The practice of outsourcing the information systems (IS) function has been an option for firms for the past 40 years. The nature of outsourcing, however, has evolved during this period. Today, larger companies are outsourcing. Also, a greater range and depth of services are being outsourced. The conclusion reached by many researchers (e.g., Kurtz, 1997) is that currently firms are considering outsourcing functions that previously they would never have contemplated outsourcing. Firms also use a number of different contractual arrangements to formalise outsourcing agreements.
This thesis contributes to the understanding of the determinants of outsourcing practices within firms. The study draws upon the transaction cost theory proposed by Williamson (1985) to explain (a) the determinants of IS outsourcing decisions, (b) the characteristics of the contractual arrangements, and (c) the determinants of firms' satisfaction/
dissatisfaction with their outsourcing decisions.
Nine hypotheses are developed describing choices in outsourcing practices after consideration of transaction frequency, asset specificity, and uncertainty. The first two propose that more-frequent, more-specific, and more-uncertain transactions are more likely to be insourced. The next two propose that less-specific and less-uncertain transactions are more likely to be outsourced using a more-complete outsourcing contract. The next two propose that more-specific and more-uncertain transactions will lead to firms investigating the reputation of the outsourcing vendor more thoroughly prior to entering an outsourcing arrangement. The remaining three relate to governance mechanisms. The first proposes that firms are less satisfied with transactions operating under inappropriate governance mechanisms. The second proposes that transactions operating under inappropriate governance mechanisms are more likely to have
their contract terms renegotiated. The third proposes that transactions operating under appropriate governance mechanisms and experiencing larger-than-expected ex post costs have their terms renegotiated when switching costs are high.
Data to test the hypotheses was collected via a series of four interviews from each of six manufacturing firms based in Queensland. One IS manager (or the closest equivalent person) was interviewed within each of the six firms. Each series of case-study interviews followed the same structure. The questions were tailored, however, for the hardware, software, and IS transactions that were relevant to the particular case-study firm.
Eight results emerged from the study. First, in all six case-study firms, more-frequent transactions and more asset specific transactions were more likely to be insourced. Second, in all six case-study firms, specific, occasional transactions were outsourced using a more-complete
outsourcing contract. Third, in all six case-study firms, more asset specific transactions were associated with firms investigating the reputation of the outsourcing vendor more thoroughly prior to entering an arrangement. Fourth, in one third of the case-study firms, higher levels of uncertainty were also associated with the case-study firms investigating the reputation of the outsourcing vendor more thoroughly prior to entering an arrangement. Fifth, none of the six case-study firms were more dissatisfied when they entered an inappropriate contracting arrangement. Sixth, one third of the case-study firms were more satisfied with those transactions that were performed in house. Seventh, in five of the six case-study firms, transactions that were governed appropriately tended to be those with low switching costs. These transactions also had a higher probability of being outsourced. Eighth, half of the case-study firms tended to be more satisfied with those transactions that had
higher switching costs. This outcome occurred because a) these transactions were typically insourced, and b) if the transactions were outsourced, the firm had more thoroughly investigated the reputation of the outsourcing vendor prior to entering the arrangement.
The findings of this research indicate that most IS transaction types were outsourced/ insourced appropriately according to transaction cost theory. Moreover, when considering those transactions that were outsourced, most were outsourced using an appropriate contracting arrangement. The research also revealed that most of the firms investigated were satisfied with their outsourcing practices. Firms had appropriately governed transactions with which they were dissatisfied and inappropriately governed transactions with which they were satisfied and vice versa. These results indicate that appropriateness of the governance mechanism is only one aspect that leads to satisfaction. Other factors such as
vendor inflexibility, lack of responsiveness, and inability to handle unforeseen circumstances decrease the satisfaction with a particular arrangement.