The Hidden Costs of IT Outsourcing

1. “The 1999 Outsourcing Trends Report” (New York: Michael F. Corbett & Associates Ltd., 1999) reflects the opinions of a wide variety of U.S. private- and public-sector executives and industry experts.

2. P. Ring and A. Van de Ven, “Structuring Cooperative Relationships Between Organizations,” Strategic Management Journal 13 (1992): 483–498.

3. B. Caldwell, “CIO Group With Clout — Exclusive Group Holds $60 Billion in Outsourcing Deals,” InformationWeek, June 23, 1996, www.techweb.com.

4. J. Cross, “IT Outsourcing: British Petroleum’s Competitive Approach,” Harvard Business Review 74, no. 3 (May–June 1995): 94–102.

5. B. Aubert, S. Rivard and M. Patry, “A Transaction Cost Approach to Outsourcing Behavior: Some Empirical Evidence,” Information and Management 30 (1996): 51–64.

6. R. Bettis, S. Bradley and G. Hamel, “Outsourcing and Industrial Decline,” Academy of Management Executive 6, no. 1 (February 1992): 7–22.

7.M. Useem and J. Harder, “Leading Laterally in Company Outsourcing,” Sloan Management Review 41, no. 2 (winter 2000): 25–36.

8. M. Earl, “The Risks of Outsourcing IT,” Sloan Management Review 37, no. 3 (spring 1996): 26–32.

ADDITIONAL RESOURCES

The importance of good contracts is addressed in C. Saunders, M. Gebelt and Q. Hu’s 1997 California Management Review article “Achieving Success in Information Systems Outsourcing.” The article shows that — if companies write tight contracts — IT outsourcing can be successful even when information systems are considered core functions. “The Information Systems Outsourcing Bandwagon,” by M. Lacity and R. Hirshheim in the fall 1993 Sloan Management Review, provides practical advice for negotiating contracts and suggests that IT outsourcing does not always lead to cost reductions.

Several additional MIT Sloan Management Review articles offer helpful guidance on strategic outsourcing — deciding what to outsource and what to keep in-house. M. Lacity, L. Willcocks and D. Feeny’s spring 1996 “The Value of Selective IT Outsourcing” explains that outsourcing only some IT activities generally yields better results than outsourcing an entire IT department. A. DiRomualdo and V. Gurbaxani’s “Strategic Intent for IT Outsourcing,” in the summer 1998 issue, distinguishes among three kinds of strategic intent: improve IT, improve IT’s contribution to company performance and commercially exploit IT to generate new revenues. J. Quinn and F. Hilmer’s summer 1994 “Strategic Outsourcing” defines strategic outsourcing as outsourcing noncore activities and focusing on core activities. The authors present tools that help managers determine which activities fall into which categories.

Two sources offer foundational reading on transaction-cost economics (TCE), which holds that economic activity depends on balancing production economics against transaction costs. In TCE terminology, IT-outsourcing fees are production costs; the hidden costs of IT outsourcing are transaction costs. R. Coase’s seminal article “The Nature of the Firm,” published in Economica in 1937, introduces TCE, and O.E. Williamson’s 1985 Free Press book, “The Economic Institutions of Capitalism,” develops Coase’s ideas.