INFORMATION TECHNOLOGY OUTSOURCING AS ORGANIZATIONAL SENSE- MAKING IN CITY GOVERNMENTS

INFORMATION TECHNOLOGY OUTSOURCING AS ORGANIZATIONAL SENSE- MAKING IN CITY GOVERNMENTS YONG-MI KIM Information Technology and Operations Management Florida Atlantic University Boca Raton, FL 33431 SHAILA MIRANDA Florida Atlantic University ABSTRACT This article examines effects of city governments asset-specificity concerns, strategic concerns, and relational concerns on their information technology outsourcing expenditures. We argue that sense-making differs across types of city governments, creating different patterns of influence of government concerns on IT outsourcing expenditure. Empirical findings based on a survey of 214 city governments support these claims. INTRODUCTION This paper seeks to understand the factors that influence city governments outsourcing of IT. Specifically, we contrast economic influences against relational influences in cities outsourcing expenditures. In studying city governments, we also find two distinct and qualitatively different types of governments: the council-manager type and the mayor-council type. These government types emphasize different managerial perspectives. The council-manager type of city government has typically been found to be more economically efficient than mayor-council types (e.g., Ferris and Graddy, 1991). The mayor-council type of the city government, by contrast, retains a traditional democratic governmental type, based on division of power. We argue that sense-making frames outsourcing in city government. It influences how managers and mayors interpret the internal and external environment and make outsourcing decisions. Therefore, this paper addresses the following questions: First, how does the sense-making surrounding information technology outsourcing influence outsourcing expenditures? Second, how does sense-making differ across mayor-council and council-manager types of city governments? In order to answer these questions, we explore the notion of organizational sensemaking. We then report on a survey of outsourcing in city governments. OUTSOURCING AS ORGANIZATIONAL SENSE-MAKING Outsourcing may be viewed as the culmination of organizational sense-making. Sense-making is an adaptive process through which organizations scan and interpret their environment, and take action (Daft and Weick, 1984). Informational inputs, acquired through environmental scanning, are the first step in organizational sense-making. For example, during the Great Depression and the two World Wars, government needed to redistribute all resources so as to help the economy recover and to win the wars. After those events, the continued growth of government was Academy of Management Proceedings 2001 TIM: D1

unwarranted. As a result, government was criticized for being slow to respond to citizens needs and spending too much in delivering services. Subsequently, government scanned the environment (criticism), culminating in President Eisenhower s announcement of privatization at the federal level in 1955. Since then, governments at all three levels (city, state, and federal) started to reduce their size by privatizing governmental services. As a result, outsourcing became popular in city governments. Governments also addressed efficiency pressures through investments in information technology. In utilizing information technology to increase productivity and decrease production costs, governments needed cutting-edge technology and highly trained IT experts. However, given governments budgetary constraints, this is a difficult undertaking. Thus, governments outsource their asset-specific IT functions in order to gain access to leading-edge technology, within their budgetary constraints. We see evidence of the outsourcing of asset-specific functions in the private sector too (e.g., Saunders et al., 1997; Lacity and Hirschheim, 1993). Such outsourcing represents a contradiction of transaction cost theory (Williamson, 1996). In anticipation of provider opportunism, outsourcing asset-specific functions may engender higher monitoring costs. However, outsourcing can reduce production costs (Ang and Straub, 1998). Outsourcing assetspecific functions provides access cutting-edge technology and skilled personnel (Grover et al., 1996). Since these resources are difficult to come by, yet critical in city governments, high asset-specificity is likely to encourage outsourcing decisions, rather than discourage it as would otherwise be indicated by transaction cost theory. Hypothesis 1: Asset-specificity concerns will have a positive impact on IT outsourcing. Traditionally, the outsourcing of strategically-important IT functions has been viewed as a poor strategic choice that compromises the possibility of leveraging IT for strategic advantage (e.g., Lacity, Willcocks, and Feeny, 1996). More recently, researchers suggest that outsourcing may actually yield strategic advantage by permitting outsourcers to leverage providers knowledge capabilities (Kavan, Saunders, and Nelson, 1999; Quinn, 1999). Outsourcing is also strategically advantageous in that it permits the outsourcer to focus on its core competencies. This desire to focus on core competencies was a reason for Kodak s landmark decision to outsource. Hypothesis 2: Strategic concerns will have a positive impact on IT outsourcing. Transaction cost theory also falls short in that it fails to consider relationships (Ang and Straub, 1998). Outsourcing decisions are not based on economically-rational logic alone. Rather, these decisions are made by individuals embedded in networks of interpersonal relationships. We see the importance of outsourcer relationships within a social network in Loh and Venkatraman s (1992) finding that the adoption of outsourcing diffuses within a social system. Outsourcerprovider relationships are a key predictor of outsourcing success (Lee and Kim, 1999). Outsourcing impinges on firms relationships with their stockholders, as evinced by favourable stockmarket reactions to outsourcing announcements (Loh and Venkatraman, 1992). Relationships are particularly salient in city governments. City governments represent dense Academy of Management Proceedings 2001 TIM: D2

networks of socio-political relationships. Consequently, we can expect these relationships to play a particularly significant role in outsourcing decisions. The nature of the impact of relationships on outsourcing decisions is likely to be different across the public and private sectors, however. In the private sector, information from peers, attitudes towards providers, or concerns about stakeholders are likely to have direct impacts on outsourcing expenditure. Given the more complex and political nature of relationships in the public sector, pressures from individual stakeholders to outsource are liable to have the converse effect on outsourcing expenditures given politicians need for consensus. Thus, while favourable stakeholder attitudes toward outsourcing may promote outsourcing expenditure in the private sector, we can expect them to have a negative impact on outsourcing in the public sector. Hypothesis 3: Relational concerns will have a negative impact on IT outsourcing. Organizations do not respond to their environment in the same fashion. Different organizations frame events differently based on their organizational structures. Characteristics of the environment combined with management s previous interpretation experience produce these different frames (Daft and Weick, 1984). Although the two different types of city government are influenced by a similar environment, due to managers different view of the environment and the different government structure, the sense-making process is different. Sense-making shapes events into decisions; decision-making clarifies what is happening (Weick and Meader, 1993). Action is crucial for sense-making. Strategic issues do not come in a prepackaged form; rather, decision-makers selectively choose which issues are to be considered important, while ignoring others. Those selected are subsequently interpreted and infused with meaning (Dutton and Jackson, 1987). Depending on the organization, what is out there will also differ. Sense-making can explain how one organization gets there, while other organizations take actions differently. Taking action also impacts on the environment and the structure of the organization. People who act in organizations produce structures and constraints; at the same time, they are also constrained by the structure. These different structures create different frames within which the environment is viewed. The structure of the council-manger type of city government is oriented toward centralizing the power of the council members, and managers are responsible for efficient management of the city government. Managers in this form of government are trained like those in the private sector and the institutional culture is one of efficiency. The reappointment of the mangers is evaluated based upon their ability to manage the city government within the constraints of the city budget. We can therefore understand decision-making in this type of city government based on rational choice models. Hypothesis 4: The effect of asset specificity concerns on IT outsourcing will be higher for manager-type governments than for mayor-type governments. Hypothesis 5: The effect of strategic concerns on IT outsourcing will be higher for manager-type governments than for mayor-type governments. Academy of Management Proceedings 2001 TIM: D3

The structure of the mayor-council government tends to fragment power so that one party cannot exercise complete power over the city management. This type of government tends to have a rich variety of conflict manifested by divergent goals. This conflict may be sustained unless coalitions emerge to link two of the parties (Svara, 1990). In this government structure, the decision to outsource may not lie solely with the mayor because outsourcing governmental services may impact employees jobs, which may be protected by another source of power. Decisions in this form of government therefore reflect the balance among contending forces. Officials in city hall are competitors whose resources, liabilities, and skills at playing the game determine their relative advantage within the governmental process (Svara, 1990). We expect that this diffuse need to balance relationships among political constituencies in the mayor-council type of government will make this government type more resistant to direct pressures to outsource from individual constituencies. In the case of the bureaucraticallyorganized council-manager type of government, by contrast, direct pressures to outsource will not have as negative an effect on outsourcing expenditure. Hypothesis 6: The effect of relational concerns on IT outsourcing will be higher for mayor-type governments than for manager-type governments. RESEARCH METHODS Following a pilot study and a pre-test during which the survey instrument was developed and validated, the instrument was mailed to 800 IT managers in city governments. A total of 232 responses (29%) were collected: 131 (57%) from council-manager type governments and 101 (43%) from mayor-council type governments. Of these, 214 were usable. Outsourcing expenditure was assessed as respondents reports of the percentage of IT budget allocated to outsourcing four activities: data communication and networks, application development, end-user support, and systems planning. Independent variables, i.e., assetspecificity concerns, strategic concerns, and relational concerns, were measured using 7-point Likert scales. Cronbach s alpha was computed for each scale and found to be greater than 0.82. RESULTS We employed the partial least squares (PLS) technique to simultaneously estimate our measurement and path models. In order to validate each of the paths in the model, blindfolding was conducted. A family-wise significance level of 0.01 was adopted. All paths were found to be highly significant (at the 0.001 level). As expected, asset specificity concerns and strategic concerns have a strong positive effect on the extent of IT outsourcing (Beta=0.315 and Beta=0.085 respectively). By contrast, relational concerns negatively impact IT outsourcing (Beta=-0.081). Thus, hypotheses 1, 2, and 3 were supported. The R 2 for the model was 0.114. This was highly significant (F=9.0068, p=0.0000). Thus, asset specificity concerns, strategic concerns, and relational concerns explained a significant amount of the variance in the percentage of IT budget outsourced. Academy of Management Proceedings 2001 TIM: D4

Following our initial analysis of the full model, we conducted two separate tests on the mayortype-government and manager-type-government sub-samples. In order to accurately test the differences in path coefficients across the two models, it was necessary to hold the measurement model constant. To accomplish this, we weighted each indicator with its factor loading derived from our initial analysis to create a composite score for each latent variable. We then re-ran the path model based on the composite data for each government-type sub-sample. Hypotheses 4, 5, and 6 were tested by comparing the beta coefficients across the two models. Once again, all tests were highly significant indicating that the sizes of the effects for managerand mayor-type governments were considerably different. While asset specificity and strategic concerns had a greater impact on the percentage of the IT budget outsourced for manager-type governments, relational concerns had a much greater effect on the outsourcing for mayor-type governments (asset-specificity concerns: t=87.34, p=0.0000; strategic concerns: t=130.23, p=0.0000; relational concerns: t=152.31, p=0.0000). Thus, hypotheses 4, 5, and 6 are supported. DISCUSSION This research examined the IT outsourcing decision from an organizational sense-making perspective. First, we proposed that asset-specificity, strategic, and relational concerns would influence IT outsourcing expenditure. This was indeed the case. However, asset-specificity concerns were found to be the strongest predictor of outsourcing expenditure. This indicates that the greater a city s concern for the asset-specificity of their IT operations, the more they were likely to spend on outsourcing IT functions. This finding, coupled with the positive effect of strategic concerns on outsourcing expenditure, suggests that reduced production costs that ensue from outsourcing may outweigh the potentially higher transaction costs associated with outsourcing asset-specific functions. This finding is consistent with Ang and Straub s (1998) finding that production costs are more important than transaction costs in the outsourcing decision. Our findings also indicate that relational concerns discourage outsourcing. In private industry, we would anticipate a positive influence of relational concerns on outsourcing expenditure. This is similar to the prevailing notion of isomorphism in outsourcing (e.g., Loh and Venkatraman, 1992). However, given the complexity of socio-political networks in city government, we predicted that individual pressures to outsource would actually have a negative effect on outsourcing. Our findings supported this position. Our results indicate that organizations develop different sense-making patterns over time and consequently take different actions. Thus the policy outcomes in city governments should be interpreted as the product of their sense-making activities within the context of their history, environment, and organizational structure. We find this to be a useful perspective in distinguishing between the predictors of IT outsourcing expenditure across types of city governments. Specifically, these differences in sense-making across mayor-council and councilmanager types of city governments resulted in different patterns of influence of asset-specificity, strategic, and relational concerns on IT outsourcing expenditure. Academy of Management Proceedings 2001 TIM: D5

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