Using Accounting Metrics As Performance Measures To Assess The Impact Of Information Technology Outsourcing On Manufacturing And Service Firms

Abstract

This study focuses on the information technology (IT) outsourcing decision and asks whether reported financial statement data can measure short-term financial effects of the IT outsourcing decision and thus add to the literature on the benefits of outsourcing. In this study we used accounting metrics derived from archival financial data to assess the impact of IT outsourcing on firms’ performance measures. In the sample of 79 firms from 1986 to 2009, there were 45 firms in the manufacturing sector and 34 firms in the service sector. The comparative study between manufacturing and service sectors will help identify where the higher potential of outsourcing impact lies. Firms’ performance is measured over a two-year period, one year before and one year after outsourcing decisions were made. For performance measures, we used cost efficiency, productivity, profitability, growth, cash management, and market ratio metrics. Using accounting metrics we show that IT outsourcing has a favorable short-term impact on manufacturing firms’ cost efficiency, productivity, and cash management. At the same time outsourcing the IT function has little favorable impact on service firms’ short-term performance measures.