distracted from their fundamental rect variable cost approach to controlling the IT
strategic thrusts in the marketplace by the ongo- operations. Outsourcing provides an unambigu-
ing impediments associated with an increasingly ous approach to arriving at a detailed cost struc-
complex IS infrastructure, outsourcing allows ture of IT operations. The costs become pre-
companies to refocus their business efforts to- dictable for the service receiver, since the respon-
wards higher level issues. sibility of cost overruns is often placed on the
(b) Improved Focus on Strategic Use of IT. Since service provider 171.
IS departments have a group of experienced and
efficient development professionals, outsourcing (3) Technological Factors
allows management to focus available IS talent (a) Access to Leading-Edge Technology. Out-
on IT activities that promote competitiveness sourcing allows the service receiver to gain imme-
rather than routine activities of systems mainte- diate access to otherwise unavailable state-of-the-
nance or operations. Furthermore, outsourcing art technology. This increases the receiver’s com-
can improve flexibility and responsiveness in petitiveness in delivering products or services.
meeting market needs and internal requirements. (b) Avoidance of Obsolescence Risk. Due to the
Quick response in this area is becoming a strate- accelerated changes in the nature of the IT in-
gic necessity of time-based competition. frastructure, the risk of obsolescence is high [5].
(c) Enhanced IT Competence. Since IT as a Outsourcing allows the service receiver to move
source of competitive advantage pervades the en- the obsolescence risk to the service provider: the
tire value chain [301, outsourcing allows the ser- service provider has the ability to diversify these
vice receiver to leverage the competence of one risks across a broad range of service receivers.
or more service providers without internalizing all However, long term contracts might, in fact,
the required competence. spread the risk back to the receiver!
(d) Enhanced IS Staff Expertise. Because of the
specialized nature of IT, the staffing of qualified 3.2. Disadvantages of outsourcing
personnel is critical, especially in times of signifi-
cant technological change. Outsourcing allows the There are some drawbacks to outsourcing.
service receiver to transfer this problem to the These may make outsourcing unattractive to po-
service provider, who is in a better position to tential receivers and lead to user resistance
select, train, and manage IT personnel. [ 19,261.

(2) Economic Factors (11 Managerial Factors

(a> Economies of Scale and Scope. The challenge (a> Loss of Flexibility or Control. From the point
for IS management today is to accomplish more of view of IS executives, outsourcing reduces real
38 I/. Gror:er et al. / Information & Management 27 (1994) 33-44

or perceived control over both the quality of monitoring the outsourcing contract are poten-
software and the timetable of a project since the tially wide ranging, indirect, and substantial.
work is now being carried out by people not (b) Hidden or Potential Costs. Additional costs
under direct supervision. may be incurred in releasing or transferring em-
(b) Threat to Long Term Career Prospects. With ployees, in license transfer by software vendors,
outsourcing, the service receiver often finds that and in re-negotiating contracts [13,14].
many IS professionals do not find suitable jobs or
promising career paths in other areas of the cor- (3) Conflicting Interest Factors
poration. In fact, addressing the personnel dis- (a> Profit-Motivated Service Provider. In some
placement caused by outsourcing discourages cases, the profit motive of the service provider
many IS executives from evaluating the option might not be in the best interests of the service
objectively. In practice, however, there are sev- receiver. Some service providers are in the busi-
eral alternatives, including personnel layoff, re- ness of maximizing their profit at any cost; this
training, and absorption of displaced personnel could run counter to a service receiver’s interest.
into the payroll of the service provider. (b) Systems and Data Confidentiality. Since the
service provider may offer a customized but simi-
lar system to several service receivers, with some
(2) Cost Related Factors direct competitors, concern arises over data secu-
(a) Increased coordination costs. Outsourcing may rity.
require increasing time to communicate and co-
ordinate with the service provider: typically, in The advantages and disadvantages suggest that
formal meetings. The costs of negotiating and outsourcing might not necessarily be a panacea

* Firm Size

* Industry Type

* Information Intensity

Outsourcing of IS Functions (Overall)

* Application Development & Maintenance

* Systems Operations

* Telecommunications Management & Maintenance

* End User Support

* Systems Planning & Management

Fig. 3. Research model.

 K Grocer et al. /Information & Management 27 (1994) 33-44 39

for all organizations. With the trend toward func- differential measure, we can focus on the prolif-
tional outsourcing, it is possible that different eration of contemporary outsourcing that oc-
organizations might find it beneficial to outsource curred after Eastman Kodak and General Dy-
selected IS functions. namics signed mega-contracts rather than the
older facilities management that was prevalent in
the 1970s.
4. A descriptive study of functional outsourcing The outsourcing budget in each case is ex-
pressed as a percentage of the firm’s total IS
Our study assesses the extent to which various budget. Budgets were assessed for the five IS
IS functions are being outsourced and whether functions. Both the present and earlier outsourc-
this differs across demographic factors such as ing budgets are calculated as follows: the percent-
size, industry, and information intensity. While age of the total IS budget allocated for a function
multi-million dollar contracts pioneered by com- is multiplied by the percentage of that function’s
panies like Eastman Kodak and General Dynam- budget allocated for outsourcing. The sum for all
ics involve complete outsourcing of all IS func- five functions becomes the measure of the degree
tions: many companies are choosing the functions of outsourcing. Subtracting the sum of three years
they wish to outsource. Therefore, it is appropri- ago from the present sum yields the change in
ate to examine the components of outsourcing. overall outsourcing budget (COB). The difference
Five functions have potential for outsourcing: was also computed in the case of each IS func-
function 1: applications development and mainte- tion; this represents the change in outsourcing for
nance; function 2: systems operations; function 3: each function.
telecommunications and networks management;
function 4: end user support; and function 5: 4.2. Data collection
systems planning and management [4,27,29]. Fig.
3 shows the relationships being examined. The questionnaire instrument was first re-
viewed in personal interviews with thirteen prac-
4.1. Instrument tising professionals in the IS area; seven were top
IS executives. Feedback was evaluated and
Data were collected via a mail survey question- changes were made after each meeting. In order
naire. It should be noted that this was a part of a to maximize the response rate for the final mail-
larger study on outsourcing. Only items relevant ing, the steps suggested by researchers [lo,341
to this study are described here. Three demo- were followed. These included addressing re-
graphic type variables were measured in the in- spondents by name (names were obtained from
strument. Size was assessed using several mea- recent directories), immediate follow-up on unde-
sures: sales revenue, number of employees, and livered questionnaires by calling companies for
number of IS employees. Industry was assessed correct addresses or names, and a follow-up mail-
using a categorical scale. Information Intensity ing three weeks after the first mailing. The unit
was measured by the IS Budget/Sales indicator, of analysis for this research is an organization,
originally proposed by Nolan as a measure of IS which may be a corporation, a business unit, a
maturity and subsequently used in other studies subsidiary, or a division served by an IS depart-
[e.g., 12,181. ment.
A continuous measure (degree of outsourcing) One thousand companies received the survey
is a superior indicator to a dichotomous measure. questionnaire. It was addressed to the top execu-
Outsourcing of IS functions, the dependent vari- tive in charge of Information Systems. The names
able in the research model, refers to the differ- were obtained from the Spring 1992 edition of
ence between the current outsourcing budget and the Directory of Top Computer Executives pub-
that three years earlier for overall outsourcing lished by Applied Computer Research, Inc. One
and for each constituent IS function. By using a hundred and eighty eight usable responses were
40 V. Gro~,er et al. /Information & Management 27 (1994) 33-44

received, representing a response rate of about Table 1

Profile of the responding companies
19%. To ensure that these responses were repre-
sentative of the larger population, non-response Frequency Percent

bias was assessed by comparing the respondents (a) Industry

with the non-respondents in terms of a few char- Manufacturing 39 20.7
Banking/Finance/Insurance 52 27.6
acteristics of the sample [ll] and by comparing
Healthcare 23 12.2
those who respond immediately with those who Other 74 39.4
respond after follow-up steps are taken [15]. Two Total 18X 100
key organizational features: company total sales
(b) Sales Revenue
and number of employees using data obtained Less than $50 million 12 6.4
from Compact Disclosure, were used for compar- $50 million to below $100 million 11 5.9
ison. T-tests show no significant differences be- $100 million to below $500 million 55 29.3
tween the two groups at the significance level of $500 million to below $1 billion 26 13.8
$1 billion to below $5 billion 33 17.6
0.05. This lack of non-response bias improves
$5 billion to below $10 billion 17 9.0
confidence that the results from the study sample $10 billion and above 13 6.9
can be generalized to the larger population. Unanswered 21 11.2
Total 188 100

(c) IS Budget as Percentage of Total Sales

5. Results Less than 0.5% 14 7.4
0.5% to below 1% 15 8.0
5. I. Responding sample characteristics 1% to below 2% 62 33.0
2% to below 3% 32 17.0
3% to below 5% 19 10.1
The industry representation of respondent 5% to below 15% 17 9.0
companies, as shown in Table 1, indicates that a 15% and above 7 3.7
large proportion of these companies are manu- Unanswered 22 11.7
facturers, financial institutions (banking, insur- Total 188 100

ance, etc.) and healthcare. The responding com- Cd) Number of IS Employees
panies represent a wide variance in size, with 63 Less than 20 25 13.3
of 167 companies having an annual sale of $1 20 to below 50 40 21.3
50 to below 100 36 19.1
billion or above, and 23 having sales below $100
100 to below 300 32 17.0
million. Also, 111 of the companies have 2000 or 300 to below 1000 27 14.4
more employees, and 17 have fewer than 300. 1000 and above 18 9.6
The IS departments in these companies exhibit Unanswered 10 5.3
similar variance. Seventy five of 166 companies Total 188 100

have IS budgets that are equivalent to 3% or

more of total sales and 113 of 178 companies
have 50 or more IS employees. age of the firm’s total IS budget, both currently
and three years ago. The resulting correlations
5.2. Validity of the outsourcing measures between the computed measures (i.e., estimates
summed over IS functions) and the overall assess-
Variables with computational measures are ments range from 0.85 to 0.90 (p < 0.001) indicat-
evaluated for their internal consistency through ing validity of the measures.
correlation with alternative measures. Since the
change in degree of outsourcing is measured by 5.3. Outsourcing of IS functions
personal assessment of the respondent, alterna-
tive measures were added to the instrument. The change in IS outsourcing using the current
These measures are single questions asking for IS budget as a base over the three year period
the outsourcing budget, expressed as a percent- averaged about 6%. In other words, on average
 K Grol>er et al. /Information & Management 27 (1994) 33-44 41

Table 2 ing. Applications development however includes

Change in outsourcing of IS functions over 3 years systems analysis, design, construction and mainte-
IS Function Distribution of 3 year nance. Companies are realizing that “reinventing
increase of IS budgets
the wheel” through in-house development may
Applications Development 30% not always be appropriate. Numerous service
and Maintenance
providers specializing in certain software by in-
Systems Operations 36%
Telecommunications Management 17%
dustry or application facilitate application devel-
and Maintenance opment through outsourcing.
End User Support 16% We suspect that the outsourcing of end-user
Systems Planning 1% support and especially telecommunications (in-
and Management
creases of 16% and 17% respectively) is a grow-
Total 100%
ing phenomenon. The proliferation of networks
in the past decade, the shortage of experienced
an additional 6% of the (current) IS budget was personnel in telecommunications and the avail-
turned over to external service providers. Consis- ability of large common carrier services in the US
tent with the growing importance of outsourcing, (like AT&T, MCI, Sprint, etc.) makes it econom-
this number is fairly significant. The breakdown ical and sensible to outsource. The variety of
of this figure over the five IS functions is illus- network solutions offered by third party providers
trated in Table 2. should dramatically increase. For instance, solu-
It is apparent that applications development tions to meet specific industry needs and network
and maintenance and systems operations are the integration services to integrate disparate tech-
two most outsourced IS functions. Systems opera- nology platforms should be highly valued. Also,
tions, which represents 36% of the increase in higher bandwidth digital networks for data, voice,
outsourcing, includes mainframe and mini com- and video applications will require specialized
puter operations for daily processing runs, backup services for network design, implementation, and
and recovery procedures, and systems software ongoing management. Similarly, while end user
maintenance. This type of outsourcing is more computing is growing, outsourcing of end user
reflective of the earlier “facilities management” support might increase among IS departments
days and represents a generic type of outsourc- who would rather not deal with the “non-conven-

Table 3
Tukey’s test for industry differences
Mean% change in outsourcing
Manufacturing Finance Healthcare Manufacturing- Manufacturing- Finance-
(n = 39) (n = 52) (n = 23) Finance Healthcare Healthcare

Applications 0.556 1.788 2.646

Development and
Maintenance

Systems Operations 1.514 1.851 2.232

Telecommunications 0.195 0.605 3.771 *** ***

Management and
Maintenance

End User Support 0.501 0.138 3.532 *** ***

Systems Planning and 0.121 0.055 0.196

Management
Overall Outsourcing 2.886 4.437 12.378 ***
42 V. Gror,er et al. /Information & Management 27 (1994) 33-44

tional” services involved in user education, train- frastructure and information center operations
ing, and consulting. than the average manufacturing concern. In fact,
Finally, systems planning and management end user support for hospitals outsourced at a
does not seem to be outsourced at levels compa- significantly higher level than both manufacturing
rable to the other four functions. This would and finance firms. Hospitals, while not tradition-
include administrative functions like project man- ally strong in the IS area seem to be looking
agement, financial management, personnel man- outward for two of the more progressive areas of
agement, planning, etc. These functions might be IS rather than developing expertise in-house. In
deliberately retained in-house by most companies contrast, both manufacturing and especially fi-
in order to maintain administrative control over nance firms have a stronger tradition in IS and
both outsourced and insourced IS functions. can rely more on in-sourcing. These trends may
change as outsourcing decisions become more
5.4. Demographic uariables and outsourcing closely aligned with corporate need, and the ven-
dor environment becomes more specialized and
The three industries with the highest represen- competitive.
tation in our sample were manufacturing, fi- Table 4 provides Pearson’s correlations be-
nance, and healthcare. To observe whether the tween the various size and information intensity
degree of outsourcing differs across industries, measures and the degree of functional IS out-
Tukey’s tests were conducted for mean differ- sourcing. What seems remarkable is the absolute
ences for each pair of industries. The results are lack of correlation (magnitudes close to 01 be-
illustrated in Table 3. tween size measures and any kind of outsourcing.
Within the parameters of the existing sample, This strongly confirms our prior assertions that
healthcare seems to be outsourcing more of its unlike a decade ago, outsourcing is not the provi-
budget for every IS function. The differences are dence of smaller firms. Larger firms are also
significant between healthcare and manufactur- looking toward external service providers, even
ing for outsourcing of telecommunications, end though IS resources might be available in-house.
user support, and overall outsourcing. This would The mega contracts signed by Eastman Kodak
suggest that the healthcare industry (which con- and General Dynamics are testimony to this.
sists here mainly of hospitals) are relying more on Interestingly, information intensity (measured
external vendors for their telecommunications in- as the ratio of IS Budget to Sales) exhibits two

Table 4
Pearson correlation matrix for IS functional outsourcing
Total Sales Number of Number of IS IS Budget as a
Employees Employees 5%of Sales
Applications - 0.030 - 0.047 - 0.093 0.041
Development and
Maintenance

Systems Operations 0.056 - 0.010 - 0.023 - 0.042

Telecommunications 0.021 - 0.038 -0.031 0.048

Management and
Maintenance

End User Support 0.022 0.106 0.018 0.190***

Systems Planning and 0.029 0.011 - 0.010 -0.719****

Management

Overall Outsourcing 0.039 - 0.011 - 0.051 - 0.003

 V. Grover et al. /Information & Management 27 (1994) 33-44 43

significant relationships between outsourcing of sourcing and the effects of certain demographic
end user support and system planning and man- factors.
agement. However, the relationship between the IS outsourcing is not a new phenomenon; how-
number of IS employees, which presumably com- ever its nature has evolved over the years. The
prise a significant portion of the IS budget, and results confirm our assertions that size is no longer
these IS functions is close to zero. Perhaps the IS a factor in determining whether to outsource.
budget/sales is really referring to the ratio of There is also support for our contention that a
infrastructural expenses (i.e., hardware and soft- variety of IS functions are being outsourced as
ware> to sales. If this is true, the first correlation opposed to only traditional IS operations. While
indicates that companies spending more on IS the predominant function remains operations, ap-
infrastructure relative to sales tend to outsource plications, end-user support, and telecommunica-
their end user support function. The newer in- tions are also being performed by external service
frastructures tend to be microcomputer (e.g., providers. Such findings might indicate some de-
client server) oriented. Therefore the positive gree of maturity in making outsourcing decisions
correlation might be reflective of the fact that where every decision is examined on its contin-
companies investing more in microcomputer con- gent merits rather than as a result of a prevailing
figurations and software seem to be turning over trend. With the proliferation of vendors and their
support for that function to an external service increasing specialization by industry, function, and
provider. * Many IS departments might view application, the parameters surrounding this de-
end-user support as a “non-core” IS function and cision might change. Different industries may then
therefore turn over information center operations pursue different levels of outsourcing. Our results
on a period-based contractual mode to an exter- indicate a stronger trend toward outsourcing in
nal service provider [261. the healthcare industry, particularly in telecom-
The second correlation is exceptionally strong munications and end-user support.
and negative. This implies that companies with The decision to outsource should be evaluated
lower infrastructural expenses relative to sales strategically based on technological, economic and
tend to outsource their IS planning and manage- strategic advantages. Concurrently, management
ment activities. The strength of this relationship problems, potential hidden costs and motives of
indicates that companies with smaller IT infras- the service provider should be evaluated. It might
tructures might be turning to external consul- be advantageous to turn over information center
tancy services to plan and manage their opera- operations to an external provider (which seems
tions. Given the small magnitude of outsourced to be occurring more in companies with larger IT
IS planning and management budgets, this rela- investments), however, if these applications are
tionship should be interpreted with caution. critical to the future of the firm then viewing
them as a “nuisance” that should be outsourced
might be a mistake.
6. Conclusion Finally, it should be noted, that the analysis
was based on a 19% response rate. Although
The objective of this paper was to: (1) provide non-response bias was estimated, it should be
an evolutionary perspective of IS outsourcing, (2) recognized that the potential of sample frame
review the outsourcing decision in terms of its error exists. Also, the scope of this study was
advantages and disadvantages, and (3) provide restricted to the demographic variables of size,
preliminary empirical data on IS functional out- industry and information intensity. To determine
guidelines for outsourcing decisions would re-
quire analysis of a number of rich contextual
* A concise definition of outsourcing consistent with the one
variables and their effect on outsourcing (e.g.,
given earlier was provided to the respondent. This definition management risk taking propensity, industry
did not include after-sales service of vendor purchases. practices, vendor aggressiveness, perceptions of
44 I/ Grocer et al. /Information & Management 27 (1994) 33-44

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