Personal Computing Industry Center

Offshore sourcing of IT development has grown rapidly in the past decade. Yet some firms are much more active than others in offshore sourcing, and some report greater success in offshore performance. This raises two questions. First, how can we explain differences in firm sourcing choices, even among firms operating in the same industry? Second, what factors influence the impact of offshore sourcing on firm performance?

We use data from a 2010 survey of U.S. software companies to analyze the factors that influence global sourcing decisions and the impacts of offshore sourcing on firm performance. We first examine the factors that shape sourcing choices for all firms, those that offshore and those that do not. We then focus on only those firms that offshore, examining both the determinants of offshoring and the performance outcomes of offshoring for firms with different strategies.

The most important contribution of this analysis is the finding that there are two types of offshoring strategic motivation, as identified through factor analysis. One is operational improvement and the other is international market expansion. These differences in strategy are significantly associated with the choice of sourcing options, and with the cost savings achieved from offshoring. It appears that firms motivated by cost reduction are more likely to use the outsourcing option rather than setting up their own captive development centers, while those motivated by market expansion are more likely to use captive development. Firms that go offshore for operations reasons report greater cost reduction than those that go for market access.