1 Introduction

When managers outsource all or part of IT, the motivation is to create business value for the firm. One means of creating business value is by achieving dramatic cost savings through outsourcing; another is through decisions that lead to strategic control of IT resources. In the former, IT outsourcing returns profits to the firm by taking advantage of economies in the marketplace. Theoretically, IT vendors/outsourcers drive down the costs of production and technical expertise by spreading these expenses over a large client base; accordingly, their customers are able to benefit indirectly from these economies of scale through attractive pricing of IT products and services by vendors (Dibbern et al. 2004).

Strategic control is the second avenue for value creation. Managers who identify IT resources that are critical to their firm’s operations and to its strategic direction are theoretically better able to manage those resources if the firm maintains control over them. By divesting themselves of activities that are not strategic, they can capitalize on superior design, marketing, production, inbound logistics, or distribution capabilities. Thus, organizations that outsource IT activities that are not strategic can concentrate energies on distinctive resources that are directly related to value creation for the firm. The notion of strategic control of the IT resource has strong theoretical underpinnings in resource dependency theory (Pfeffer and Salancik 1978).

While both the cost savings and strategic control lines of reasoning have solid theoretical bases, nearly all of the research to date on IT sourcing has posited and/or tested economic and financial models, i.e., has stressed cost, rather than positing strategic control models. The current study seeks to fill this gap in the IT outsourcing research portfolio by proposing and testing a Strategic Control Model.

The notion of resource dependency is central to RDT and to the current study. Specifically, a resource dependency is created any time a firm relies on an external entity for a resource needed by the firm. The more critical the resource is to the firm, the more serious is the dependency. This thesis posits, therefore, that, overall, when organizations depend on external entities for IT resources critical to their survival, they yield control and ultimately jeopardize firm performance.

The results of this study offer insights for researchers and managerial guidelines regarding whether and how managers control the IT resource. When making such critical decisions, strategic control proves to be a good explanation for how the most effective managers outsource IT and how the firm reaps downstream benefits from their control decisions.

2 Theoretical and conceptual background

2.1 Resource dependency theory

Resource Dependency Theory (RDT) examines organizational decision making in light of the impact of the environment on the organization. RDT recognizes that the key to organizational survival is the ability to acquire and maintain resources (Pfeffer and Salancik 1978). An organization must be open to its environment due to its dependence on that environment to obtain critical resources such as personnel, information, raw materials and technology. Resource acquisition may be problematic and unpredictable. To guarantee the flow of resources, therefore, a firm will adapt to changes in its environment that impact the flow of resources to the firm. Adaptation is not passive, however, but rather a strategic choice to cope with pressure in the environment (De Wit and Verhoeven 2000). Successful organizations, therefore, attempt to minimize their dependence on or increase their influence over organizations in their environment (Birkinshaw et al. 2001; Teng et al. 1995; Grover et al. 1994).

Although organizations are constrained by their dependency on their environment, opportunities exist to pursue organizational interest (Pfeffer and Salancik 1978). Firms can negotiate their positions within these constraints. RDT recognizes that organizational strategy focuses not only on products and customers but also on the suppliers and other entities in the environment that impact the flow of resources to the firm. Organizations thereby interact dynamically as they act strategically to manage their resource dependency on other firms (Pfeffer and Salancik 1978).

Given the preceding discussion of RDT, an important research question emerges: To what extent does the degree of dependency that results from outsourcing various IT resources affect firm performance? The ultimate decision that organizations make is based upon the degree of control desired for a given IT resource. According to RDT, firms will choose to own, nurture, have exclusive access to, and thus control strategic resources that will lead to improved competitiveness. Conversely, it is not necessary for firms to own and control those assets that are not strategic and integral to their distinctive competence.

2.2 Information technology outsourcing and RDT

Prior studies indicate that outsourcing is a strategic arrangement for a firm (Lacity and Hirschheim 1993; Insinga and Werle 2000). At its core, RDT argues that no firm can exclusively rely on its own resources to survive. The effectiveness of a firm, therefore, is related to its ability to acquire needed resources from external vendors.

RDT argues that organizations will engage in a strategic decision making process when deciding whether or not to acquire critical resources from external entities (Pfeffer and Salancik 1978). Important resources will be retained in-house while less important resources will be outsourced. Implicit in the outsourcing deal will be a dependent relationship that will have to be negotiated and constructed. According to Pfeffer and Salancik (1978) this dependence is determined by three resource dimensions: importance, discretion and substitutability for that resource. Important resources are those critical to the survival of the firm. Discretion is the ability of the firm to control resource availability. Finally, substitutability refers to the availability of alternative sources for obtaining the resource. By assessing all three factors with respect to a given IT resource, a firm can determine the degree of dependence associated with outsourcing a specific resource and make the decision according to the degree of control the firm is willing to relinquish.

Importance of the IT resource is probably the most researched of the three factors affecting the firm’s dependence. IT resources are playing an increasingly critical role in organizations. Much has been written about the strategic role of the IT resource in organizations (Sethi and King 1994; Clemons and Row 1991; Brynjolfsson and Hitt 1996) and studies have found a relationship between IT and sustained competitive advantage (Clemons 1991; Clemons and Row 1991). With respect to discretion, firms attempt to minimize dependency on external entities through negotiation and contracts. In addition, many IT resources in firms are idiosyncratic to the business and not easily duplicated. Hence, few or no substitutes exist for those IT resources that have a great deal of specificity to the firm. While discretion and substitutability are important factors, we have chosen to focus on and operationalize the importance factor.

Lacity and Willcocks (2001) analyzed hundreds of case studies and determined that the decision to outsource critical IT applications increased the firm’s dependency on the external entity. The resultant dependency is enough to deter the firm from transferring control via an outsourcing deal. Similarly Kern and Willcocks (2002) analyzed several outsourcing relationships and concluded that too much dependence on vendor’s performance is risky.

Traditionally, core IT applications are recommended for in house control (Lacity and Hirschheim 1993). Research suggests that core competencies are what make an organization “unique” in its competitiveness (Quinn and Hilmer 1994). It is the knowledge that the organization has gained of its own processes (Prahalad and Hamel 1990) that allows it to compete with the best in the world (Quinn and Hilmer 1994). An organization that possesses a core competency can integrate core technologies and governance processes, realizing price-performance ratios and customer service levels that exceed those of its competitors (Prahalad 1993). Core technologies are a critical enabler of this capability (Prahalad 1993). To compete globally, firms need to ask whether external control of a function will improve its ability to perform an activity at a level comparable with the best of breed (Drtina 1994).

2.3 Control of the IT resource

Although the issue of IT as a strategic resource has been discussed widely in IS studies, little previous research has empirically examined the effect of a resource-dependency perspective on sourcing decisions (Dibbern et al. 2004). Prior research using transaction cost analysis (Ang and Straub 1998, Beier 1989, Grover et al. 1996, Nam et al. 1996, Schary and Coakley 1991) has studied the impact of asset specificity on external procurement. While Grover et al. (1994) and Teng et al. (1995) used RDT as a theory base for studying the impact of resource gaps and strategic role of IS on the IS outsourcing decision, the wider implications of resource dependency through IS outsourcing on firm performance were not examined. Whereas case study evidence suggests that managers think value is created in the IT function through strategic focus on core competencies (Lacity et al. 1994), more quantitative evidence is needed to support this qualitative work in order to better understand the relationships between views about IT as a strategic resource and the control of IT functions.

Reasoning from transaction cost and agency theories, for example, Ang and Beath (1993) discusses the role of agents of the firm and agents of the outsourcing vendor and how the nature of the relationship leads to different kinds and different intensities of control. Part of this control is related to the contract that binds the organizations, but part is built into the management decision to give up control over assets.

The basic argument in Ang’s work is that the degree of outsourcing depends on which agent has control over the activity. When one agent is completely responsible for an activity, then her conceptualization argues that this would be a case of either “total outsourcing” to outsiders or “total insourcing” to insiders. In the former situation, the firm has lost nearly all control of the asset. In the latter, the firm retains total control. But monitoring by one of the agents of the firm would indicate a higher level of firm control decisions whereas providing information or other inputs to the outsourcer, without extensive monitoring, would represent less control.

Based on RDT and consistent with other researchers, we conceptualize the notion of control of the IT resource as a continuum (see Fig. 1). One end of the continuum occurs when the firm yields control of all of its IT resources resulting in the greatest dependency on the external environment. In this case the firm is engaged in “Total Outsourcing.” Conversely, the decision to control all IT resources may be said to be a “Total Insourcing” decision. The extent of control of the IT resource, therefore, represents a set of decisions regarding which resources are to be retained and which are not. We refer to this as Extent of Control. This notion is conceptually close to what Lacity and Willcocks (1998) call “selective” outsourcing.Footnote 1

Fig. 1
figure 1

Continuum of control of the IT resource

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2.4 Research model and hypotheses

The Strategic Control Model (SCM; Fig. 2) expresses causal relationships in the context of resource dependency. The model indicates that when firms depend on external entities for resources critical to their survival, they yield control. IT functions that are viewed as important and, thereby, strategic are more likely to be controlled internally. IT functions that are less strategic are more likely to be outsourced to some extent. Our contention is that the effects of IT as a strategic resource on performance will depend on where the resource is controlled. The more strategic the resource, the more the need to control that resource internally. The less strategic the resource, the less the need to control that resource internally. When a “match” exists (Venkatraman 1989) between how strategic a resource is and where that resource is located, higher performance should ensue. Where such a match is not observed, lower levels of performance should be expected. SCM argues, therefore, that extent of control moderates the effect of strategic IT resources on performance (H1).

Fig. 2
figure 2

The strategic control model (SCM). The solid dot represents a moderated path tested by H1. The grayed paths are part of the SCM but are not tested in this paper

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3 Study hypotheses

3.1 Detailing of hypotheses

When organizations depend on external entities for resources critical to their survival, they yield control. Yielding control of highly dependent resources leads to lower performance. Based on the Strategic Control Model, we test the following:

H1: Extent of control negatively moderates the relationship between strategic dependence on IT resources and firm performance.

The conventional graphical model showing this set of relationships is Model A (see Fig. 3a). Directionality is a measurement issue as to which direction the variables move to show stronger effects. Extent of Control in this study is being measured as higher when a firm outsources. Therefore, as this number goes higher (and dependence is also high), the firm performance declines. This is why we expect a negative coefficient.

Fig. 3
figure 3

a Model A. b Model B

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From a resource dependency perspective, management must direct the acquisition and deployment of resources, and thereby, control resources to optimize performance and obtain organizational goals. RDT stresses the need for firms to capitalize on their unique assets and to develop management strategies to exploit the advantages from strategically positioned resources.

A full testing of the moderating effect calls for a comparison with the direct effect of strategic dependence on the IT resource on performance (Sharma et al. 1981; Chin et al. 2003). A direct effect is not expected to add significantly to the explained variance and is examined specifically to see if the posited moderation is the most powerful explanation of performance. Formally, H2 is:

H2: A model linking the moderator extent of control X resource dependence to performance will have statistically higher explained variance than a model linking only resource dependence to performance.

What is being tested in H2, in effect, is the difference in explained variance between Model A and Model B.

3.2 Design, sampling, and measures

To assess the hypotheses, 54 business units (BUs) in 27 firms were investigated. Since outsourcing and firm performance were measured at the BU level, our N for testing was 54. See Appendix A for a list of international firms chosen to represent a breadth of industry deployment of IT as a strategic asset; this sample also represented a breadth of outsourcing experiences, as can be seen in Table 1. These firms were headquartered in seven countries (USA, Canada, Malaysia, Singapore, Australia, UK and Switzerland) in the financial, retail and manufacturing industries. These three industries are at the forefront of change in industry structure due to the combination of technological innovation and the accelerated pace of globalization (Bradley et al. 1993). They also provide a contrast in their strategic use of information and information technology (Cash et al. 1992; Porter and Millar 1985). Data were collected both at the firm and business unit (BU) levels. The firm level provides insight into the strategic role of IT in the organization. The business unit level allows us to examine the outsourcing decision at the point closest to the outsourcing experience.

Table 1 Constructs and measure
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In order to focus on BU outsourcing of IT in complex and representative settings, the firms selected met the following criteria:

  1. 1.

    Comprised of at least two autonomously managed BUs with a distinct set of products or customers

  2. 2.

    Were in the top five in their industry by market share in their region

  3. 3.

    Recorded data on historical IT investment, IT outsourcing and performance which could be made available to the researchers; and

  4. 4.

    As a group of firms, offered a broadly based international perspective

To implement the study internationally, a research team collected data from universities located in or near the country of the firm’s headquarters (see “Acknowledgments” for list of research partners). The researchers met to refine the concepts and methods for the study and then used the same data collection procedures.

Appendix B shows the instrument that was used to collect data (Table 1 below is a shorthand version) and details of the research method, including the justification of measures employed.

3.3 Descriptive statistics

As can be seen from Table 2, the variables demonstrate reasonable dispersion, none suffering from a floor or ceiling effect. This distribution suggests that the data is conducive for further statistical testing.

Table 2 Descriptive statistics from study
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Firms varied in the level of their strategic IT investment from 0 to 70% of their portfolios, and the average deltas varied from a 100% decrease to 75% increase. Clearly, all firms were engaged in making decisions about which IT functions to outsource in that no firm or business unit in the study completely outsourced all of their IT activities. As a percentage of IT investment, the 5 year average of IT outsourcing varied from 0 to 50%, averaging 8.6%. The average delta increase over that time was 3.9%, moreover, which suggests that firms were gradually outsourcing more and more of their IT services over time.

3.4 Data analysis

The frequency distributions for CONTROL1 indicate that the sample group did not have cases of total outsourcing. Fortunately, there is dispersion on the CONTROL variables, although it is equally clear that no firms were engaged in total outsourcing. This means that a straightforward PLS analysis can be performed on the CONTROL variables without transforming them to match the conceptualization of Extent of Control in Fig. 2. In this case, higher levels of internal control should moderate IT as a strategic resource and this moderation should lead directly to higher performance.

Partial Least Squares (PLS) was used to analyze the variables and relationships posited for explaining the IT outsourcing environment. Table 3 is a snapshot of the overall results of hypothesis testing.Footnote 2 While the distinction between formative and reflective indicators is still ambiguous in the methodological literature (Diamantopoulos and Winklhofer 2001), we are convinced that the constructs of Extent of Control and Firm Performance are formative and thus treated them in that way. Dependence on IT is a multi-dimensional construct with both formative and reflective aspects and was modeled in the PLS runs as such (Petter et al. 2007).

Table 3 Overall results of study hypothesis testing
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Sample size was sufficient for PLS analysis (Gefen et al. 2000). The path coefficients, their T statistics, and the explained variance for the models are shown in Fig. 3. The model to test H1 explains circa 49% of the variance in the latent dependent variable.

In the test of H1, the coefficient linking BU-level IT resources moderated by extent of control of those resources with performance was statistically significant. This result supports H1 (formative coefficient = −0.702; p value < 0.05; R2 = 0.487). The finding suggests that firms that invest in IT as a strategic asset are less likely to outsource, and supports the proposition that strategic or core competencies should be retained within the organization and not be outsourced (Prahalad 1993).

3.5 H2 comparative model analysis

To examine the moderation issue further, a PLS run was performed that linked only the dependence on IT as a strategic resource with performance. In this way we are able to compare a model (Model B) that links our resource dependence variable directly to performance with the moderation acting alone (Model A). The test is a pseudo-F test, which in both the case of the formative and reflective interpretation are highly significant (p < 0.05). Effect sizes (f 2) are calculated as (\({{\left( {R_{{\text{Model 1}}}^{\text{2}} - R_{{\text{Model 2}}}^{\text{2}} } \right)} \mathord{\left/ {\vphantom {{\left( {R_{{\text{Model 1}}}^{\text{2}} - R_{{\text{Model 2}}}^{\text{2}} } \right)} {\left( {1 - R_{{\text{Model 2}}}^{\text{2}} } \right)}}} \right. \kern-\nulldelimiterspace} {\left( {1 - R_{{\text{Model 2}}}^{\text{2}} } \right)}}\)(Mathieson et al. 2001; Chin et al. 2003). Multiplying f 2 by (n − k − 1), where n is the sample size and k is the number of independent variables (IVs), yields a pseudo-F test for the change in R 2 with 1 and n − k degrees of freedom (Mathieson et al. 2001). According to Cohen (1988), an effect size of 0.02 is small, 0.15 is medium, and 0.35 is large. In our case, the effect size difference is medium, indicating that the models are markedly different in terms of their ability to explain the variance in the dependent variable. In short, the SCM is validated by this model comparison.

4 Discussion, implications, and limitations

The analysis uncovered numerous exciting findings about control over IT resources and the effects of IT outsourcing. The strategic control model, a major contention of the research, was supported in the hypotheses. Firms that invest at significant levels in strategic systems are sensitive to when they should retain control of core assets (Lacity 1995). This has major implications for the concept of strategic fit.

C-level executives are responsible for recognizing which assets the firm is dependent on for its competitive advantages and to nurture these core assets. This fitting of strategy to firm performance is one of the most important jobs of a C-level manager. Not to recognize the strategic nature of this choice is tantamount to allowing the firm to drift and to only randomly capitalize on what has or can make it a success. Outsourcing too much or outsourcing the wrong assets represents a failure of strategic fit.

This is one of the first studies that examines under which circumstances outsourcing will contribute to relatively better firm performance. As such, our focus is set on the role of fit between the strategic role of IS assets within a firm and its sourcing strategy as a key enabler for higher firm performance.

Sustaining an IT-enabled competitive advantage requires continuous innovation, environmental scanning and a corporate mindset that understands the strategic use of IT. Such an environment is difficult to cultivate when control over a strategic asset is handed over to an integrator or service provider.

Whether managers view IT as a strategic resource or not, the outsourcing decision is almost certainly not an indiscriminate one. There is evidence in the study that selective sourcing decisions lead to higher performance and that there are adverse consequences involved in ignoring the connection between viewing IT as a strategic resource and selectively outsourcing it. Higher levels of performance uncovered in this study include: (1) larger profits per employee and (2) higher ROA. PERF3, increased competitiveness or comparative pricing against competitors, did not load significantly (see Appendix B), but the other performance measures did. These significant effects are last in a value chain that begins by arguing that strategic choices about sourcing IT eventually impact the firm’s bottom line.

Grounded in resource dependency theory, the strategic control model expresses these relationships in a parsimonious fashion. In this study, the model received sufficient support to justify further research in this vein. In short, it appears that firms that selectively outsource IT and take advantage of these competitive opportunities will be justified in their investment decision. A significant business payoff awaits firms that can successfully manage selective outsourcing.

Managers and researchers alike need to consider the implications of these findings. For scholars, it is important to note that the strategic control hypothesis received support through both the objective and subjective measures, but that the theoretical framework does needs further work in construct specification and testing of subjective measures and alternate measures of performance.

Of course, all research has limitations and there are some that need to be noted in the present study and addressed in future work. Whereas the quality of the data was generally excellent and 14 observations per business unit assessing the outsourcing activity (CONTROL1) added richness to our measures, further studies in differing settings and locales are always in order and part of the process of normal science.

Measurement issues lie at the heart of solid research and, although most of the measures in the instrument performed reasonably well, further work in this vein can refine and hone the approach. It would be useful, for example, to have accompanying subjective and objective measures for even more of the variables in the data set. This would help to rule out methods bias and to conclude that the effects observed are not artifactual. Instrumentation of the attitudes toward IT as a strategic asset needs to be revisited.

Given that the present study represents a departure from the usual outsourcing theory bases of transaction cost and incomplete contracting (Ang and Straub 1998; Lacity and Hirscheim 1993; Richmond et al. 1992a, b), we feel that RDT has proven itself to be a useful lens for formulating theoretical propositions related to the outsourcing decision.

Practitioners should recognize that deciding which IT resources are strategic is a crucial phase in the overall systems integration process. Non-core assets can be taken over by outsourcers with no loss of strategic control. On the other hand, retaining IT assets that are strategic will enable the firm to remain competitive and better capable of responding to future technological uncertainty.

This study raises interesting questions about the worldwide trend of increasing IT outsourcing. For example, some governments (e.g. Federal Government of Australia)Footnote 3 have mandated market testing for outsourcing all IT investments, often combining several departments in the outsourcing contract (e.g., Taxation and Health) to achieve a stronger bargaining position. In contrast to this approach, the results of this study strongly support a selective approach to outsourcing based on strategic control of key IT assets and the core competencies of the organization. Strategic control should be the ultimate purpose of outsourcing, rather than any arbitrary attribution of value to IT outsourcing in its own right. Managers in the position to influence key outsourcing decisions should think about the need to strategically control each IT activity and make their decisions accordingly.