Stock markets have reacted favorably to firms who announced their implementation of E-business projects for commercial exploitation. Those that outsourced E-business projects in order to achieve swift execution also achieved abnormal positive returns. Contrary to expectations, outsourcing E-business projects with high task complexity also led to positive results. We analyzed the process and found that these three factors explained more than 20% of the variance in abnormal returns. The results were obtained from an event study of 96 E-business-related announcements, including those made by firms in the S&P500 index during 1999–2002. This paper contains information that should therefore help firms identify E-business projects for outsourcing.
E-business projects have generated significant top-management attention recently. Indeed, outsourcing such projects has required management attention to ensure their success, because of their dynamic environments [8], [10] and [33]. However, no research has been reported on this in the literature. Our work used E-business outsourcing announcements as the data used to investigate market reactions.
IS researchers have studied outsourcing from multiple perspectives to understand the contractual aspects and their consequences [23] and [49]. A number focused on contingency factors that have a bearing on outsourcing a particular IT asset; the factors have included internal IT cost structure, internal IT performance, production and transaction costs, firm cash needs, characteristics of IT portfolio to be sourced, internal IT capability factors, etc. [27], [32], [35], [42], [50] and [53]. While some studies have utilized objective firm-level data and metrics, most involved either a case study or a survey. Further, in almost all, the dependent variable of interest was the extent of outsourcing (e.g., in terms of ratio of outsourcing expenditure and total IT expenditure).
However, while the studies attempted to overcome response bias, key informant approaches have suffered from limitations. Respondents may have provided reasons that they believe to be the drivers of outsourcing and considered to be socially-acceptable reasons, but the arguments may have little to do with the real decision making process. Further, whether outsourcing is or is not appropriate cannot be discerned until the firm performance is studied in the context of the contingency factors of interest.
This paper adds to the research published in Information and Management by using financial metrics to evaluate IS decisions. For example, in [38], it was found that changes in textual data in financial reports indicated a stock change in the following quarter, while [17] presented a financial model to analyze IT investments and modeled their impacts on firm value after considering risk and industry or company events. Also [16] examined whether the market recognized competitive advantages earned from IT investments. Such studies are becoming common in the literature; e.g., the effect of CIO changes [12], IT infrastructure investments, IT investments [18] and [28], ERP systems [26] and E-commerce.
We have presented the results of an event study that examined stock market reactions to characteristics of publicly announced E-business projects. Table 5 summarizes the hypotheses and corresponding findings.Our paper first addressed the question:
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Do stock markets recognize the role of the drivers of E-business outsourcing decisions and reward firms that make appropriate outsourcing choices with positive abnormal returns?
We used cumulative abnormal returns as a dependent variable to provide an objective firm-level performance measure to evaluate appropriateness of the outsourcing decision.
The literature on corporate announcements suggested that stock markets react to certain categories of strategic announcements more than others. For example, yearly many firms spend large amounts to change their names. These changes require significant top-management attention and effort and are intended to provide better signals to investors about the primary business activities of the company. However, in a study of the 147 name changes reported in the Wall Street Journal from 1979 to 1987, it was found that the announcement yielded insignificant positive returns [29] though another study found that name changes yielded positive abnormal returns.
We also studied, for the first time, three outsourcing contingency factors – project strategic intent, project execution swiftness and project task complexity – in the context of E-business outsourcing. We found that stock markets reacted positively to E-business outsourcing announcements with the strategic intent of commercial exploitation. Also, such projects that were planned to be swiftly executed to overcome the potential risks of business requirements obsolescence and technology change and obsolescence triggered positive stock market reactions. Finally, outsourced E-business projects with high task complexity achieved positive abnormal returns. These contingency factors explained more than 20% of the variance in abnormal returns, which is very satisfactory.
One of our most important contributions was the identification of stock market rewards to E-business outsourcing decisions when projects need swift execution; our results showed that stock markets reward firms for outsourcing when it is necessary. The contradictory results for task complexity suggest that stock markets are not influenced by concerns over coordination.
It is necessary to point out the limitations of the research. The first is associated with the use of stock market reactions as measures of the business impact of E-business initiatives. Though our data sample includes pre- and post-bubble period announcements, stock markets were volatile during the period of data collection. Also, the novelty of electronic commerce led to significantly high valuations for E-business initiatives then.
The results have important implications for IS managers. They provide a basis for deciding upon the kinds of electronic commerce projects likely to increase the firm's value and also to help decide whether to outsource them. We have provided support for recent suggestions that IS managers should focus their attention on identifying and implementing bread and butter E-business projects that bring measurable financial returns. Good projects directly impact the business by increasing revenue or by developing and marketing new services that can generate new revenue streams.
