Outsourcing Risk Avoidance: Comparative Study of Manufacturing and Service Firms

The researcher examines the Information Technology (IT) outsourcing risk avoidance tolerance of managers by measuring the effect on organizational performance. IT outsourcing risk avoidance factors were partitioned by the value of long-term versus short-term and high-value versus low-value contracts. The sample was obtained from the financial archival data of 79 firms during the period of 1986 to 2009. The risk-avoidance effect was evaluated in terms of financial metrics. Cost efficiency, productivity, profitability, growth, cash management, and market ratio were calculated to measure each company's performance. Organizational performance was the dependent variable, which was measured by comparing fluctuations of the stock's market value. The findings indicate that manufacturing firm performance was better with short-term and low-value contracts. However, the results are mixed for service firms. In manufacturing firms, the market reacted positively when managers announced long-term and high-value outsourcing contracts to avoid IT risks. By contrast, the market reacted positively when low-value and long-term outsourcing contracts were selected by service firm types in the sample.