European Journal of Information Systems (2009) 18, 235–248
& 2009 Operational Research Society Ltd. All rights reserved 0960-085X/09
Factors considered when outsourcing an
IS system: an empirical examination of the
impacts of organizational size, strategy
and the object of a decision
Bjarne Berg and
Antonis C. Stylianou*
Department of Business Information Systems &
Operations Management, The Belk College of
Business Administration, University of North
Carolina at Charlotte, Charlotte, NC, U.S.A.
*Correspondence: Antonis C. Stylianou,
Department of Business Information Systems
& Operations Management, The Belk College
of Business Administration, University of
North Carolina at Charlotte, Charlotte, NC
28223, U.S.A.
Tel.: þ 704.687.7605;
Fax: þ 704.687.6330;
E-mail: astylian@uncc.edu
Received: 22 February 2008
Revised: 30 October 2008
2nd Revision: 16 April 2009
3rd Revision: 10 June 2009
Accepted: 11 June 2009
www.palgrave-journals.com/ejis/
Abstract
As IT expenditures have been growing over the last few years, organizations
have started to scrutinize them more closely and some are deciding to
outsource parts of their Information Systems (IS) operations. Unfortunately,
there is a lack of research on the impact that the object of an outsourcing
decision may have on the factors considered when making such a decision. The
impact of organizational size and the firm’s strategy has also not been
conclusively established in the literature. This paper examines and compares
the different supplier, internal, technology and cost factors considered when
outsourcing Online Transaction Processing (OLTP) or Decision Support Systems
(DSSs) (the object of a decision). It also examines the divergent decision factors
for large, medium and small organizations, and the competitive strategy’s
impact on the factors that are considered. The paper is based on a study with
samples from four large SAP Conferences and includes 1889 individuals
working in organizations that use enterprise resource planning software.
This research found that the object being outsourced, the firm’s competitive
strategies, and the organizational size are factors that significantly influence
the outsourcing decision process. We found that the relative importance
of decision factors for the outsourcing of OLTP is significantly different
from those for a DSS and that, where the outsourcing object is of strategic
importance, there is a closer attention to internal factors. Our findings confirm
that outsourcing strategies are aligned with organizational strategies. For
example, cost factors dominate in the outsourcing decision among organiza-
tions that employ a low-costs strategy as compared to those following a
differentiation or niche strategy. Also, compared to firms pursuing other
competitive strategies, for the outsourcing of DSS, differentiators place a
significantly higher emphasis on supplier factors. Regarding the role of
company size, we found significant differences in the importance given to
supplier, internal, technology, and cost factors by organizations of different
sizes. For example, compared to smaller organizations, larger organizations
gave less importance to supplier and technology factors and more importance
to cost factors.
European Journal of Information Systems (2009) 18, 235–248. doi:10.1057/ejis.2009.18
Keywords: Information Systems; outsourcing; management
236 Factors considered when outsourcing an IS system
Introduction
Expenditures on IT over the last decade have remained
high and are expected to grow 4.5% to over 3.4 trillion
dollars in 2008 (Gartner, 2008). Given the resulting
pressures on the overall budgets, organizations have
started to scrutinize such expenditures more closely. In
an effort to remedy perceived inefficiencies in internal
IS operations, reduce costs, and have easier access to
new technologies, some organizations are deciding to
outsource parts of IS operations. At the same time the
outsourcing model has matured and providers have
increased their capabilities and became more stable,
internal IS departments have retooled and refocused in
order to become more competitive with outside alter-
natives. As a result, outsourcing decisions continue to be
important as they have become more common.
We define outsourcing as ‘the use of external agencies
to process, manage, or maintain internal data and to
provide information related services’ (Smith et al., 1998),
whether offshored or operated domestically. IS outsour-
cing has been studied extensively. Some studies focused
on the implementation of the outsourcing decision,
implications to nations, employees, and organizations
(Dibbern et al., 2004). Others have examined the success
factors related to industry process standardization
(Wullenweber & Weitzel, 2007) and some have created
predictive models for outsourcing success. A distinct track
of research in the outsourcing field examines the
decision-making process of the outsourcers. With regards
to this track, Dibbern et al. (2004) identified a gap in the
literature in the area of comparative studies that include
the object that is to be outsourced. This paper attempts to
fill some of this gap by exploring how the object of an
outsourcing decision (what to outsource), organizational
size, and strategy lead companies to emphasize different
decision factors (i.e., supplier, internal, technology, and
cost factors). This insight could have significant benefits
to service providers. Armed with this information, sellers
may target the value proposition of their services based
on firm size, strategy and the object of the outsourcing
decision, instead of merely relying on cost as the
overriding factor. Beside the practical benefits of under-
standing these links, the results of this study could also
benefit future outsourcing research by highlighting the
importance of appropriate research scope, that is,
whether future research should be more narrowly focused
on organizations of similar sizes, competitive strategies or
grouped around the object being considered for out-
sourcing.
To determine what object to select in our study, we
examined the software offerings of the largest enterprise
resource planning (ERP) software provider in the world,
SAP AG. With revenues of $15 billion in 2007, the
German company has two distinct software offerings.
The Online Transaction Processing (OLTP) software
known as R/3, and the Decision Support System (DSS)
software known as NetWeaver. Each of these solutions are
marketed, sold and licensed separately by the company
European Journal of Information Systems
Bjarne Berg and Antonis C. Stylianou
and the software offerings are, therefore, distinct in scope
and purpose and have a significant market size. In our
survey, the term ‘OLTP’ refers to the R/3 system and
the term ‘DSS’ refers to the NetWeaver system. As the
NetWeaver software runs on separate servers, has a
completely different user interface, different trade maga-
zines and conferences, the distinction in the SAP
community between OLTP and DSS is very clear.
For data gathering, we surveyed 1889 employees of SAP
customers at national SAP conferences over a period of 8
months. Our large-scale survey focuses on how out-
sourcing decisions are made. We do not examine if the
subsequent actions of the companies are successful or
not. Instead we focus on the factors used in the decision-
making process.
The next section contains a review of the literature
leading to the development of hypotheses. That is
followed by a section describing the sampling and
instrument development procedures. Then the findings
are presented and discussed and the paper closes with the
conclusions section.
Literature review and hypothesis development
Firm strategy and outsourcing decisions
A fundamental principle of business is that a firm’s
strategy should drive its actions. Porter outlines three
fundamental competitive strategies that a firm can
undertake: a low-cost provider of products and services,
a niche player, or a differentiator (Porter, 1985). These
strategies can either drive the organization’s core compe-
tencies or are sometimes created based on the core
competencies already in place (Prahalad & Hamel,
1990). Traditionalists have argued that for IS outsourcing
to be effective, it should only be considered when what is
outsourced is not a core activity of the organization and
does not provide a strategic differentiation (Lacity et al.,
1996). Others have argued that the first step in out-
sourcing is to create a strategic objective of the transac-
tion (Stark et al., 2006). There are also several proposed
guidelines for when to outsource IS functions based on a
firm’s strategic positioning (Apte & Mason, 1995; Cronk
& Sharp, 1995; Earl, 1996) or a strategy’s possible need for
dynamic capabilities (Eisenhart & Martin, 2000) that may
be provided through outsourcing.
Unfortunately, the impact of a firm’s competitive
strategy on the IS outsourcing decision is weakly
supported in the literature. Despite proposed models, a
link between core strategies and outsourcing has been
hard to establish (Smith et al., 1998). For example, a link
between the strategy types, such as prospector, defender
or analyzer, and the outsourcing decision has not
been conclusively established (Teng et al., 1995). Also,
researchers found only partial support that an orga-
nization’s strategy may have some moderating
effects on outsourcing decisions (Grover et al., 1994a).
Others have found conflicting empirical support for a
link between strategy and outsourcing decisions when
 Factors considered when outsourcing an IS system
examining the negative impacts of outsourcing core
competencies (Currie & Wilcox, 1998; Hancox &
Hackney, 1999).
When viewed in the context of the object being
outsourced we see that more consistent results have
emerged. Links were found between computer firms’ core
competencies and a tendency to keep these in-house
(Slaughter & Ang, 1996) and between strategic goals and
outsourcing contract extensions (Nam et al., 1996).
However, in view of the overall conflicting findings of a
link between strategy and outsourcing, we have yet to see
conclusive evidence for a strong relationship between a
firm’s strategy and the decision to outsource.
Supplier factors
Supplier factors are often post hoc a decision to outsource
(i.e., considered during vendor selection). However,
supplier factors are also an important part of the decision
whether to outsource at all. If few realistic choices exist,
companies are unlikely to be early adopters of new
processes and technology services. Organizations may
look at established success models to determine what
factors they should emphasize when making the decision
to outsource, as well as during the vendor selection
process after the decision has been made.
Predictive models for outsourcing success based on
empirical studies include measures such as: the supplier’s
expertize with the client’s IS operations, IS operations in
general, and outsourcing; the supplier’s investment in the
outsourcing process; supplier’s human resources specifi-
city; and the external relatedness of the organizations
(Gable & Sharp, 1992). An area of contention is the
impact of the number of available suppliers on an
outsourcing decision. Nam et al. (1996) did not find
support for this measure, whereas Bahli & Rivard (2003)
found that the existence of only a small number of
suppliers affected the success of an outsourcing effort.
Others have found that the number of suppliers may
not be as important as the mere presence of one in
the relevant technology or process area (Ang &
Cummings, 1997).
As the number of available suppliers increases, the
feasibility of outsourcing increases and this could have an
impact on the decision-making process and the like-
lihood that organizations will engage in outsourcing
activities (Levina & Ross, 2003). Our research explores the
relative importance given to this measure by organiza-
tions.
Additional supplier factors validated by outsourcing
studies include the supplier’s demonstrated understand-
ing of organizational needs, apparent trustworthiness of
the supplier’s employees, and the supplier’s prior experi-
ence with the object being outsourced (Gable, 1996). In
addition, companies have reported that obtaining access
to a country’s skilled workforce and taking advantage of a
supplier’s host country’s universities rank among the
top five reasons for outsourcing (Palvia, 1995). Our
research includes all these measures individually and
Bjarne Berg and Antonis C. Stylianou 237
also groups them as an overall average score of all
supplier factors. Although heuristics and fuzzy logic
models exist that suggest ways to provide weights to
the vendor selection process (Yao & Hongli, 2007), the
use of averages is frequent in outsourcing research
(Nam et al., 1996; Bahli & Rivard, 2003; Charalambos &
Nakatsu, 2008). Actually, in much of the research
published, the use of averages is not directly stated, but
manifests itself by not weighting the factors used. To
provide insights into our findings, we report scores for all
individual measures (Table 10) as well as the group ave-
rages (Table 7). The measures obtained from the literature
and used in our study are summarized in Table 1.
Internal factors
In addition to supplier factors, organizations are also
looking at internal factors when considering outsourcing.
These include the need to sustain 24/7 operations,
perceived improvements in IS flexibility and agility
(Djavanshir, 2005) and the internal relatedness of the
processes being outsourced (Gable & Sharp, 1992; Bahli &
Rivard, 2003). Processes that are outside the normal
operations of a company, or that are not deemed a good
fit with the core operations of a business model are more
likely to be outsourced. Other internal factors may
include an organization’s expertise with outsourcing in
general, or in a specific related area, as well as the
organization’s expertise in IS operations (Djavanshir,
2005). It is more likely that organizations that have little
familiarity with IS operations will outsource those
functions. Our research includes all these measures
individually and also groups them as an overall average
score of all internal factors (Tables 7–10).
Technology factors
Some organizations choose to outsource IS due to
uncertainty around technology choice, or task complex-
ity (Djavanshir, 2005). Large-scale ERP systems, such as
SAP R/3, have a high degree of complexity and an
increasing number of organizations have, therefore,
decided not to acquire these systems. Instead some are
relying on outsourcing as a means to get access to the ERP
technology without making formal software or hardware
purchases. This lack of commitment to a specific system
is frequently motivated by perceptions regarding the
frequency of technology changes (Nam et al., 1996; Ang
& Cummings, 1997) and uncertainty regarding the long-
term IS strategic direction of the organizations due to
events such as mergers and divestitures. The technology
factors in our research, therefore, include the perceived
uncertainty associated with a long-term DSS and OLTP
technology choice, and the perceived complexity of these
systems.
Cost factors
Recent research has suggested that the overall costs of
outsourcing have been consistently underestimated by
organizations (Gan, 2006). However, a driving factor of
European Journal of Information Systems
238 Factors considered when outsourcing an IS system Bjarne Berg and Antonis C. Stylianou

Table 1 Measures and factors from literature

Construct Measures Reference

Cost factor Labor cost reduction Loh & Venkatraman, 1992; Djavanshir, 2005
Cost factor Overall costs Arnett & Jones, 1994; Alpar & Saharia, 1995;
McFarland & Nolan, 1995; Palvia, 1995
Internal factor Expertize of client with outsourcing Bahli & Rivard, 2003
Internal factor Need for 24/7 operations Djavanshir, 2005
Internal factor Improved flexibility and agility Gonzalez et al., 2005; Djavanshir, 2005
Supplier factor Supplier’s technology and facility investments Bahli & Rivard, 2003
Supplier factor Human resources specificity Bahli & Rivard, 2003
Supplier factor Small number of suppliers Nam et al., 1996; Bahli & Rivard, 2003;
Levina & Ross, 2003
Supplier factor External relatedness Bahli & Rivard, 2003; Levina & Ross, 2003
Supplier factor Internal relatedness Bahli & Rivard, 2003
Supplier factor Expertise of this supplier with the IS operations Bahli & Rivard, 2003
Supplier factor Expertise of the supplier with outsourcing Bahli & Rivard, 2003
Supplier factor Supplier’s demonstrated understanding of client needs Gable, 1996
Supplier factor Apparent trustworthiness of supplier (risk) Gable, 1996; Yang & Wang 2007
Supplier factor Supplier’s prior experience Gable, 1996
Supplier factor Access to host country’s skilled workforce and talents Djavanshir, 2005
Supplier factor Taking advantage of host country’s universities Djavanshir, 2005
Technology factor Technology uncertainty Nam et al., 1996; Ang & Cummings, 1997;
Bahli & Rivard, 2003
Technology factor Expertise of the client with the IS operations Bahli & Rivard, 2003
Technology factor Task complexity (IS system) Bahli & Rivard, 2003

outsourcing has been to reduce costs while being able to
provide the same level of service. Justifications include
beliefs that the outsourcer has ‘better economies of
scale, tighter control over fringe benefits, better access
to lower cost labor pools and a more focused expertise
in managing IS’ (Smith et al., 1998). This economic
perspective is echoed in many studies (Arnett & Jones,
1994; Alpar & Saharia, 1995; McFarland & Nolan, 1995;
Palvia, 1995). In this economic perspective, we find two
consistent measures: labor costs reduction and/or overall
costs reduction.
As labor costs are a function of an organization’s overall
cost structure, outsourcing is sometimes used to change
the overall labor cost structure for the whole organiza-
tion. In these cases, outsourcing may be used as a tool for
an overall reduction in compensation even for those jobs
that remain (Loh & Venkatraman, 1992).
The distinct importance of labor costs was confirmed in
a recent survey of 114 senior IS managers who ranked
labor cost as the most important item considered when
outsourcing IS (Djavanshir, 2005), well ahead of other
factors such as flexibility and agility and a set of supplier
factors. In this paper, we do not consider implicit costs or
non-tangible costs, but make a distinction between labor
costs and overall financial costs (measured as the total
reduction in spending on those activities being out-
sourced).
The object of the outsourcing decision
SAP suppliers in the outsourcing market have increased
substantially. A 2005 survey of 872 outsourcing vendors
identified over 115 companies providing SAP outsourcing
services (Brown & Wilson, 2005). With the increase in
suppliers and outsourcing activity, companies using SAP
face increasing peer pressure to outsource. However, they
have two core decisions to make. First, should they
outsource at all, and second, should they outsource the
transaction processing system (SAP R/3) and/or the DSS
(NetWeaver). In general, outsourcing of OLTP allows
management to focus available IS talent on important
and strategic IT applications (such as DSS), rather than
the mundane and routine transaction processing activ-
ities (Wang & Yang, 2007).
We suggest that DSSs are at the heart of the firm’s
ability to differentiate their product and services and they
are, therefore, more important to those who employ that
strategy. As DSS are seldom highly standardized (SAP
NetWeaver is only partially standardized), organizations
that are differentiators, and consider outsourcing these
systems, may be more exposed to the risk that the
supplier may not have the ability to support them. We
would, therefore, expect that organizations that are
differentiators are placing a higher emphasis on factors
relating to the suppliers. Such factors include trust,
experience (Gable, 1996), supplier’s expertize, employees,
investments in technology and facilities, prior experience
in IS operations (Bahli & Rivard, 2003), the number of
suppliers available (Levina & Ross, 2003) and access to
a skilled labor force and educational system (Djavanshir,
2005). The link between strategy and the object of the
outsourcing decision is important, as it is likely that the
object may be closely linked to a firm’s strategy in certain

European Journal of Information Systems

 Factors considered when outsourcing an IS system
cases, while unimportant in others (Teng et al., 1995).
We, therefore, propose the following hypothesis:
H1 When outsourcing a decision support system, supplier
factors are more important to organizations that employ
a differentiation strategy than those employing other
strategies.
A survey of 357 firms, suggested that a strategy of total
outsourcing, without consideration of what is being
outsourced, can be very dangerous due to the inflexibility
it creates, and that managers should be very selective in
deciding which IT functions are outsourced (Gonzalez
et al., 2005). We agree with option theory that suggests
that DSSs add a longer time horizon between problem/
opportunity discovery and the need for actions, and,
therefore, have a high intrinsic value to managing an
organization (Simon, 1960). Transaction processing
systems, on the other hand, may be viewed more as
common infrastructure often standardized by ERP soft-
ware packages such as SAP and Oracle. Although it is
likely that, given these differences, different decision
criteria will be used depending on the object of the
outsourcing decisions (what to outsource), we found no
research demonstrating that such differences actually
exist, which leads us to the following null hypotheses:
H2a There is no difference between the importance given to
supplier factors considered in a DSS outsourcing
decision and that of an OLTP outsourcing decision.
H2b There is no difference between the importance given to
internal factors considered in a DSS outsourcing
decision and that of an OLTP outsourcing decision.
H2c There is no difference between the importance given to
technology factors considered in a DSS outsourcing
decision and that of an OLTP outsourcing decision.
H2d There is no difference between the importance given to
cost factors considered in a DSS outsourcing decision
and that of an OLTP outsourcing decision.
Firm size and outsourcing decisions
Research has been more successful in establishing a link
between a firm’s size and outsourcing decisions. In a
study of 226 banks, Ang & Cummings (1997) found that
firm size affected factors such as supplier presence,
technology uncertainty, task complexity, and asset
specificity (object of decision) on IS outsourcing. They
also found that these factors did not affect small banks as
much as large banks in their conformity to peers. As
resources were constrained, both large and small banks
were induced toward conforming to peer influence on
outsourcing. However, for large banks, factors such as
production cost advantages and supplier presence sig-
nificantly strengthened, while factors such as asset
specificity and task complexity weakened. A follow-up
Bjarne Berg and Antonis C. Stylianou 239
study in 1998 of 243 banks confirmed these findings (Ang
& Straub, 1998). In their discussion, Ang and Straub state
that ‘no doubt there are other elements to firm size that
would also explain why this relationship appears so
consistently as a factor associated with outsourcing in the
IS literature’ (Brynjolfsson et al., 1994; Grover et al.,
1994a, b). To examine these relationships, we propose the
following set of null hypotheses:
H3a In an IS outsourcing decision, there is no difference
between the importance given to supplier factors by
organizations of different sizes (Fortune 500, Fortune
1000, and smaller organizations).
H3b In an IS outsourcing decision, there is no difference
between the importance given to internal factors by
organizations of different sizes (Fortune 500, Fortune
1000, and smaller organizations).
H3c In an IS outsourcing decision, there is no difference
between the importance given to technology factors by
organizations of different sizes (Fortune 500, Fortune
1000, and smaller organizations).
H3d In an IS outsourcing decision, there is no difference
between the importance given to cost factors by
organizations of different sizes (Fortune 500, Fortune
1000, and smaller organizations).
In their bank study, Ang & Straub (1998) found a
consistent strong negative relationship between firm size
and the degree of outsourcing. Another study by Sobol &
Apte (1995), however, found a significant positive
relationship between firm size and overall outsourcing.
Given the inconsistency in the past literature, we
hypothesize a relationship but not a direction.
H4 There is no difference in the percent of IT budget that
firms of different sizes (Fortune 500, Fortune 1000, and
smaller organizations) plan to spend on outsourcing.
As there are several pros and cons to measuring a firm’s
size by its revenues (Mitra & Chaya, 1996), in this paper
we classified companies as Fortune-500, 1000 and smaller
organizations by both revenues and the number of
employees (Fortune, 2006).
Competitive strategy
When examining the literature we found an implied
agreement that a relationship exists (or should exist)
between the various strategies and the relative impor-
tance of the factors considered. Based on Porter’s (1998)
work, we would expect that organizations that employ a
low-cost strategy will need to rely heavily on being highly
efficient in their transaction processing. This indicates
that firms following a low-cost strategy may regard their
OLTP systems as more crucial to their long-term success.
European Journal of Information Systems
240 Factors considered when outsourcing an IS system
On the other hand, firms following niche and differ-
entiation strategies rely more on market information and
may regard their DSSs as more crucial to their long-term
success.
H5 Organizations that employ a niche or a differentiation
strategy assign less weight to cost factors in an IS
outsourcing decision than organizations that are primarily
competing using a low cost strategy.
Sampling and instrument
Based on the set of established measures and the
instruments used in the literature (see Table 1), a survey
instrument was created. The instrument was reviewed by
a group of five IT professors from two institutions as well
as a set of graduate students. Following this input, a pilot
survey was conducted (n ¼ 23) with the preliminary
instrument to examine it for clarity, terminology, and
organization. The published revenues and number of
employees for the world’s largest 1000 organizations were
used as measures of company size (Fortune, 2006). The
survey results were analyzed using correlations for
convergent and divergent validity. Strong correlations
within the measures were established indicating good
convergent validity and expected low correlations were
found between measures, indicating divergent validity of
the instrument.
To examine the outsourcing factors being considered
by companies of different sizes and competitive strate-
gies, we then administered the surveys at four national
SAP conferences over a period of 8 months. The
conferences were attended by Chief Information Officers,
General Managers, Vice Presidents and managers of
Business Systems, Consulting, Finance, ERP, Financial
Planning, Global Projects, and IT and by functional
professionals such as ERP Program Managers, BI Team
Leads and ERP Directors (WIS Publishing, 2007). The
combined attendance at these conferences was over
15,800 individuals from corporations in the U.S.A. and
the rest of the world. The convenience sample resulted in
1889 returned surveys of 2381 distributed. Of the 1889
respondents, 44 did not identify company size, and 36
did not identify a strategy (response ¼ ‘n/a’). Also, 270
respondents did not engage in any form of outsourcing
Table 2 Sample response and distributions
Responses
Number for surveys Issued vs returned Response rates
Survey 1 623/466 75%
Survey 2 968/802 83%
Survey 3 492/391 79%
Survey 4 298/230 77%
2381/1889 79%
European Journal of Information Systems
Bjarne Berg and Antonis C. Stylianou
and were not planning to do so (within 3 years) or had no
responses. The overall usable sample size for most
research questions was, therefore, 1575 (see Table 2).
After administrating the survey at the first two
conferences, we did a comparison of the first two survey
results and found no significant differences between the
survey results when measuring the constructs, indicating
a good test–retest reliability. Cronbach alphas were also
calculated for each of the scales on the instrument and
scores ranged from 0.69 to 0.83. Although the alpha
coefficients for the sub-scales were not extremely high,
Liu & Zumbo (2007) state that the magnitude of the
coefficient is directly related to the number of items in
the scale and note that, for shorter scales, alpha
coefficients in the high 0.60s or 0.70s are acceptable.
Separately, descriptive statistics of each factor based on
firm size and competitive strategy were calculated (see
Table 3).
We also performed factor analysis with the extraction
method of principal component analysis and Varimax
with Kaiser normalization as the rotation method to test
the survey instrument. The rotation converged in
six iterations and identified four distinct components
(Table 4). Further analysis of the component matrix
demonstrated a clear separation of the four components
with rotation sums of squared loaded eigenvalues of 5.71,
3.17, 2.86, and 2.04 respectively, and a cumulative 72.5%
of the variance explained (Table 5). This supports prior
research (see Table 1) that indicated that supplier,
technology, internal and cost factors are distinct in an
outsourcing decision-making process and also confirms
convergent and divergent validity of the constructs.
Competitive strategies
To determine the respondents’ relative competitive
strategies, we asked three questions related to their
organizations (see Appendix A) and used clustering of
responses to determine their predominant strategy types
(acknowledging that few organizations engage in a
competitive strategy that is one-dimensional). The
clustering was performed using group average and
Minikowski as a distance measure (P ¼ 3). The WPGMC
method (Lance & Williams, 1967) yielded three useful
clusters, each representing a niche, a low-cost, and a
differentiation strategy, using a 5-point Likert scale. As
Organization size
Fortune-500 Fortune-1000 Smaller organizations No answer
220 (47%) 65 (14%) 173 (37%) 8 (2%)
400 (50%) 108 (13%) 274 (34%) 20 (2%)
234 (59%) 36 (9%) 108 (28%) 13 (3%)
125 (54%) 19 (8%) 83 (36%) 3 (1%)
979 228 638 44
 Factors considered when outsourcing an IS system Bjarne Berg and Antonis C. Stylianou 241

Table 3 Descriptive statistics

Firm size Competitive Individual Supplier factors Internal factors Technology factors Costs
strategy responses
Mean St. dev. Mean St. dev. Mean St. dev. Mean St. dev.

Fortune-500 Niche 279 2.901 0.811 2.331 0.568 2.377 0.803 3.331 1.094
Differentiators 361 2.783 0.749 2.557 0.736 2.306 0.684 2.963 1.300
Low cost 327 3.239 0.576 2.975 0.597 2.602 0.598 3.388 0.864

Fortune-1000 Niche 68 2.690 0.558 3.200 0.662 2.569 0.699 2.895 0.727
Differentiators 135 3.405 0.351 3.640 0.564 2.783 0.470 2.873 0.632
Low cost 13 2.376 0.361 3.410 0.400 2.167 0.192 2.795 0.251

Smaller organizations Niche 182 3.196 0.390 2.880 0.681 2.350 1.032 2.718 1.275
Differentiators 365 3.153 0.676 3.053 0.796 2.812 0.892 3.089 1.285
Low cost 79 2.725 0.713 2.691 0.417 2.281 0.459 2.377 1.187

Table 4 Factor analysis – rotation component matrix

Factor analysis Component

Supplier Internal Technology Cost

Supplier – take advantage of education system at supplier’s location 0.722 0.164 0.044 0.398
Supplier – take advantage of skilled workforce at supplier’s location 0.834 0.277 0.223 0.032
Supplier – the service provider’s current investment in IS 0.620 0.361 0.326 0.312
Supplier – provider’s prior IS experience 0.786 0.407 0.223 0.147
Supplier – experience in similar business processes (internal relatedness) 0.820 0.235 0.294 0.082
Supplier – provider in same industry (external relatedness) 0.836 0.077 0.274 0.119
Supplier – knowing the service provider’s employees 0.785 0.092 0.185 0.130
Supplier – the service provider’s employees understanding company needs 0.883 0.238 0.237 0.076
Supplier – the number of available service providers 0.532 0.419 0.279 0.237
Supplier – the trustworthiness of the service provider’s employees 0.896 0.243 0.105 0.129
Supplier – service provider’s general expertise with outsourcing 0.784 0.508 0.051 0.157
Internal – unfamiliarity with outsourcing in general 0.180 0.868 0.058 0.257
Internal – improve flexibility & agility 0.255 0.680 0.400 0.073
Internal – need for 24/7 operations 0.204 0.597 0.429 0.149
Technology – uncertainty of IS technology selection 0.304 0.264 0.765 0.335
Technology – unfamiliarity with IS technology 0.275 0.258 0.769 0.147
Technology – IS system complexity 0.297 0.356 0.688 0.225
Cost – overall cost reduction 0.013 0.035 0.023 0.856
Cost – reduce labor costs 0.349 0.269 0.134 0.620
Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization (Rotation converged in six iterations).

the cluster centroids were established, each response was
classified based on its Minikowski distance. Twenty-one
non-anonymous surveys were classified based on their
distance to each of the centroids, confirming the
classification validity. The classification results and the
centroids are included in Table 6.
Findings and discussion
Overall findings
When examining the factors considered for overall OLTP
and DSS outsourcing by organization size, we found that
Fortune-500 organizations rate cost factors (labor and
overall costs) as most important, regardless of competi-
tive strategies (see Figure 1). Fortune-1000 organizations
rate internal factors (improved flexibility, agility, famil-
iarity with outsourcing, 24 h operations) as most
important, while smaller organizations rate supplier
factors (skilled work force, number of providers, invest-
ments, prior experience, similar activities, similar indus-
try, knowledge of provider’s employees, trust, general
expertise, understanding of needs, education system at
provider location) as the most important factors.
While the most important factors considered were
uniform within an organizational size grouping (i.e.,

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242 Factors considered when outsourcing an IS system Bjarne Berg and Antonis C. Stylianou

Table 5 Factor analysis – eigenvalues and variance

Total variance explained

Component Initial eigenvalues Rotation sums of squared loadings

Total % of variance Cumulative % Total % of variance Cumulative %

1 9.49 49.95 49.95 5.71 30.04 30.04

2 1.69 8.88 58.84 3.17 16.69 46.73
3 1.45 7.65 66.49 2.86 15.04 61.77
4 1.14 6.02 72.51 2.04 10.75 72.51

Table 6 Competitive strategies among respondents

Employer’s organization size Niche strategy Differentiation Low cost strategy No stated strategy Total number of respondents

Fortune 500 279 361 327 12 979

Fortune 1000 68 135 13 12 228
Smaller organizations 182 365 79 12 638

Total 529 861 419 36 1845

Differentiator Low cost Niche

Final centroid – differentiator 2.8963 1.8532 2.2300

Final centroid – Low cost 1.3093 2.9965 1.4421
Final centroid – Niche 1.7677 1.5835 3.5547

Factors Considered when Outsourcing IT

3.45
3.25
3.05
2.85
2.65
2.45
2.25
Fortune-500 Fortune-1000 Smaller org
Figure 1 Factors considered when outsourcing IT based on
organizational size.
Fortune-500 companies considered the cost factor as
most important, regardless of the strategy), we did find
that when organizational size was considered together
with strategy the magnitude was different (see Table 7).
As expected, low-cost Fortune-500 organizations had
the highest emphasis on costs when outsourcing,
whereas smaller niche players had a significantly higher
emphasis on supplier factors. A surprising finding was
that Fortune-1000 organizations engaged in a differentia-
tion strategy placed a significantly higher emphasis on
internal factors when compared to other same size
niche or low-costs organizations. Further research would
be needed to establish why this may be the case. We
examined the magnitude of differences using a two-factor
ANOVA without replication and P-values ranging from
5.93E-05 and 2.63E-55.
Overall, seven out of the top 10 factors considered
when outsourcing an OLTP system are related to the
supplier, while costs only rank as factors 9th and 10th
(see Figure 2). Technology factors were least significant
Supplier factors
Internal factors
overall. However, when examining the responses to the
Technology factors factors considered for outsourcing DSS (see Figure 3) we
Costs find that labor costs are ranked 5th compared to 9th for
OLTP, a significant difference (Po0.01). A bigger diver-
gence is found in the organization’s unfamiliarity with
the DSS technology. For consideration of outsourcing a
DSS system, the factor ranks 6th in importance, while for
consideration of outsourcing an OLTP system, unfami-
liarity of technology is ranked the least important (19th).
Overall, this confirms previous research that high labor
cost intensive IT areas, and technology uncertainty are
important factors why organizations choose to outsource
some IT areas.
Finding – H1a
Our first hypothesis is that when outsourcing a DSS,
supplier factors are more important to organizations that
employ a differentiation strategy. We found support for
this. Cost leaders rated the importance of supplier factors
as 2.97, differentiators rated this as 3.16 and niche players
rated this in the middle as 3.04. Further analysis of these
numbers demonstrated that there were significant statis-
tical differences between differentiators and both of the
other strategies (99% confidence). This supports the
hypothesis that companies engaged in a differentiation
strategy may recognize the unique strategic importance

European Journal of Information Systems

 Factors considered when outsourcing an IS system Bjarne Berg and Antonis C. Stylianou 243

Table 7 Most important factors for outsourcing based on organizational size and competitive strategies
Factors considered when outsourcing IS

Supplier factors Internal factors Technology factors Costs

Niche strategy – Fortune-500 2.90 2.33 2.38 3.33

Niche strategy – Fortune-1000 2.69 3.20 2.57 2.89
Niche strategy – smaller org 3.20 2.88 2.35 2.72
Niche strategy average 2.93 2.80 2.43 2.98

Differentiator – Fortune-500 2.78 2.56 2.31 2.96

Differentiator – Fortune-1000 3.41 3.64 2.78 2.87
Differentiator – smaller org 3.15 3.05 2.81 3.09
Differentiator average 3.11 3.08 2.63 2.98

Low cost – Fortune-500 3.24 2.98 2.60 3.39

Low-cost – Fortune-1000 2.38 3.41 2.17 2.79
Low cost – smaller org 2.73 2.69 2.28 2.38
Low-cost strategy average 2.78 3.03 2.35 2.85
*Mean scores on a 5-point Likert scale (most important factors for the respective firm size and strategy are highlighted).

Most important factors for OLTP outsourcing

The service provider's prior experience with the transaction system
The service provider's expertise with outsourcing in general
The trustworthiness of the service provider's employees
The service provider's employees' understanding of our needs
The service provider's experience with performing similar activities as us
The service provider's current overall investments in transaction systems
To take advantage of the skilled workforce of our service partner
To improve our transactional flexibility and agility
To reduce labor costs
To reduce overall costs
To provide 24 hour transactional operations
The complexity of the transaction system
The service provider working in a similar industry as our organization
Our unfamiliarity with outsourcing in general
The number of available outsourcing service providers
Knowing the service provider's employees
Uncertainty in our long-term transactional system technology choice
To take advantage of different education systems at our service partner's location
Our unfamiliarity with OLTP technology

1.00 1.50 2.00 2.50 3.00 3.50

Figure 2 Most important factors for OLTP outsourcing.

of DSSs and, therefore, place a higher importance on
supplier factors than organizations engaged in other
strategies (Table 8).
Finding – H2a–d
H2a–d stated that the importance of the factors (cost,
technology, supplier, and internal) considered in a DSS
outsourcing decision is not different from that in an
OLTP outsourcing decision. Using a two-factor ANOVA
with replication, we tested the overall hypothesis that the
four factors being considered are different for each object
type (DSS and OLTP). We found this to be the case at a
99% confidence level (F ¼ 270.37, n ¼ 1575). This overall
test is important, as it provides an adjustment for the
Bonferroni effect of multiple t-tests. We also tested each
hypothesis (H2a–d) individually. The results in Table 9
indicate that the object being outsourced results in
significant differences in the weighting of all factors.
Based on the results shown in Table 9, all four null
hypotheses (H2a–d) can be rejected.
When exploring our data set further, we also found that
there were statistical differences for 15 of the 19 factors
considered depending on the object of the decision
(Table 10). This indicates that the object of the out-
sourcing decision has an impact on what factors are being
considered important in a decision-making process. This

European Journal of Information Systems

244 Factors considered when outsourcing an IS system Bjarne Berg and Antonis C. Stylianou

Most Important factors for DSS outsourcing

The service provider's expertise with outsourcing in general
The trustworthiness of the service provider's employees
The service provider's employees' understanding of our needs
The service provider's prior experience with the DSS technology
To reduce labor costs
Our unfamiliarity with DSS technology
The service provider's current overall investments in DSS
The service provider's experience with performing similar activities as us
To take advantage of the skilled workforce of our service partner
To improve our DSS flexibility and agility
To reduce overall costs
To provide 24 hour DSS operations
The service provider working in a similar industry as our organization
Knowing the service provider's employees
The complexity of DSS
The number of available outsourcing service providers
To take advantage of different education systems at our service partner's location
Our unfamiliarity with outsourcing in general
Uncertainty in our long-term DSS technology choice

1.00 1.50 2.00 2.50 3.00 3.50

Figure 3 Most important factors for DSS outsourcing.

Table 8 Differences in weighting of supplier factors Table 9 Differences in mean factor scores based on the
when outsourcing a decision support system (t-scores) object of outsourcing
Supplier factors DSS mean OLTP mean t-score

Competitive strategy Cost leader Niche Differentiator Supplier factors 3.032 3.109 5.23***
Internal factors 3.041 2.796 10.27***
Cost leader
Technology factors 2.339 2.721 14.98***
Niche 1.879**
Costs 3.016 3.101 2.20**
Differentiator 4.459*** 3.374***
Two-tailed matched pair t-test of sample means assuming equal
Two-tailed matched pair t-test of sample means assuming equal variance.
variance. * significant at 90%; ** significant at 95%; *** significant at 99%
* significant at 90%; ** significant at 95%; *** Significant at 99% confidence level.
confidence level.

also implies that future research exploring the outsour- The level of importance attached to supplier factors was
cing decision-making process should not group a variety significantly different between Fortune-500 companies
of IS systems, but instead should be very specific in and the rest, whereas there were no significant differ-
grouping similar purpose systems. ences between Fortune-1000 and smaller organizations.
Overall, supplier factors were less important to Fortune-
500 companies than to the other organization sizes.
Finding – H3a–d In the level of importance attached to internal factors,
H3a–d state that the factors (supplier, internal, technol- there were statistically significant differences between all
ogy, cost) considered in an IS outsourcing decision are organizational sizes, and internal factors were most
not different for organizations of various sizes (Fortune important to Fortune-1000 companies.
500, Fortune 1000 and smaller organizations). Using an Technology factors were least important to Fortune-500
ANOVA without replication for each of the factors we companies. This may be due to the organizational
found that the mean values for supplier, internal, resources and the ability to acquire needed technologies.
technology, and cost factors overall were significantly While there were no statistical differences between
different for Fortune-500, Fortune-1000, and smaller Fortune-1000 and smaller organizations, overall technol-
organizations. Specifically, we found F-statistics of ogy factors scored consistently lower than all other
11.05, 160.67, 17.15, and 19.22, respectively, for each of factors regardless of the size of the organizations.
the factors (99% confidence, n ¼ 1575). Therefore, con- The level of importance attached to cost factors was also
curring with previous research (Ang & Cummings, 1997; significantly different between Fortune-1000 and For-
Ang & Straub, 1998), this set of null hypotheses can be tune-500 companies. The latter attached more impor-
rejected. To further explore the relationships between tance to cost factors than any other factor. There were no
each factor and firm sizes, we performed individual significant differences between Fortune-1000 and smaller
t-tests, as shown in Table 11. organizations.

European Journal of Information Systems

 Factors considered when outsourcing an IS system Bjarne Berg and Antonis C. Stylianou 245

Table 10 Differences in the importance of IS outsourcing factors: OLTP vs DSS outsourcing

IS outsourcing factors Average scores Differences

OLTP DSS
9
Our unfamiliarity with OLTP/DSS technology 2.06 3.39 30.52*** >
>
>
>
>
>
Knowing the service provider’s employees 3.07 3.41 7.87*** >
>
>
>
>
To reduce labor costs 2.42 2.74 6.40*** >
> Factors that are
>
>
>
>
The service provider’s expertise with outsourcing in general 3.56 3.77 4.32*** >
> more important to
=
The trustworthiness of the service provider’s employees 3.50 3.66 2.99*** > a DSS outsourcing
>
>
The service provider’s current overall investments in OLTP/DSS 3.18 3.30 2.80*** >
> effort
>
>
>
>
To take advantage of different education systems at our service 3.44 3.53 1.85* >
>
>
>
>
>
partner’s location >
>
>
>
;
The service provider’s employees’ understanding of our needs 2.18 2.27 1.81*

The service provider working in a similar industry as our organization 2.68 2.76 1.58 9
>
>
>
The complexity of OLTP/DSS 2.70 2.73 0.60 =
No major differences
To improve our OLTP/DSS flexibility and agility 3.08 3.05 0.69 >
>
>
;
The service provider’s prior experience with the OLTP/DSS technology 3.57 3.50 1.55

9
To take advantage of the skilled workforce of our service partner 3.18 3.08 1.80* >
>
>
>
The service provider’s experience with performing similar activities as us 3.38 3.27 2.20** >
>
>
>
>
>
The number of available outsourcing service providers 2.59 2.44 2.85*** >
>
>
= Factors that are more
To reduce overall costs 3.05 2.89 2.88*** > important to an OLTP
>
>
Uncertainty in our long-term OLTP/DSS technology choice 2.23 2.05 4.42*** >
>
>
>
>
outsourcing effort
>
>
To provide 24 h OLTP/DSS operations 3.03 2.77 4.59*** >
>
>
;
Unfamiliarity with outsourcing in general 2.65 2.11 11.16***
Two-tailed matched pair t-test of sample means assuming equal variance.
*significant at 90%; **significant at 95%; ***significant at 99% confidence level.

Table 11 Differences between means for factors grouping Fortune-500 against smaller organizations and
considered when outsourcing is between organizations that further classifications may yield little information.
of various sizes
Factor Firm size Fortune-500 Fortune-1000
(t-scores) (t-scores)
Finding – H4
H4 was that the percent of IT budget that firms plan to
Supplier factors Fortune-1000 3.35*** spend on outsourcing is not significantly different
Smaller organizations 3.74*** 0.55 between firms of various sizes (Fortune 500, Fortune
1000, and smaller organizations). Due to the inconsistent
Internal factors Fortune-1000 11.18*** results of previous studies, the hypothesis was not
Smaller organizations 8.72*** 10.4***
predicting a direction for this relationship. Based on the
results of the t-tests in Table 12, we can reject the null
Technology factors Fortune-1000 4.38***
hypothesis. Our analysis leads to a conclusion that there
Smaller organizations 3.89*** 0.55
are significant differences in the percent of IT budget that
Costs Fortune-1000 6.57*** firms of different sizes plan to spend on outsourcing.
Smaller organizations 4.37*** 1.36 Furthermore, there are indications that we may be
dealing with a non-linear relationship.
Two tailed t-test of sample means assuming equal variance (based on
sample variance).
To further explore the relationship between outsour-
* significant at 90%; ** significant at 95%; *** significant at 99% cing expenses and firm size, we computed the percent of
confidence level. IT budget currently spent on outsourcing as well as the
planned annual growth in this expense and compared
the results across the three firm size classes. In the case of
Overall, Fortune-1000 and smaller organizations had current expenses, there was a non-linear relationship,
no significant differences on any factors considered when which was also not consistently significant. Also, there
making an outsourcing decision except for internal were differences in the current expenses between the
factors. In general, we found the largest differences Fortune 500 and 1000 and between smaller organizations
between the Fortune-500 and the other organizations. and the Fortune 1000. No significant differences were
This may indicate that future research should look at found in the comparison between current expenses for

European Journal of Information Systems

246 Factors considered when outsourcing an IS system Bjarne Berg and Antonis C. Stylianou

Table 12 Differences in firm reported outsourcing levels (t-scores)

Area Classification Fortune-500 Fortune 1000

Current spending on outsourcing as % of IT budgets Fortune 1000 15.56***

Smaller organizations 0.54 13.37***

Planned spending on outsourcing in 3 years Fortune 1000 28.07***

Smaller organizations 49.96*** 3.31***

Annualized growth over 3 years Fortune 1000 16.61***

Smaller organizations 77.98*** 26.75***
Two-tailed t- test of sample means, unequal variance (tested).
* significant at 90%; ** significant at 95%; *** significant at 99% confidence level.

Table 13 Firm reported current and planned outsourcing as a percentage of IT budgets

Classification n % of IT budget Expected % of IT budget % of IT budget Expected % of IT budget
spent on OLTP spent on OLTP outsourcing spent on DSS spent on DSS outsourcing
outsourcing today (%) within 3 years (%) outsourcing today(%) within 3 years (%)

Fortune-500 967 13.93 29.98 6.20 20.16

Fortune 1000 216 12.64 23.47 3.13 9.68
Smaller organization 626 14.15 20.35 6.09 10.78

smaller organizations and those of Fortune 500 firms Table 14 Differences in weighting of cost factors when
(Table 12). outsourcing (t-scores)
Furthermore, we collected data on the current and
Costs factors
3-year planned expenses on OLTP and DSS (Table 13). For
DSS expenses (both actual and planned), Fortune 500 Competitive strategy Cost leader Niche Differentiator
spend the most, followed by smaller firms and then the
Cost leader –
Fortune 1000. In the case of OLTP expenses, there are Niche 1.731* –
differences in the order between actual and planned. Differentiator 2.890*** 0.966 –
Two-tailed matched pair t-test of sample means assuming equal
variance.
Finding – H5 * significant at 90%; ** significant at 95%; *** significant at 99%
confidence level.
Our last research hypothesis was that organizations that
employ a niche or a differentiation strategy are less likely
to consider cost factors, than organizations that are
primarily competing using a low-cost strategy. Using a cost pressures and cost structures may yield further
test of sample means assuming equal variance in the insights into this relationship.
population (based on equal variance in sample), we
found this hypothesis supported by our data. Specifically,
we found that costs factors were rated significantly higher Conclusion
by firms that employ a low-costs strategy. Also, no In spite of the substantial research effort in the area of
differences were found between firms that employ a outsourcing, there are still gaps in our understanding of
niche or a differentiation strategy (see Table 14). organizations’ decision-making process and their deci-
This indicates that a firm’s strategy appears to impact sion factors. Most past studies have approached the
the factors that are used when a firm is making a decision outsourcing decision from a generic perspective without
to outsource an information system. When we analyzed regard to the object of the decision. As demonstrated by
the data without respect to the object of the outsourcing this research, there can be significant differences in the
decision, we found that the relative importance of costs relative importance attached to key decision factors for
factors for firms with a low-costs strategy was 3.18, the outsourcing of different types of systems. For
whereas firms with a different core strategy attached example, we found significant differences between the
significantly lower scores to the cost measures. Addi- outsourcing of OLTP and DSS in 15 of the 19 decision
tional research into various industries that have different factors we examined.

European Journal of Information Systems

 Factors considered when outsourcing an IS system
While past studies offered conflicting support for the
impact of competitive strategy and company size on the
decision factors, we found support for the importance of
both. Our findings confirm that outsourcing strategies are
aligned with organizational strategies. For example, cost
factors dominate in the outsourcing decision among
organizations that employ a low-costs strategy as com-
pared to those following a differentiation or niche strategy.
Also, compared to firms pursuing other competitive
strategies, for the outsourcing of DSSs, differentiators
place a significantly higher emphasis on supplier factors.
Regarding the role of company size, we found significant
differences in the importance given to supplier, internal,
technology, and cost factors by organizations of different
sizes. For example, compared to smaller organizations,
larger organizations gave less importance to supplier and
technology factors and more importance to cost factors.
From a practitioner’s point of view our findings may be
particularly interesting. Recent research from IBM’s
Global Services examined how to build scorecards and
predictive models to identify the best opportunities to
sell outsourcing services based on primarily financial
measures (Mojsilović et al., 2007). Using the results of our
study to expand these models to include the factors
considered by the buyer based on what is being out-
sourced, the buyer’s firm size, and strategy type, is likely
to improve the accuracy of such models and also reduce
the costly negative time window (time from targeting to
contract written) through a more focused sales effort.
About the authors
Bjarne Berg-Saether is an associate professor at the
School of Computer Science and Mathematics at Lenoir
Rhyne University. He has worked as a senior manager at
PriceWaterhouse Coopers and has published many
articles on ERP and data warehousing technologies for
trade journals. He is currently completing a second doc-
torate at the University of North Carolina at Charlotte.
Antonis C. Stylianou has over 25 years of experience in
computer information systems. Currently, he is Professor
of management information systems and a member of
the graduate faculty at the University of North Carolina
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My organization competes primarily by providing lower
cost products/services than our competitors.
My organization competes primarily as a specialized
provider of products/services.