Michel Patry

A transaction cost model of IT outsourcing

This paper proposes and tests an explanatory model of information technology (IT) outsourcing behavior. Relying on transaction costs and incomplete contracts theories, the model hypothesizes that characteristics of IT operation activities--asset specificity, uncertainty, business skills, and technical skills required to perform the activities--will influence the level of their outsourcing. The model was tested using data from a survey of 335 firms. Results indicate that uncertainty is the major deterrent to outsourcing, while the level of technical skills is the most important reason to outsource. Business skills do not seem to play a significant role. Finally, asset specificity, which is always presented as a constraint to outsourcing, showed inconsistent effects.

A transaction cost approach to outsourcing behavior: some empirical evidence

Abstract Outsourcing of information services is a fast growing trend and is receiving much attention in the IS community. This paper presents the results of a study of the outsourcing behavior of ten large organizations. The analysis used the transaction cost framework to explain outsourcing behavior at two different levels. At the first level of analysis, the role of asset specificity, measurement problem, and frequency in explaining the choice of the outsourced activities is investigated. The second level of analysis focuses on the influence of asset specificity and measurement problem on the terms and on the management of the contract between a firm and its outsourcer. The results presented here support the basic principles of transaction cost and incomplete contract theories.

Assessing the risk of IT outsourcing

Outsourcing decisions and contractual arrangements of the type required by an IT outsourcing deal entail risks. This is not to say that outsourcing is bad in itself. It only means that, as in other risky business ventures, such as new product development, capital investments and IS projects, risk assessment and risk management are important contributors to the success of an IT outsourcing venture. This paper focuses on risk assessment. After providing a brief conceptual definition of risk, the paper reviews the empirical literature in order to identify the main undesirable outcomes that may result from an IT outsourcing deal. It then uses transaction cost and agency theory as a primary theoretical basis, and proposes a framework for categorizing risk factors which have been identified in the literature. Finally, the paper discusses the dynamics of risk by examining how the various risk factors are linked to the undesirable outcomes.

A framework for information technology outsourcing risk management

This paper takes stock from several studies on Information Technology outsourcing risk. A definition of risk is offered, and an illustration from five case studies is used to show how risk can be managed. Results show that an active risk management approach can reduce risk exposure substantially while enabling the organizations to still reap the benefits associated with outsourcing.

Managing the risk of IT outsourcing

While it can bring several benefits, IT outsourcing entails some risks. As is the case in other types of investments or business ventures, the risk associated with an IT outsourcing project must be evaluated and managed. This paper proposes a framework for the management of IT outsourcing risk and assesses the usefulness of the framework using data gathered about two cases of system development outsourcing. After providing a conceptual definition of risk and of risk exposure, the paper presents the proposed risk management framework. The two cases are then described, along with the evaluation of the level of risk exposure of each and the risk management mechanisms that were included in the contracts. The results of the study suggest that, by charting the various items that contribute to risk exposure and by specifically applying appropriate mechanisms that can target those elements with higher levels of risk exposure, outsourcing risk can be adequately managed.

Regulation and Productivity

We investigate the impact of occupational safety and health (OSH) and environmental regulation on the rate of growth of total factor productivity (TFP) in the Quebec manufacturing sector during the 1985–88 period. Our results show that environmental regulation and OSH protective reassignments (a prevention policy with respect to OSH) have led to a reduction in productivity growth, while the presence of mandatory prevention programs and of fines for infractions to OSH rules have led to an increase in productivity growth. Interestingly, this is, to our knowledge, the first result showing that OSH regulation may have had a positive effect on productivity growth.

Development of Measures to Assess Dimensions of IS Operation Transactions

Information Systems (IS) researchers often rely on Organization Economics models to describe and explain various IS management issues. While those models are found to be useful, measures are yet to be proposed to assess the dimensions of IS transactions. In this paper we present the results of a study that was a first effort toward this end. The focus of the study was on one type of transaction, IS operations, in a particular management context, that of outsourcing. Measures were developed for four critical dimensions of IS operation transactions: asset specificity, measurement problem, origin of the most important investment, and governance mechanism. Data from 250 large Canadian firms were used to assess the measures, using the partial least squares technique.

IT outsourcing risk management at British Petroleum

The paper reports the results of a study of three successive IT outsourcing contracts at British Petroleum (BP). We offer an operational definition of IT outsourcing risk and use it to assess the risk exposure associated with each contract. We then examine how the management at BP dealt with outsourcing risk. Our results show that careful and deliberate risk management can substantially attenuate the level of risk exposure, and that IT outsourcing risks can be managed.

Managing IT Outsourcing Risk: Lessons Learned

Risk is inherent to almost any business decision. New product development, capital investments, and implementation of state of the art technology are often used as examples of risky business ventures; while they may lead to major benefits, they may also result in important losses. Outsourcing decisions, and contractual arrangements of the type required by an IT outsourcing deal, are another example of a risky business endeavor. While it can lead to lower costs, economies of scale, access to specialized resources, and new business ventures (Gupta and Gupta, 1992 ; Huff, 1991), outsourcing can have unwanted outcomes such as escalating costs, diminishing service levels, and loss of expertise, to name a few (Earl, 1996; Gack, 1994 ; Lacity and Hirschheim, 1993).

Characteristics of IT outsourcing contracts

Once the decision to outsource an activity has been made, managers are faced with issues related to the management of the relationship with their service providers. A critical element of relationship management is the contract itself, which defines, more or less completely, the nature of the services to be rendered and of the relationship itself. In this paper, we rely on transaction cost theory to develop a series of propositions on the relationship between the characteristics of the transaction - asset specificity, number of suppliers, measurement problems, uncertainty, and permanent character of the contract - and the level of contract completeness. A survey of 200 firms was conducted to test the propositions.