Risks and Effects of IS/IT Outsourcing: A Securities Market Assessment

Abstract

CEOs are ultimately responsible to investors for firm performance, including the results of IS/IT outsourcing. CIOs, while responsible for implementing the outsourcing contract, do not share that same level of motivation or responsibility as the CEO. Although previous studies examine market effects of outsourcing on firm stock, and of IS technology investment on firm value, no published IS research ties outsourcing to financial performance or examines its effects on firm risk. This study addresses these issues with a securities market assessment of outsourcing. It examines outsourcing announcement effects on firm value and firm risk, using empirical data.The findings of this research are: large-company IS/IT outsourcing has a value-neutral, but risk-changing effect on the firm, as measured by initial reactions in company stocks and listed options. Over time, firm value improves following outsourcing. Weak firms experience increased risk with outsourcing, while all other firms experience a reduction in risk.Given these findings, outsourcing is a tool the CEO can use to signal investors that steps are being taken to improve firm performance. By examining outsourcing from this perspective, we conclude that CEO and CIO perceptions of outsourcing differ, as do their motivations and job responsibilities. Outsourcing appears to benefit the entire firm, the investors, and the CEO, far more than it benefits the IS department and the CIO.