This paper develops empirical proxy measures of information technology (IT) risk and incorporates them into the usual empirical models for analyzing IT returns: production function and market value ...specifications. The results suggest that IT capital investments make a substantially larger contribution to overall firm risk than non-IT capital investments. Further, firms with higher IT risk have a higher marginal product of IT relative to firms with low IT risk. In the market value specification, the impact of IT risk is positive and significant, and inclusion of the IT risk term substantially reduces the coefficient on IT capital. We estimate that about 30% of the gross return on IT investment corresponds to the risk premium associated with IT risk. Taken together, our results show that IT risk provides part of the explanation for the unusually high valuations of IT capital investment in recent research.
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Despite significant progress in evaluating the productivity payoffs from information technology (IT), the inability of traditional firm-level economic analysis to account fully for the intangible ...impacts of IT has led to calls for a more inclusive and comprehensive approach to measuring IT business value. In response to this call, we develop a process-oriented model to assess the impacts of IT on critical business activities within the value chain. Our model incorporates corporate goals for IT and management practices as key determinants of realized IT payoffs. Using survey data from 304 business executives worldwide, we found that corporate goals for IT can be classified into one of four types: unfocused, operations focus, market focus, and dual focus. Our analysis confirms that these goals are useful indicators of payoffs from IT in that executives in firms with more focused goals for IT perceive greater payoffs from IT across the value chain. In addition, we found that management practices such as strategic alignment and IT investment evaluation contribute to higher perceived levels of IT business value.
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Firms are increasingly sourcing internal information systems functions from external service providers. However, there is limited empirical evidence of the economic impact of this delivery option ...and, more specifically, of the productivity gains accruing to firms that have outsourced. Moreover, there is little evidence of the role and contributions of the individual mechanisms by which service providers create value for client firms. We are particularly interested in whether client firms benefit from the accumulated knowledge held by information technology (IT) service firms. In this paper, we examine the impact of IT outsourcing on the productivity of firms that choose this mode of services delivery focusing, on the role of IT-related knowledge. Since firms selfselect into their optimal sourcing mode, we use a variety of econometric techniques including propensity scorebased matching and switching regression to control for potential bias arising from endogenously determined sourcing modes. We demonstrate that IT outsourcing does lead to productivity gains for firms that select this mode of service delivery. Our results also suggest that IT-related knowledge held by IT services vendors enables these productivity gains, the magnitude of which is moderated by a firm's IT intensity. Moreover, the value of outsourcing to a client firm increases with its propensity for outsourcing, which in turn depends on firm-specific attributes including efficiency level, financial leverage, and variability in business conditions. Our analyses also show that firms that outsource have been able to achieve additional productivity gains from contracting out compared with their counterfactuals.
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Companies that outsource information technology (IT) services usually focus on achieving multiple objectives. Correspondingly, outsourcing contracts typically specify a variety of metrics to measure ...and reward (or penalize) vendor performance. The specific types of performance metrics included in a contract strongly affect its incentive content and ultimately its outcome. One specific challenge is the measurement of performance when an outsourcing arrangement has a mix of objectives, some that are highly measurable and others that are not. Recent advances in contract theory suggest that the design of incentives for a given objective is affected by the characteristics of other objectives. However, there is little empirical work that demonstrates how relevant these "multitask" concerns are in real-world contracts. We apply contract theory to examine how objectives and incentives are related in IT outsourcing contracts that include multiple objectives with varying measurement costs. In our context, contracts generally share the objective of reducing IT costs but vary in the importance of increasing IT quality. We establish empirical results about performance measurement in IT outsourcing contracts that are consistent with recent theoretical propositions. We find that the use of strong direct incentives for a given measurable objective is negatively correlated with the presence of less measurable objectives in the contract. We show that outsourcing contracts that emphasize goals with high measurement costs employ more performance metrics than initiatives whose objectives have a lower measurement cost profile. Surprisingly, as the number of performance metrics increases, satisfactory outcomes decrease, which we explain within a multitask theory framework. Overall, our results provide empirical support for multitask principal-agent theory and important guidance in designing outsourcing contracts for complex IT services.
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5.
Information Technology Outsourcing Chang, Young Bong; Gurbaxani, Vijay; Ravindran, Kiron
MIS quarterly,
09/2017, Volume:
41, Issue:
3
Journal Article
Peer reviewed
Information technology outsourcing (ITO) is the predominant mode of acquiring information systems services, providing clear evidence that the economics of service delivery favor external service ...providers over in-house information systems departments. An interesting feature of many large ITO arrangements is that the production assets necessary for service delivery are transferred to the vendor. The argument in favor of such asset transfers, based in property rights theory, is that they are necessary to incentivize vendors to continue to invest in transaction-specific assets to improve service. On the other hand, transaction cost economics predicts that transferring such assets increases bilateral dependence and will elevate the risk of post-contractual opportunistic behavior. The contracting challenge in this context is to specify the terms of exchange to achieve the client’s objectives for outsourcing while managing the risks of asset transfer. We develop a theoretical framework to derive propositions on contract design in the presence of asset transfer. We identify the importance of contractual clauses that mitigate the associated risks and the complementary role of compensation mechanisms, specifically the pricing scheme and IT-related performance incentives. We have compiled a unique dataset that allows us to test our propositions by comparing ITO contracts that include asset transfer to those that do not. We find that asset transfer does significantly affect contract design, manifested in the inclusion of clauses that protect both clients and vendors. Outsourcing objectives are more likely to be met when contracts include compensation mechanisms that complement asset transfer.
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Many IT outsourcing arrangements include the purchase of the client's IT assets by the vendor. Asset transfer benefits the client who can recapture some value through the sale and may even negotiate ...a lower price because the vendor may be more efficient in using these assets. On the other hand, asset transfer creates lock-in for the client and limits future contractual options. To study these tradeoffs, we develop a game-theoretic framework wherein asset transfer creates a one-sided switching cost to the client, and vendors have private information both on their intrinsic capabilities, either high or low, and on the level of quality-improving effort they exert. The quality of IT services depends on the vendor's capability and quality-improving effort. In a two-period model, we show that when quality is verifiable, the client uses asset transfer as a device to design efficient screening contracts, so that a high capability vendor is selected. On the other hand, when quality is non-verifiable, the client mitigates contractual inefficiency by voluntarily locking into a long-term relationship with the vendor and may transfer assets at a lower than efficient level, even to a high-capability vendor. Our results show that asset transfer can play a strategic role in outsourcing relationships, not just an operational one.
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Despite the importance to researchers, managers, and policy makers of how information technology (IT) contributes to organizational performance, there is uncertainty and debate about what we know and ...don't know. A review of the literature reveals that studies examining the association between information technology and organizational performance are divergent in how they conceptualize key constructs and their interrelationships. We develop a model of IT business value based on the resource-based view of the firm that integrates the various strands of research into a single framework. We apply the integrative model to synthesize what is known about IT business value and guide future research by developing propositions and suggesting a research agenda. A principal finding is that IT is valuable, but the extent and dimensions are dependent upon internal and external factors, including complementary organizational resources of the firm and its trading partners, as well as the competitive and macro environment. Our analysis provides a blueprint to guide future research and facilitate knowledge accumulation and creation concerning the organizational performance impacts of information technology.
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This paper presents new evidence on the role of embeddedness in predicting contract duration in the context of information technology outsourcing. Contract duration is a strategic decision that ...aligns interests of clients and vendors, providing the benefits of business continuity to clients and incentives to undertake relationship specific investments for vendors. Considering the salience of this phenomenon, there has been limited empirical scrutiny of how contract duration is awarded. We posit that clients and vendors obtain two benefits from being embedded in an interorganizational network. First, the learning and experience accumulated from being embedded in a client-vendor network could mitigate the challenges in managing longer term contracts. Second, the network serves as a reputation system that can stratify vendors according to their trustworthiness and reliability, which is important in longer term arrangements. In particular, we attempt to make a substantive contribution to the literature by theorizing about embeddedness at four distinct levels: structural embeddedness at the node level, relational embeddedness at the dyad level, contractual embeddedness at the level of a neighborhood of contracts, and finally, positional embeddedness at the level of the entire network. We analyze a data set of 22,039 outsourcing contracts implemented between 1989 and 2008. We find that contract duration is indeed associated with structural and positional embeddedness of participant firms, with the relational embeddedness of the buyer-seller dyad, and with the duration of other contracts to which it is connected through common firms. Given the nature of our data, identification using traditional ordinary least squares based approaches is difficult given the unobserved errors clustered along two nonnested dimensions and the autocorrelation in a firm’s decision (here the contract) with those of contracts in its reference group. We use a multiway cluster robust estimation and a network auto-regressive estimation to address these issues. Implications for literature and practice are discussed.
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Powered by digital technologies, many peer-to-peer platforms, or what is called the sharing economy, have emerged in the past decade. Although the impact of the sharing economy has received ...considerable attention over the past few years, extant research has not fully documented the impact of the sharing economy on consumers, workers, industry, or society as a whole. In this study, we exploit the geographical and temporal variation in Uber’s entry to examine its impact on the personal bankruptcy rate as well as on other consumer credit default rates. We empirically document the changes in personal bankruptcy filings after Uber’s entry, and show that personal bankruptcy filings under Chapter 7 experience a drop of 0.047 per 1,000 people after Uber enters a county, which translates to a 3.26% reduction in quarterly bankruptcy filings. Uber’s entry also leads to a reduction in Chapter 13 personal bankruptcy filings, but to a smaller degree (0.018 cases per 1,000 people per quarter). We check the validity of our estimates using business bankruptcy filings, which we find are uncorrelated with Uber’s entry.
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This paper examines the effects of IT-related spillovers on firm-level productivity improvements over a long-term horizon. In contrast, prior research has largely focused on the direct and ...contemporaneous impacts of IT investments. As a result, we do not fully understand how IT investments are associated with ongoing productivity improvements in future periods and how spillovers influence these gains. In this paper, we examine whether firms receive incremental benefits from IT-related spillovers and whether these spillovers lead to more persistent returns. We focus on the spillovers that accrue to firms from their interindustry transactions, especially the IT services industry. We model and estimate the impact of spillovers on long-run productivity using firm-level data from the manufacturing, transportation, trade, and services sectors. We find that spillover impacts are highly significant, but that the magnitude and persistence of the impacts vary. Firms with high IT intensity receive greater spillover benefits from the IT services industry. Moreover, these benefits are sustained over a long-term horizon. However, the impact of IT-related spillovers does not persist in low IT intensity firms regardless of the source. Overall, our results shed light on the existence and sources of IT-related spillovers and on their important role in shaping the long-run returns to IT investment. Our results also help explain the findings of excess returns to IT investment in the IT productivity literature.
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