The Market Value of IT Outsourcing Investment Announcements: An Event-Study Analysis

The market for information technology outsourcing has seen significant growth in the last decade (GartnerGroup, 1998). Companies use IT outsourcing to increase the efficiency of their globalization process, while maintaining core competency strength. As a result, the ability to manage effective IT outsourcing projects is of utmost important to the success of IT managers (Sambamurthy & Zmud, 2000). In addition, the ability to make an informed decision when buying and IT outsourcing is seen as a core capability for IT managers (Feeny and Wilcocks, 1998). However, the proper metrics to use to assess the decision to initiate an IT outsourcing engagement are still somewhat undefined. While the cost savings reaped through IT outsourcing are often attractive, traditional accounting measures may underestimate potential improvements in economic output brought about by an outsourcing engagement, such as streamlined business processes, better quality customer service, and a wider range of knowledge on technological offerings. One way information systems (IS) researchers can assess the business performance of IT outsourcing investments is by using market-based measures such as stock prices. This study addresses the question: Do IT outsourcing investment announcements affect the market value of the firm, and if so, how does the effect differ across the service industry versus the IT industry, and across project type? To answer these questions, we analyze the impact of IT outsourcing investment announcements on the common stock prices of publicly traded firms.