The make-or-buy decision in ICT services: Evidence from luxembourg

In this paper, we seek to analyse the characteristics of firms located in Luxembourg that choose to outsource and/or offshore Information and Communication Technologies (ICT) services. Outsourcing occurs when firms choose to 'buy' rather than 'make' in-house. It involves greater specialisation as firms switch from sourcing inputs internally to sourcing them from external suppliers. Offshoring occurs when firms move production overseas, either its own foreign affiliates or outsourced suppliers. As globalization is a new way firms choose to organize their activities, a broad literature focuses on the outsourcing and the offshoring of activities (Grossman and Helpman, 2005; Marin and Verdier, 2003). Even if a lot of papers consider the outsourcing of materials (Antras and Helpman, 2004; Hubbard and Baker, 2003), firms resort more and more to the outsourcing of business services. Indeed, technological changes favour the compatibility and tradability of many services across the world (Goodman and Steadman, 2002; Abramovsky, Griffith and Sako, 2004). Consequently, a lot of firms outsource, for example, their call centre or invoice and payroll services. A literature review shows that outsourcing is extensively documented concerning the adoption factors of outsourcing, in particular, the benefits (i.e. cost reduction, the ability to focus on core competencies, technological leadership, etc.) and the risks (i.e. vendor opportunism, lock-ins, contractual difficulties, etc.). Because information systems (IS) outsourcing is a growing phenomenon, in this study, we focus on ICT services outsourcing. The ICT services we investigate are notably the management of the ICT system, the development of software, database, website and the administration of the internal and external communication networks. These ICT services can be easily transferred across firms, especially the programming and network needs of the firm. Consequently, the costs of transaction between the firm and its supplier are reduced and beyond the cost of outsourcing. As firms are cost minimising, the demand for outsourced services depends on the relative cost of producing the services in-house compared to outsourcing. This cost may vary across firms depending on notably the size of the firm and its investment in ICT. Concerning ICT investment an ambivalent hypothesis can be formulated. First, according to Abramovsky and Griffith (2006), we can suppose that firm's investment in ICT can diminish the cost of outsourcing and favour this phenomenon. Second, conversely if the firm has skilled workers it can reduce the cost of managing in-house ICT services. We conduct our analyses on a large and nationally representative dataset at the firm unit level. The dataset comes from the Luxembourg part of the ?ICT Usage and e-Commerce in Enterprises'' survey collected in 2007. We try to determine the main important profiles of firms that resort to outsourcing and/or offshoring of their ICT services.