The role of risk and return in information technology outsourcing decisions

Abstract

This paper views information technology (IT) outsourcing decisions as classical make-or-buy decisions. In essence, these decisions consist of finding an acceptable balance between benefits and risks. The principal contribution of this paper is the development of a model that describes the relationship between outsourcing benefits and risks. It draws on work from two streams of research: transaction cost theory and modern financial theory. The model can assist managers in determining whether outsourcing or insourcing is a better choice for a particular IT function and in evaluating and comparing competing vendor proposals. The model can also serve as a framework for future research in IT governance issues.