Seminar: Dr. Robert Kauffman, "Returns to IT Outsourcing" (1/30/2009)

This study evaluates the contributions of IT outsourcing to economic growth by using a production function framework and a panel data set from sixty industries in the United States over the 1998 to 2006 period. Our results demonstrate that IT outsourcing has made a positive and significant contribution to the growth of both industry output and labor productivity, implying that it has not only helped industries produce more output but also made their labor more productive. Moreover, our analysis of split data samples reveals systematic differences between high- and low-IT-intensity industries in terms of the degree and impact of IT outsourcing. Our results indicate that high-IT-intensity industries use more IT outsourcing as a percentage of output but less as a percentage of own IT capital, and achieve higher returns from IT outsourcing. This suggests that to reap greater value from IT outsourcing, firms need to develop IT capabilities by intensively investing in IT themselves. By comparing results from sub-periods and analyzing a separate data set for the earlier period of 1987 to 1999, we conclude that the value of IT outsourcing has been stable from 1998 to 2006 and consistent over the past two decades. The high returns we find for IT outsourcing also suggest that firms may be underinvesting in IT outsourcing.

Authors:  Kunsoo Han, Robert J. Kauffman and Barrie R. Nault