Research Note—IT Outsourcing and the Impact of Advisors on Clients and Vendors

Abstract

There is significant information asymmetry in the information technology (IT) outsourcing market. Clients are uncertain about vendors’ capabilities and vendors are uncertain about clients’ requirements. Prior literature has examined many devices to reduce such information asymmetry, e.g., vendor reputation, client-vendor prior relationship, vendors’ Capability Maturity Model (CMM) rating, vendor location, and technological diversity of the vendor. We examine the impact of (to our knowledge) a hitherto unconsidered device, i.e., the use of an advisor. In the context of global sourcing, third-party advisors, with their accumulated knowledge of client requirements and the vendor landscape, can mitigate the information asymmetry between clients and vendors. However, in an extensive data set of IT outsourcing contracts going back two decades we found use of advisors to be rare (less than 5% of contracts go through an advisor). This motivates us to rigorously analyze their impact on clients and vendors as an open empirical question. Using a data set of 753 large IT outsourcing contracts, and through a series of econometric specifications and robustness tests, we establish that the presence of an advisor is associated with higher revenue for vendors and more positive contract outcomes. This analysis presents what is to our knowledge the first concrete evidence that third-party advisors can mitigate the information asymmetry in the IT outsourcing market and lead to better matching that benefits clients as well as vendors.