OUTSOURCING ALIGNMENT WITH BUSINESS STRATEGY AND FIRM PERFORMANCE

As motivations of Information Technology (IT) outsourcing are evolving from a primary focus on cost reduction to an emerging emphasis on improving business performance, it is imperative for organizations to align their outsourcing strategy with their business strategy in order to reap better outsourcing benefits and firm performance. Accordingly, a critical challenge facing organizations is how to effectively organize and manage a well-planned outsourcing strategy in accordance with the direction of a business strategy. With the premise that organizations with the fit between business strategy (i.e., defenders, prospectors, and analyzers) and outsourcing strategy (i.e., independent, arm's length, and embedded strategies) are expected to have better outsourcing benefits and organizational performance than those without such fit, this study seeks to answer the following questions: First, are certain outsourcing strategies more effective than others in particular business strategies?; Second, do their effective alignments positively affect outsourcing benefits and firm performance? To answer these questions, we hypothesize three theoretically feasible sets of internally congruent patterns between business strategy and outsourcing strategy which lead to a greater achievement of outsourcing benefits and firm performance as compared with misfit patterns between them. Empirical data gathered from 136 organizations in Korea that have outsourced their IT functions to external service providers are analyzed. The empirical evidence shows that outsourcing alignment with business strategy significantly influences the outsourcing success and firm performance of defenders, analyzers, and prospectors. The findings have significant implications for further research and practice.