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Assessing the Risk of IT Outsourcing

Author

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  • Benoit A. Aubert
  • Michel Patry
  • Suzanne Rivard

Abstract

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 the0501n 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 Ce texte porte sur l'évaluation du risque d'impartition des services informatiques. Le risque est défini ici comme étant fonction d'événements indésirables pouvant résulter d'une décision d'impartir, et des facteurs pouvant mener à ces événements indésirables. La théorie des coûts de transaction et la théorie de l'agence servent de base théorique à l'identification des principaux facteurs de risque. Les événements indésirables sont identifiés à partir d'une recension des écrits sur l'impartition des services informatiques.

Suggested Citation

  • Benoit A. Aubert & Michel Patry & Suzanne Rivard, 1998. "Assessing the Risk of IT Outsourcing," CIRANO Working Papers 98s-16, CIRANO.
  • Handle: RePEc:cir:cirwor:98s-16
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    File URL: http://www.cirano.qc.ca/files/publications/98s-16.pdf
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    References listed on IDEAS

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    1. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-795, December.
    2. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
    3. Fine, Charles H. & Whitney, Daniel E., 1996. "Is the make-buy decision process a core competence?," Working papers #140-96. Working paper (S, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    5. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    7. Barzel, Yoram, 1982. "Measurement Cost and the Organization of Markets," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 27-48, April.
    8. Langlois, Richard N. & Robertson, Paul L., 1992. "Networks and innovation in a modular system: Lessons from the microcomputer and stereo component industries," Research Policy, Elsevier, vol. 21(4), pages 297-313, August.
    9. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
    10. Teece, David J. & Rumelt, Richard & Dosi, Giovanni & Winter, Sidney, 1994. "Understanding corporate coherence : Theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 23(1), pages 1-30, January.
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    Citations

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    Cited by:

    1. Benoit A. Aubert & Vital Roy, 1999. "A Resource Based View of the Information Systems Sourcing Mode," CIRANO Working Papers 99s-34, CIRANO.
    2. Benoit A. Aubert & Michel Patry & Suzanne Rivard & Heather Smith, 2000. "IT Outsourcing Risk Management at British Petroleum," CIRANO Working Papers 2000s-31, CIRANO.
    3. Benoit A. Aubert & Vital Roy, 2000. "A Resource-Based Analysis of IT Oursourcing," CIRANO Working Papers 2000s-30, CIRANO.
    4. repec:eee:ijoais:v:10:y:2009:i:2:p:79-96 is not listed on IDEAS
    5. Benoit A. Aubert & Sylvie Dussault & Michel Patry & Suzanne Rivard, 1998. "Managing the Risk of IT Outsourcing," CIRANO Working Papers 98s-18, CIRANO.
    6. Julia Trampel, 2004. "To Offshore or Nearshore IT services? An investigation using transaction cost theory," Industrial Organization 0406001, EconWPA.

    More about this item

    Keywords

    Outsourcing of IS; agency theory; transaction cost economics; Sous-traitance des systèmes informatiques; théorie de l'agence; économie des coûts de transaction;

    JEL classification:

    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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