Does IT outsourcing create firm value?

Abstract

The continued growth of IT outsourcing seems to reflect a fundamental belief among businesses that outsourcing creates wealth and delivers value to companies that outsource. Such a belief is supported by theories of production and transaction cost economies. These theories suggest that IT outsourcing should indeed generate greater wealth and create greater value for firms that outsource vis-a-vis firms that prefer to manage and operate their IT in-house. Yet, to date, there is little objective evidence to show how IT outsourcing actually does create value to companies. Drawing on transaction and production cost economies, we argue that IT outsourcing should create value for firms. We test our hypothesis using an event study of 420 IT outsourcing announcements by U.S. public listed companies during the period 1989-1999. Results showed that IT outsourcing did create value for firms in terms of positive short-term stock market returns.