Production economics findings

Length: 597 words

Overall, ? results offer evidence that economic factors can play ? significant role in ? decision-making processes of bank managers. Production and transaction economies affected ARE outsourcing choices; surprisingly, financial slack did not have ? bearing on such decisions. Based on ? data analysis presented earlier, perceived comparative advantages in production costs offered by vendors appear to lead to ? greater degree of IS outsourcing.

This result is consistent with findings in ? research of ? U. S. automobile industry, which strongly supported ? effect of production advantage of ? supplier on sourcing decisions (Walker and Weber 1987). Production costs were particularly salient, reflecting perhaps that ? main corporate rationale for outsourcing is operational cost savings. With an average 15% to 20% savings in operational cost from outsourcing, banks have been able to substantially reduce technology outlays on IT expenditure (Anonymous 1993).

For example, First Fidelity Bancorp, which has $29 billion in assets, reduced operating expenses by as much as $150 million in 1991, with, ? bulk of ? saving derived from lower labour and equipment costs related to IT. Though this is an argument that reports in popular press tend to inflate potential savings (Lacity and Hirschheim 1993), ? present research shows, nevertheless, that perceived comparative cost advantages offered by vendors is ? main factor in banks outsourcing IS services. In that banking is an industry with ? long history of outsourcing, ? strength of ? finding in ? present research is worth re-emphasizing.

As predicted, bank managers were apparently cognizant of ? need to factor in marketplace “friction” in assessing ? returns they would receive from IS outsourcing. Bank managers were apparently not overconfident in ? returns they would receive from IS outsourcing and their decisions were tempered somewhat by ? extent of transaction costs associated with outsourcing. They were aware, for example, that organizations must pay ? price to negotiate ? good contract and to monitor ? ongoing actions of their systems integrators.

Financial slack findings Based on ? results of ? data analysis, ? sourcing decision is not readily explained by ? organization’s sensitivity to fluctuations in financial slack. In spite of ? fact that diverse forms of theory-based measurement were utilized, ? latent construct was not significant at ? . 05 levels. With ? model size of 225, furthermore, statistical power was high (Cohen 1977), which means that it is unlikely that these results are simply ? statistical artefact.

As discussed in an earlier research (Lacity and Hirschheim 1993) and in ? report written by ? General Accounting Office (GAO 1992), IT vendors often offer financial packages whose net present value provide organizations with immediate cash infusions and postpone payments until ? end of ? contract. Based on such accounts, it has been thought that this type of sourcing arrangement enables banks to maintain capital, defer losses on disposing assets, and show an increase in financial value on ? balance sheet.

Though, these arrangements also mean that bank books are artificially inflated and hence do not reflect ? true financial position of ? institutions. ? evidence in this research indicates that banks, in any case, are not regarding outsourcing merely as ? monetary solution for alleviating anxiety generated from declining retained earnings or potential slack available from outside ? organization. This finding suggests that such short term financial solutions (Behara et al. 1995) are not being favoured over decisions based on other economic factors. Organization size findings

? strong relationship between ? control variable, bank size, and outsourcing was not surprising. Smaller organizations have more difficulty generating economies of scale in their IT operations that allows them to justify internal operations (Lacity and Hirschheim 1995). No doubt there are other elements to organization size that would also explain why this relationship appears so consistently as ? factor associated with outsourcing in ? IS literature (Brynjolfsson et al. 1994; Grover et al. 1994). Organization size, for example, clearly has roots in social characteristics related to IT sourcing (Ang and Cummings 1997).

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