Analyzing the impact of a firm s capability on outsourcing success: A process perspective

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1 Available online at Information & Management 45 (2008) Analyzing the impact of a firm s capability on outsourcing success: A process perspective Hyun-Soo Han a,1, Jae-Nam Lee b, *, Yun-Weon Seo c,2 a Department of Information Technology Management, College of Information and Communications, Hanyang University, Seoul, Republic of Korea b Korea University Business School, Anam-Dong, Seongbuk-Gu, Seoul , Republic of Korea c Branch of System Development Marine Corps Headquarters, Republic of Korea Received 27 July 2006; received in revised form 5 June 2007; accepted 9 September 2007 Available online 19 December 2007 Abstract We investigated the effect of a firm s resource capabilities and interaction processes on the success of IT outsourcing. Grounded in available literature on outsourcing relationship and process theory as well as a resource-based view of the IT resource capability, a conceptual model was composed to examine the causal structure of capability, process, and relationship in IT outsourcing. We identified the firm s resource capability factors and, based on the premise that relationship intensity should be affected by the IT outsourcing process, we developed a first-order factor analysis of resource capabilities in the interactions between the outsourcer and provider. Results of empirical testing using responses from 267 IT outsourcing project teams in Korea supported most of our hypotheses. The integration of corporate IT resource and capability theories with social exchange theory distinguishes our research from that of others, who have generally treated these theories separately. # 2007 Elsevier B.V. All rights reserved. Keywords: IT outsourcing; Relationship intensity; Firm s IT capabilities; Interaction process; Outsourcing success 1. Introduction IT outsourcing is a commonly accepted and growing practice [2,4]. But despite the growing trend to outsource, few organizations report success. Thus providers and client organizations are under increasing pressure to exhibit the value of their outsourcing. Improving the quality of the relationship between the organizations has been suggested as the best way to meet this challenge. The interactions between the clients and their service providers often go beyond rules, agreements, and exceptions; they also depend on intangible factors that cannot be easily incorporated into * Corresponding author. Tel.: ; fax: addresses: hshan@hanyang.ac.kr (H.-S. Han), isjnlee@korea.ac.kr (J.-N. Lee), yunweon@ihanyang.ac.kr (Y.-W. Seo). 1 Tel: ; fax: Tel.: ; fax: a contract. Researchers have examined the effects of the interrelationship on success by considering various contextual variables [12,20]. The development of a partnership has also been studied extensively and a number of models have been proposed for building and sustaining the relationships [22,24]. Despite these efforts, there are still unaddressed weaknesses. One is a failure of prior studies to consider the effect of the firm s capabilities. Each organization has a fundamentally different predisposition to exploit resources, evaluate their value, assimilate them, and apply them to final goods. This has been termed the firm s capability [3]. Although organizations may have the same internal and external resources, their performance can be significantly different depending on their capabilities. Most prior studies, especially those which adopted a resource-based view (RBV) [37], explored the identification of necessary IT assets and their direct impact on business /$ see front matter # 2007 Elsevier B.V. All rights reserved. doi: /j.im

2 32 H.-S. Han et al. / Information & Management 45 (2008) performance. However, the literature is rather limited. As indicated in the study of Rivard et al. [33], most RBV studies asserted that IT capability should enhance business functions to achieve performance gains. Ravichandran and Lertwongsatien [32] posited the interrelatedness of a firm s IT resources and capabilities and, suggested that IT capabilities make an impact on a firm s performance by enhancing IT support for core competencies. Most organizations adopt IT outsourcing as an effective means of reducing costs and complementing the firm s IT capability. Due to what we considered as a gap in the research literature, we therefore decided to investigate the effect of the firm s IT-related capabilities on outsourcing relationship and to attempt to determine how resources and capabilities can be exploited to cultivate the IT outsourcing relationship. We hoped to provide managerial insights on the necessary resource capabilities and the process aspect in order to build a successful relationship between the firm and the vendor. Based on the premise that relationship intensity should be affected by IT outsourcing process, we emphasized the role of the IT outsourcing interaction process as an intervening variable linking the causal relationship between corporate resource capabilities and relationship intensity. The interaction process was first introduced in the International Marketing and Purchasing (IMP) group s Interaction Model [14]; it characterizes the development of a relationship as a process rather than as the result of focal elements. The model focuses on the factors which lead to closer relationships between the buyers and sellers. The importance of both the interaction process and relationship intensity has been reported in various disciplines [10,18]. 2. Theoretical framework 2.1. The research model A process model does not conceive of outcomes as dependent variables. Instead, they are the final result, for instance, of a developmental sequence. Process theory implies a set of sequential, necessary conditions [25]. It ensures that the set of outcomes do not occur unless the specified set of events in a chain is fulfilled. If some events necessary for the outcome fail to occur, all or some desired outcomes may not be achieved [36]. Today, many researchers advocate a process-assessment of IT business values arguing that the first-order impact of IT investment is realized by improving business processes, inter-process linkages, or both, resulting in improved performance. In addition, Melville et al. [27] suggested that IT and the complementary resources of the firm affected the effectiveness of business processes, with consequently improved organizational performance. We adopted a process theory approach to attempt to explain the impact of the client firm s resource capability on outsourcing success. In our model, the interaction process is introduced as an intervening construct on the causal chain between the firm s resource capability and relationship intensity. The Interaction model was developed by the European IMP group [38]. It views interactions between customers and suppliers as a series of short-term social interactions influenced by the long-term business process, reflecting the developmental aspects of relationships. The model delineates the exchange elements that may be regularized over time to improve cooperation between the parties. Our model thus emphasized three basic processes, exchange, communication, and cooperation, in the development of a close relationship between the organizations. The model showed how to enhance understanding of the core operational characteristics affecting IT outsourcing relationship. Drawing on previous work on resource capability, inter-organizational relationships, and process theory, our model was developed, as shown in Fig. 1; the structure of resource capability is an antecedent of process, the process impact on process improvement, and the improvement affect performance. It demonstrates the subsequent causal relationships among the firm s capability, interaction process, relationship intensity, and outsourcing success The selection of variables Variables for firm s capability Variables in the client firm s resource capability were extracted from existing literature, as shown in Table 1. Most of the studies had adopted the RBV (which provides a Fig. 1. Research model.

3 H.-S. Han et al. / Information & Management 45 (2008) Table 1 IT related resource capability of the Firm Studies Key Variables Research Types Bassellier et al. Knowledge of technology applications and system development, knowledge of Empirical (IT competence) management of IT, access to IT knowledge IT experience, experience in IT projects and in management of IT Bharadwaj IT Infrastructure, human IT resources, IT-enabled intangibles Conceptual Feeny and Willcocks Nine Core IT Capabilities: leadership, business systems thinking, relationship building, Conceptual architecture planning, making technology work, informed buying, contract facilitation, contract monitoring, vendor development Lacity et al. Vendor management Conceptual Lee et al. Technical specialties knowledge, technology management knowledge, business Empirical functional knowledge, interpersonal and management skill Melville et al. Technological IT resources, IT personnel resources Conceptual (IT value) Mata et al. Proprietary technology, technical IT skill, managerial IT skill, access to capital Empirical Ross et al. IT human resources asset, technology asset, relationship asset Conceptual theoretical foundation to explain the firm s capability and resources) as a theoretical lens. The variables include the most relevant constructs to represent a firm s IT-related capabilities organized from different perspectives. One research stream defined a firm s core IT-related assets as associated with business competitiveness; Ross et al. [34] defined a firm s core IT assets as technology, human resources, and relationship. Similarly, Bharadwaj [8] suggested three firm-specific IT resources (IT infrastructure, human IT resources, and IT-enabled intangibles) as organizational IT-related capabilities that influence performance. In addition, Mata et al. s finding [26] indicated that managerial IT skill was only one influential factor among the four critical IT-related resource capabilities that providing sustained competitive advantage. Bassellier et al. [5,6] defined IT competence with two dimensions (explicit and tacit) from the business manager s perspective. Feeny and Willcocks [11] suggested nine core IS capabilities, including vendor development, and organized them into three dimensions such as business and IT vision, design of IT architecture, and delivery of IS services. Lacity et al. [19] emphasized vendor management capability, while Lee et al. [21] suggested technical and managerial expertise necessary to cope with a new business environment. To investigate the relevant firm s capabilities that have an impact on the process of outsourcing in influencing a relationship with a vendor, three major variables are identified with reference to the RBV studies organized in Table 1. The variables are IT capability, consisting of technical IT and managerial IT capabilities, organizational relationship capability, and vendor management capability. Instead of identifying new constructs, we extracted the variables from the existing RBV theoretical literature to understand the relevant capabilities affecting the process of cultivating a relationship with a vendor in IT outsourcing. More specifically, the three variables of the firm s capability are organized as follows: 1. To leverage the outsourcing vendor s technical expertise, the client firm s (technical and managerial) IT capability is important. Technical IT capability involves technical knowledge and skills needed to develop applications, while managerial IT capability implies knowledge of where and how IT is deployed effectively and profitably to meet strategic business objectives. We assumed that the client firm will also require IT capabilities to be effective in monitoring a vendor s work. 2. Organizational relationship capability (the ability to coordinate between IT and business groups) is needed to allow the business to engage effectively in IT issues [7]. To enhance a firm s business performance, IT must be exploited. 3. Vendor management capability (looking beyond an existing contractual arrangement to explore long-term relations with suppliers) can create a win win situation. This should facilitate the vendor s participation in the IT outsourcing. The management s coordination of the vendor s work should induce the vendor s proactive collaboration resulting in better performance [35] Variables for the interaction process Our interaction process was drawn from the IMP group s Interaction Model. Metcalf et al. [28] theorized buyer seller relationships based on this Model as a way to suggest the constructs of social and information exchange as the determinants of cooperation and adaptation. Adopting the same constructs, Kalafatis [16] applied it to examine the relationship-building structures at different levels of the traditional distribution channel. Mohr and Spekman [29] included macro-level constructs of communication behavior and conflict resolution as determinants of a successful partnership. One of the studies performed by Lee and Kim [23] classified partnership-related factors into the determinants of partnership quality and the attributes of the partnership itself. The determinants of partnership quality included communication, information sharing, participation, cooperation, knowledge sharing, joint action, participation, and conflict resolution. Kern and Willcocks [17] also formalized the interaction process in the context of operationalizing the process of an IToutsourcing relationship. By combining the results of these studies, we selected three major variables to represent the degree of the interaction:

4 34 H.-S. Han et al. / Information & Management 45 (2008) information sharing the extent to which critical and proprietary information is communicated to the partners; communication quality the accuracy, timeliness, adequacy, and credibility of the information exchanged [15]; and collaborative participation extent of understanding the firm s core business process management by the vendor and appreciation of the vendor s IT expertise for managerial problem solving by the client. Thus, partners should engage in joint planning goal setting and issue resolution Variables for relationship intensity Relationship intensity has been termed: closeness, relationship strength and quality, etc. The variables employed to measure the level of relationship intensity include measures of trust, dependence, commitment, coordination, benefit and risk share, etc. [30]. Bove and Johnson [9] proposed two key attributes of relationship intensity, trust and commitment. We adopted these attributes as the main constructs of relationship intensity Outsourcing performance Outsourcing success was generally analyzed from strategic, technological, and economic perspectives. Lee and Kim added the user s perception of outsourcing performance, such as reliability, relevancy, timeliness, accuracy, currency, and completeness of information, but we focused mainly on business rather than user satisfaction with IT outsourcing in this study Research hypotheses Hypotheses between client firm s capability and interaction process Rapid environmental changes are now compelling firms to develop more diverse technical IT skills. Though a firm s outsourcing could reduce the burden of maintaining a broad IT capability, the ability of its IT personnel should effectively leverage the competence of the vendor firm. If a firm has a clear IT standardization program, then it would be in a better position to communicate with its vendors. The IT personnel s managerial ability should guide the vendor outsourcing effort in a performance-enhancing direction. Since the success of IT outsourcing can be achieved through business performance, the IT personnel s in-depth understanding of the firm s business needs and requirements can encourage a vendor to engage in information sharing and communication activities. This will also increase the level of collaborative participation between the client and the vendor. Consequently, the first set of hypotheses is: H1-1. The firm s IT capability positively influences the degree of information sharing. H1-2. The firm s IT capability positively influences the degree of communication quality. H1-3. The firm s IT capability positively influences the degree of collaborative participation. The importance of a cooperative relationship between the IT department and business groups has been addressed in the previous studies. A cooperative relationship would positively influence a business group s perception that the IT personnel understand business goals and concerns. Indeed, a cooperative relationship can encourage a business group to engage more actively in IT projects. Thus, a closer interorganizational relationship will facilitate more information sharing for the purpose of reflecting business needs accurately. Furthermore, sensitive information can be shared, leading to a higher communication quality and more collaborative participation. This leads to three hypotheses: H1-4. The firm s organizational relationship capability positively influences the degree of information sharing. H1-5. The firm s organizational relationship capability positively influences the degree of communication quality. H1-6. The firm s organizational relationship capability positively influences the degree of collaborative participation. Vendor management ability is one of the core capabilities that facilitate outsourcing. In practice, it helps vendors implement their services to satisfy all user needs. In addition, formalized outsourcing management processes and work evaluation principles are required for better communication and information sharing. Moreover, the outsourcing will be more reliable and qualified to share corporate information. Thus a good relationship, cultivated by effective vendor management, will create a win win situation for future potential benefits. Accordingly, effective vendor management may influence the degree of interaction. From this, the following hypotheses were generated: H1-7. The firm s vendor management capability positively influences the degree of information sharing. H1-8. The firm s vendor management capability positively influences the degree of communication quality. H1-9. The firm s vendor management capability positively influences the degree of collaborative participation Hypotheses between the interaction process and relationship intensity Fundamental information sharing occurs through contractually agreed upon communications, such as regular meetings and exchanges. Both parties are able to act more effectively by sharing information and being knowledgeable partners. Thus, relationship intensity can create a compe-

5 H.-S. Han et al. / Information & Management 45 (2008) titive advantage through strategic sharing of key information. Thus, we made the following hypotheses: H2-1. Information sharing positively influences the degree of trust. H2-2. Information sharing positively influences the degree of commitment. Communication involves both formal and informal sharing of information between parties. However, communication quality involves the accuracy, timeliness, adequacy, and credibility of the exchange. Therefore, the following hypotheses were proposed: H2-3. Communication quality positively influences the degree of trust. H2-4. Communication quality positively influences the degree of commitment. Collaborative participation allows partners to establish mutual expectations and specifications of cooperative effort. Therefore, it plays a significant role in enhancing the sustainability of their relationship over time. Moreover, effective working interactions are marked by collaborative actions directed at mutual objectives, thereby leading to higher relationship intensity. This is expressed in the hypotheses: H2-5. Collaborative participation positively influences the degree of trust. H2-6. Collaborative participation positively influences the degree of commitment Hypotheses between relationship intensity and outsourcing success Trust assumes that a partner will perform an action resulting in positive outcomes and not engage in unexpected behavior. Commitment is a mutual belief that an ongoing relationship with a partner is important enough to warrant maintenance. Thus, relationship intensity is associated with outsourcing success. These imperatives provide the foundation for two hypotheses: H3-1. Trust positively influences the degree of outsourcing success. H3-2. Commitment positively influences the degree of outsourcing success. 3. Research methodology We designed our study to explore the impact of a firm s capability on outsourcing success and to examine its effect on the relationship between the client and vendor. We drew upon process theory to develop a research framework. The capability variables were intended to be those that affected the outsourcing success instead of the overall corporate result. Hence, the capability variables had to be measured at the project level of the organization. The study was conducted with outsourcing project teams in Korea, instead of firm level analysis. The performance of the outsourcing was accurately measured on a project basis. In general, the partnership between the client and vendor emerges at the project level. A field survey method was conducted to test the proposed model and hypotheses. Project samples were selected randomly among the ongoing projects at the time that the data were collected. We designed a complex questionnaire using constructs that had already been used and validated by prior researchers Measures We developed the survey instrument by considering prior studies with similar concepts to ours. Each of the multiitems was measured using a five-point Likert scale with items ranging from strongly disagree to strongly agree. The survey instrument used either existing measures or converted the definitions of the constructs into a questionnaire format. We introduced three variables to investigate a firm s outsourcing success: IT capability (technical IT and managerial IT), organizational relationship capability, and vendor management capability. These variables were measured by using previous empirical studies in RBV-based literature; e.g., works of Lee et al., Bassellier et al., and Feeny and Willcocks. As the unit of analysis was an outsourced project, the items to measure the organizational relationship capability included the IT department s relationship with a business group (the firm s senior management, business department, and end-users). Three variables were used to reflect the interaction process level. The measures were developed by revising the instruments of Mohr and Spekman and Lee and Kim to assess the extent of these variables. The measures of the relationship intensity were based on commitment-trust theory and relationship theory. Finally, as the sample projects were selected from among ongoing projects, outsourcing success was measured in terms of the strategic, economic, and technological outsourcing gains. The survey instrument to measure the outsourcing success included: core business concentration, IT competence enhancement, and economies of scale in resource utilization. The items related to business value were not included because the realization of business value from IT outsourcing requires a large amount of system usage after the project has been completed. The original questionnaire consisted of 50 items: 20 items determined the client firm s resource capability variables, with 13 items for the interaction process, 8 items on

6 36 H.-S. Han et al. / Information & Management 45 (2008) relationship intensity, and 9 items on outsourcing success measurement Data collection and sample characteristics Two pilot studies were conducted before the main survey. First, the initial version of the questionnaire was pre-tested by faculty members, managers of IT organizations, and IT staff members. Three faculty members who had previous experience in IT service industry were asked to review the questionnaire, and ten industry people including managers of IT organizations and staff members participated in the pre-testing process. They reviewed each item to improve the content and construct validities. The feedbacks from the faculty members were received through face-to-face interview. Since the participants from the industry were located in different region, the initial version of the questionnaire was sent to them via and feedbacks were received via phone. Second, five major IT outsourcing firms in Korea were selected. Those five firms were representatives of Korean IT outsourcing market, and they had sufficient number of IT outsourcing projects covering diverse industries and technical functional areas. The purpose of this step was to refine the question items that needed considerable effort and time to answer. The research model and variables were refined using results from these two pilot testing results. After this step, we had 45 final items left in our survey, as shown in the Appendix A; five items that were discarded during the reliability and validity tests (four items from the client firm s resource capability and one item from outsourcing success). Reliability testing and convergent validity results were reported in Table 3. For the main survey, 400 outsourcing projects were selected from the five IT firms project lists. The process of sampling data for the IT outsourcing projects was administered by the senior executives of the five IT firms to ensure randomness of the samples. Each project team was selected from separate organizational units to avoid multiple project selections from a single division. Of the 400 distributed surveys, 282 responses were received, representing a 70.5% response rate. Out of the returned questionnaires, 15 had to be discarded due to incompleteness. Thus, 267 questionnaires could be used in our final analysis. In the process of data gathering, we adopted a multiple informant approach to mitigate common method bias that is prevalent in survey-based empirical research [31]. Project managers were first asked to answer the questions that measured the firm s resource capability and IT outsourcing success. The respondents were then selected by considering the unit of analysis and who could accurately assess the level of the variables for the particular project. As such, one of the project team members considered most knowledgeable about a party was asked to answer the relevant questionnaire items. Questionnaires were then finally forwarded to the team members for completion of questions on the interaction process and relationship intensity measurement. The profile of IT outsourcing project samples used for hypotheses testing is shown in Table 2. The ranges of contract period varied from less than one year (65 responses, 24%) to over five years (seven responses, 3%). The frequency distribution of projects on an industry basis was fairly even. In addition, the IT outsourcing tasks included various types of IT outsourcing, such as application development (57%), application maintenance (33%), network service (4.5%), and IT consulting (1.9%). 4. Data analysis and results 4.1. Reliability and validity of the measures In order to analyze the data collected from the main survey, we adopted a two-stage analysis for structural equation modeling in which the measurement model was first estimated. Subsequently, a process much like factor analysis was used, with the measurement model fixed in the second stage when the structural model was estimated [1]. Our rationale for this was that an accurate representation of the reliability of the indicators was best accomplished in two stages to avoid the interaction of the measurement and the structural models. Confirmatory factor analysis was first conducted on each construct independently to validate the scale, since each variable was measured by multi-item constructs. Second, an overall confirmatory factor analysis was conducted on all items. To validate the measurement model, three types of validity were assessed: content validity, convergent validity, Table 2 The profile of sample projects Contract period Budget (unit: 1000 USD) Industry Outsourcing type 1 year less under 14 Manufacturing 38 Application development years Government/public years Banking/finance 25 Application maintenance years Construction 15 5 years more more 69 Transport/warehousing 34 Network 12 Service 45 IT Consulting 5 Others 25 Others 8 Total

7 H.-S. Han et al. / Information & Management 45 (2008) Table 3 Reliability and validity Measure Items Standard loading Composite reliability AVE Initial Final IT capability Technical IT , 0.78, Managerial IT , 0.77, 0.71, 0.79 Organizational relationship capability , 0.78, 0.81, Vendor management capability , 0.82, 0.86, 0.86, Communication quality , 0.85, 0.87, Information sharing , 0.72, 0.74, Collaborative participation , 0.80, 0.76, 0.78, Trust , 0.77, 0.77, Commitment , 0.78, 0.83, Outsourcing success , 0.79, 0.80, 0.70, 0.77, 0.85, 0.82, and discriminant validity of the instrument. The content validity was first established by ensuring that the measurement items were consistent with results in the literature, interviews with academic researchers, and pilot-testing. Then, two more types of validity were assessed, namely, convergent validity and discriminant validity. Convergent validity was assessed by looking at the composite reliability and the average variance extracted (AVE) from the measures [13]. The value of composite reliability ranged from 0.84 to 0.92 as shown in Table 3. It is higher than the 0.7 threshold commonly used for acceptable reliability. The AVE values for our measurements ranged from 0.57 to 0.71 while the threshold for acceptable convergent validity is 0.5. Finally, discriminant validity was assessed by examining the square root of the average variance extracted. The square root of the AVE for each construct was greater than the correlations between all other constructs. This is shown in Table Overall model fit We selected a confirmatory approach instead of exploratory approaches such as regression analysis. This meant that the proposed model in our study was analyzed in terms of maximum likelihood estimates using LISREL 8.54 with the sample correlation matrix for all indicators as the input matrix. Because a theory-based approach to structural equation modeling is necessary, it is suitable for testing a theoretically derived model as is the case in our study. Before performing the analysis, it was necessary to determine whether key statistical assumptions, such as the linearity of the relationships and the normal distribution of the data, had been met. Linearity was analyzed using the scatter plot method, which revealed apparent linearity. The normal distribution was analyzed by the derivation of a normal probability plot and the evaluation of kurtosis and skewness. The results were acceptable, and the data were significant at the 0.05 level. Next, we assessed the overall fit of the model to ensure that it was an adequate representation of the entire set of causal relationships. Three types of goodness-of-fit measurements were examined: absolute fit measures, incremental fit measures, and parsimonious fit measures. The results of the goodness-of-fit measurements for SEM are displayed in Table 5. To assess the absolute fit of the model, we first examined the likelihood ratio Chi-square (x 2 ). The Chi-square result was non-significant (x 2 ð826þ ¼ 1619, p > 0.05), which indicates that the actual and predicted matrices are not statistically different. As the statistical nonsignificance does not guarantee the correct model, we assessed the goodness-of-fit index (GFI), root mean square residual (RMSR), and root mean square error of approximation (RMSEA). The GFI was 0.81, which is less than the Table 4 Correlations between constructs Constructs IT capability (1) 0.75 Organizational relationship capability (2) Vendor management capability (3) Communication quality (4) Information sharing (5) Collaborative participation (6) Trust (7) Commitment (8) Outsourcing success (9) The elements on the diagonal represent the square roots of the average variance extracted (AVE).

8 38 H.-S. Han et al. / Information & Management 45 (2008) Table 5 Indices of model fit Measures Recommended level Research model Absolute fit measures Chi-square/d.f. ( p-value) p > /826 ( p > 0.05) Goodness of fit index (GFI) Higher (>0.9) 0.81 Root mean square residual (RMSR) Lower 0.05 Root mean square error of approximation (RMSEA) Incremental fit measures Non-normed fit index (NNFI) > Adjusted goodness of fit index (AGFI) > Normed fit index (NFI) > Parsimonious fit measures Normed Chi-square / Comparative fit index (CFI) Maximum value 0.98 commonly accepted threshold level of 0.9. Meanwhile, the RMSEA value was 0.06 which is in the recommended range between 0.05 and Incremental fit measures compare the proposed model to some baseline model. We assessed three indices of nonnormed fit index (NNFI), adjusted goodness of fit index (AGFI), and normed fit index (NFI). The results were 0.98, 0.75, and 0.95, respectively. Among these, the AGFI was below the commonly accepted threshold level of 0.9, and the other indices were above their respective recommended levels. Finally, parsimonious fit measures, to diagnose whether or not a model fit has been achieved by overfitting the data with too many coefficients, were assessed. The normed Chi-square (1.95) for the model was found to be within acceptable threshold limits ( /3.0) and the Comparative Fit Index (0.98) indicated a good fit. Thus, the overall model fit measures indicated that this model is acceptable Testing the hypotheses Path significance and its explanatory power (SMC) were examined with the maximum-likelihood estimates method of LISREL The hypotheses were estimated by calculating the significance of the path coefficients (tvalue). A significance level of p < 0.05 (t > 1.96) was used. Overall, the results indicated that a client firm s resource capability positively influenced the interaction process. The impact of the organizational relationship capability on information sharing (H1-4), communication quality (H1-5), and collaborative participation (H1-6) was significant. Also, the results indicated statistically positive effects of vendor management capability on information sharing (H1-7), communication quality (H1-8), and collaborative participation (H1-9). One exceptional result, contrary to our reasoning, was the non-significant relationship between IT capability and the interaction process. Statistical testing results did not indicate any positive impact of IT capability on the three constructs of the interaction process (H1-1, H1-2, and H1-3). The constructs of the interaction process consisting of information sharing, communication quality, and collaborative participation were significantly related to trust and commitment (H2-1 H2-6). Finally, the constructs of trust and commitment had significant positive impacts on outsourcing success (H3-1 and H3-2). In addition, there was a significant indirect effect of information sharing and communication quality on outsourcing success, which showed that the interaction processes and relationship intensity were meaningful intervening variables for outsourcing success. The firstorder impact of resource capability on the interaction processes and subsequent relationship intensity was also confirmed by the significant indirect effects of both capability and relationship intensity. These results are summarized and presented in Fig. 2 and Table Discussion and implications Our study contributed to the development of the relationship model that encompasses the effect of a client firm s resource capability on outsourcing success through the interaction process and relationship intensity. By adopting process theory, the resource-based firm s capability regarding outsourcing relationship was evaluated. The model provided a paradigm for understanding outsourcing relationships and how they could be nurtured and managed to ensure outsourcing success. This result may be the first empirical test to investigate the impact of a client firm s resource capability on an outsourcing relationship. Using an RBV-based firm s IT resource capability research stream, our study showed the importance of a firm s capabilities in determining IT outsourcing success, outsourcing relationship, and what its necessary processes are to develop a successful relationship. Most of the hypothesized relationships in the model have strong support from the gathered data, except for the relationship between IT capability and the interaction process. Specifically, the empirical testing results indicate

9 H.-S. Han et al. / Information & Management 45 (2008) Fig. 2. Results of the model analysis using LISREL. Table 6 Results of hypothesis testing Paths Hypothesis Estimate t-value Results Direct effects IT capability! information sharing H Reject IT capability! communication quality H Reject IT capability! collaborative participation H Reject Organizational relationship capability! information sharing H *** Support Organizational relationship capability! communication quality H *** Support Organizational relationship capability! collaborative participation H *** Support Vendor management capability! information sharing H ** Support Vendor management capability! communication qualtiy H *** Support Vendor management capability! collaborative participation H *** Support Information sharing! trust H *** Support Information sharing! commitment H ** Support Communication quality! trust H *** Support Communication quality! commitment H ** Support Collaborative participation! trust H ** Support Collaborative participation! commitment H *** Support Trust! success H *** Support Commitment! success H *** Support Paths Estimate t-value Results Indirect effects IT capability! success Organizational relationship capability! success *** Vendor management capability! success *** IT capability! Trust Organizational relationship capability! trust *** Vendor management capability! trust *** IT capability! commitment Organizational relationship capability! commitment *** Vendor management capability! commitment *** Information sharing! success * Communication quality! success *** Collaborative participation! success *** *p < 0.10, **p < 0.05 and ***p < 0.01.

10 40 H.-S. Han et al. / Information & Management 45 (2008) that organizational relationship capability and vendor management capability are key antecedents that influence the degree of outsourcing interaction process. All associations between the three variables of the interaction process (i.e., information sharing, communication quality, and collaborative participation) and relationship intensity (trust and commitment) have strong statistical significance. Finally, the relationship intensity has strongly influenced the success of outsourcing. Though the survey respondents and sites were restricted to Korean organizations, the research findings are meaningful to practitioners and academics. First, the identification of the client firm s capability as an important antecedent of outsourcing success through the interaction process and relationship intensity is critical to the management of an outsourcing relationship. For the manager, our results imply that the client firm s capability, especially organizational relationship capability and vendor management capability, is a key to understanding the process of outsourcing relationship development. Although a formal contract specifies regular progress control meetings and output reviews during the outsourcing project, managerial emphasis should also be placed on interaction processes. Especially in Korea and Asia Pacific countries where an informal contact and relationship is prevalent, in addition to a formal contract, outsourcing success will be dependent on outsourcing relationship development. Finally, the firm should exert considerable efforts in the interaction process with vendors to develop a successful relationship. Fostering a cooperative relationship based on trust and commitment is critical to reaping the benefits from outsourcing. Our study had, however, some limitations. The first is the composition of the sample population lacked randomness; the number of project units was limited and they were selected via personal connections. Second, our study was conducted as a snapshot without considering the dynamic nature of an outsourcing relationship. Ideally, a longitudinal study that tracks an outsourcing relationship over time is needed. Third, the results may have to be carefully interpreted since the population was restricted to Korea. 6. Conclusion As IT outsourcing has become a commonly accepted and growing practice, its scope and extent are continuously expanding. While the literature on outsourcing reveals the social and psychological aspects of an outsourcing relationship, the managerial need to exploit these relationship attributes has been little explored. We identified the interaction process as a key intervening variable that affects relationship intensity and investigated the firm s resource capability variables as first-order antecedents of the interaction process. The results indicated that information sharing, communication quality, and collaborative participation, positively influenced the relationship intensity with outsourcing vendors. Our study has added to knowledge of the outsourcing relationships by adopting process theory and a resource-based view at the same time. The resulting framework is useful in providing a better understanding of how to develop a successful outsourcing relationship with vendors from a managerial perspective. Appendix A Table A1. Table A1 The structure of the survey instrument Constructs IT capability Organizational relationship capability Vendor management capability Question items Technical IT capability 1. We have our scheme for IT standardization 2. We have ability to integrate IT 3. We understand the trend of IT Managerial IT capability 1. We have ability to integrate functional requirement 2. We have ability to leverage IT as strategic core competence 3. We have the blueprint of IT strategy in accordance with business strategy 4. We have ability to continuously update IT strategy according to the change of business environment 1. Our management reflects opinions from IT department in making decisions 2. Our management and IT department communicate well each other 3. IT department and end-users communicate well each other 4. IT department and business departments trust each other 1. We have formalized processes to select vendors 2. We have ability to evaluate the performance of IT outsourcing 3. We have management processes for outsourcing projects 4. We have systematic processes to manage outsourcing contracts with vendors 5. We have systematic processes to control outsourcing vendors

11 H.-S. Han et al. / Information & Management 45 (2008) Table A1 (Continued ) Constructs Question items Communication quality Information sharing Collaborative participation Trust Commitment Outsourcing success 1. The communication between us and our vendor is timely 2. The communication between us and our vendor is accurate 3. The communication between us and our vendor is complete 4. The communication between us and our vendor is credible 1. We and our vendor share each other s own information 2. We and our vendor share business knowledge of core business processes 3. Information provided by us help our vendor s business execution 4. We and our vendor share information regarding business environment and technical change that affect each other s business 1. We and our vendor make decisions for business objective and direction together 2. We and our vendor solve most problems together 3. We and our vendor are willing to comply with each other s request 4. we and our vendor are interested in each other s problems 5. We and our vendor are generally cooperative in conducting business 1. Our vendor makes beneficial decisions to us under any circumstances 2. Our vendor is willing to provide assistance to us without exception 3. Our vendor is sincere at all times 4. We and our vendor have friendly relations 1. We and our vendor do our best to maintain the relationship 2. The relationship between us and our vendor is strengthened 3. We and our vendor always try to keep each other s promises 4. We and our vendor are willing to continue the relationship 1. We have been able to refocus on core business 2. We have enhanced our IT competence 3. We have increased access to skilled personnel 4. We have enhanced economies of scale in human resources 5. We have enhanced economies of scale in technological resources 6. We have increased control of IT expenses 7. We have reduced the risk of technological obsolescence 8. We have increased access to key information technologies References [1] J.C. Anderson, D.W. Gerbing, Structural equation modeling in practice: a review and recommended two-step approach, Psychological Bulletin 103 (3), 1988, pp [2] B.A. Aubert, S. Rivard, M. Party, A transaction cost model of IT outsourcing behavior: some empirical evidence, Information and Management 41 (7), 2004, pp [3] J.B. Barney, Firm resources and sustained competitive advantage, Journal of Management 17 (1), 1991, pp [4] J. Barthelemy, D. Geyer, An empirical investigation of IT outsourcing versus quasi-outsourcing in France and Germany, Information and Management 42 (4), 2005, pp [5] G. Bassellier, I. Benbasat, B.H. Reich, The influence of business managers IT competence on championing IT, Information Systems Research 14 (4), 2003, pp [6] G. Bassellier, B.H. Reich, I. Benbasat, Information technology competence of business managers: a definition and research model, Journal of Management Information System 17 (4), 2001, pp [7] G. Bassellier, I. Benbasat, Business competence of information technology professional: conceptual development and influence on ITbusiness partnership, MIS Quarterly 28 (4), 2004, pp [8] A.S. Bharadwaj, A Resource-based perspective on information technology capability and firm performance: an empirical investigation, MIS Quarterly 24 (1), 2000, pp [9] L.L. Bove, L.W. Johnson, Customer relationships with service personnel: do we measure closeness, quality or strength? Journal of Business Research 54 (3), 2001, pp [10] F.R. Dwyer, P.H. Schurr, S. Oh, Developing buyer seller relationships, Journal of Marketing 51 (2), 1987, pp [11] D.F. Feeny, L.P. Willcocks, Core IT capabilities for exploiting information technology, Sloan Management Review 39 (3), 1998, pp [12] R. Gonzalez, J. Gasco, J. Llopis, Information systems outsourcing: a literature analysis, Informaiton and Management 43 (7), 2006, pp [13] J.F. Hair, R.E. Anderson, R.L. Tatham, W.C. Black, Multivariate Data Analysis, 5th ed., Prentice Hall, Englewood Cliffs, [14] H. Hakansson, International Marketing and Purchasing of Industrial Goods: An Interaction Approach, John Wiley and Sons, Chichester, [15] J.C. Henderson, Plugging into strategic partnerships: the critical IT connection, Sloan Management Review 31 (3), 1990, pp [16] S.P. Kalafatis, Buyer seller relationship along channels of distribution, Industrial Marketing Management 31, 2000, pp [17] T. Kern, L.P. Willcocks, Exploring information technology outsourcing relationship: theory and practice, Journal of Strategic Information Systems 9, 2000, pp [18] T. Kern, L.P. Willcocks, Exploring relationships in information technology outsourcing: the interaction approach, European Journal of Information Systems 11 (1), 2002, pp

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He received a B.S. in Industrial Engineering from Seoul National University, and M.S. in Management Science at Korea Advanced Institute of Science and Technologies (KAIST). He earned his Ph.D. in Management from University of Massachusetts Amherst, USA. Before joining as a faculty member of Hanyang University, he had been with Korean IT service company as a director of the IS consulting service department. His recent research interests include IS management, e-commerce, mobile applications, and telecommunications management. His publications appear in various international and domestic journals including International Journal of Technology Management, International Journal of Satellite Communications and Networking, International Journal of Operations and Quantitative Management, European Journal of Operational Research, Annals of Operations Research, and so on. Jae-Nam Lee is an Assistant Professor in the Business School of Korea University in Seoul, Korea. He was formerly on the faculty of the Department of Information Systems at the City University of Hong Kong. He holds M.S. and Ph.D. degrees in MIS from the Graduate School of Management of the Korea Advanced Institute of Science and Technology (KAIST) in Seoul. His research interests are IT outsourcing, knowledge management, e-commerce, and IT deployment and impacts on organizational performance. His published research articles appear in MIS Quarterly, Information Systems Research, Journal of MIS, Journal of the AIS, Communications of the AIS, IEEE Transactions on Engineering Management, European Journal of Information Systems, Communications of the ACM, Information & Management, and others. He has presented several papers at the ICIS, HICSS, ECIS, DSI and IRMA Conferences, and serves on the editorial boards of Journal of the AIS, Communications of the AIS, Information & Management, and Journal of Global Information Management. Yun-Weon Seo is a major of Republic of Korea Marine Corps. He is currently working for information system development and management at Branch of System Development at Marine Headquarters in Korea. He graduated from Korea Naval Academy and holds M.S. from Army Academy. He received his Ph.D. degree in Information Technology Management from Hanyang University in Seoul, Korea. His research areas are IT outsourcing, project management, information technology management, and electronic commerce.