Outsourcing of Information Systems as a Strategy for Organizational Alignment and Transformation

Abstract

Outsourcing of services is usually viewed as a way to increase or decrease capacity at the margin. By outsourcing a firm can vary its ability to provide goods or services such as information technology (IT) processing capacity or applications development, without taking on the long term commitment of permanent staff or equipment Today, outsourcing provides new options for managers to provide information technology infrastructures and services to a firm. In this paper we identify ways in which outsourcing may be used tactically to better align business and information technology strategies. Specifically, we consider how selective outsourcing enables alignment of incentives, business revenues and IT infrastructure costs, and how organizational intent can be made more consistent with a firm' s capabilities. We propose that outsourcing as an information systems management strategy can enable better control and lower agency costs as managers benefit from better information through external benchmarking. We also consider the role of outsourcing as a vehicle to support major organizational transformation, and as a device for enabling new models of organization. Based on our analysis we propose a series of testable propositions about outsourcing. The contributions of this paper include extension of business strategy and information technology alignment concepts to incorporate the interdependence between projects, product life cycles, and technology transfer. Most importantly, the paper highlights new directions for outsourcing research, focusing on the effects of outsourcing on the IT organization, the processes of internal technology development and the transfer of technologies between organizations.