Rules Of Efficiency Or Legitimacy? Antecedents Of It-Outsourcing - A Longitudinal Approach

It still remains unclear whether the decision to outsource IT is governed by rule of efficiency or from institutional constraints imposed by the state and the professions in order to gain legitimacy through institutional isomorphism. Our analysis is based on a unique data set that contains all first-time decisions of publicly listed German firms to engage in large-scale IT outsourcing between 1990 and 2008. We find that both motives play a role for IT outsourcing decisions. Firms are more likely to make a first-time decision for IT outsourcing when they have a considerable low cost efficiency, a low ratio of cash to liabilities, and low earnings per share. Also a firm is more likely to sign an IT outsourcing contract if successful and large peers have already made the same decision. We find that firms with a low cost efficiency are likely to choose IT outsourcing contracts with duration of more than five years while firm with low earnings per share tend to engage in short-term contracts. Consequently, economic reasons as well as institutional factors have to be kept in mind when analyzing large-scale IT outsourcing decisions. Studies that focus only on one of these motives without acknowledging the other may omit important factors.