Why Do Firms Outsource: A Tool for Contextual Ambidexterity

Abstract

Why do firms outsource information technology (it)? The literature is divided on whether it outsourcing is a cost-reduction strategy or a growth strategy. We argue that organizations can do both, i.e., they can make choices between exploitative and explorative aspects of it outsourcing, depending on the firm’s objective, i.e., to increase revenues and/or decrease costs. Our empirical findings show that it outsourcing has a positive direct effect on revenues and no impact on costs. We also find that the firms with low internal innovation capability use it outsourcing as a substitute for internal research and development (R&D) expenditure to increase revenues while firms with high internal R&D capability use it outsourcing as a complement for internal R&D expenditure to decrease costs. Moreover, in case of less concentrated i.e., more competitive industries firms tend to outsource more in order to increase revenues, while in highly concentrated i.e., less competitive industries firms tend to outsource in order to reduce cost. We reconcile our findings which are partially consistent with disparate perspectives from the literature, using the contextual ambidexterity framework. Our findings suggest that contextual ambidexterity also occurs at organizational level and is embedded in organizational level contexts. We provide important implications for is scholars working on it outsourcing and practitioners from outsourcing firms as well as it vendors.