Managerial Accountants’ IT Outsourcing Decisions: An Experimental Study of the Effect of CIO reputation and Institutional Isomorphism

Jennifer Blaskovich, Ph.D.,CPAAssistant Professor

University of Nebraska-OmahaCollege of BusinessOmaha, NE 68182

402-554-3984jblaskovich@unomaha.edu

Natalia Mintchik, Ph.D.Assistant Professor

University of Missouri-St. LouisCollege of BusinessSt. Louis, MO 63121mintchikn@umsl.edu

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ABSTRACT

While substantial effort has been devoted to understanding how cost issues drive IT outsourcing, several researchers have proposed that this narrow focus ignores the role of more subtle factors in the decision. This paper addresses this concern by investigating internal and external influences on managerial accountants’ recommendation to outsource the IT infrastructure. We hypothesize that when the chief information officer’s reputation is high (an internal factor), management accountants will advise against outsourcing. But when the reputation is low, accountants will mimic the outsourcing actions of industry peers (external factor). This expectation is based upon resource-based and institutional theories. The Institute of Management Accountants supported the study through their Foundation for Applied Research, and provided the experimental materials to its regular members. Data analysis on the 515 complete responses reveals a significant ordinal interaction between the CIO reputation and peers’ actions. Consistent with expectations, managerial accountants are more likely to recommend outsourcing in conditions of a low reputation CIO than a high reputation CIO. Further, when the CIO reputation is low, managerial accountants are more likely to recommend outsourcing when industry peers have outsourced. These findings should interest accounting professionals because the IT-infrastructure is a critical organizational element that determines the reliability of the accounting information system. Post-SOX, managerial accountants bear direct responsibility for the effectiveness of internal controls over this infrastructure. Additionally, accounting executives are routinely involved in the evaluation of strategic decisions such as IT outsourcing, providing initial projections and monitoring the consequent process. The accountants’ recommendations on IT outsourcing in this context often becomes decisive, and factors behind this recommendation should be of interest to academic researchers.

I. Introduction

Most agree that information technology outsourcing (ITO) is an undeniable trend

in the global economy (Beasley et al. 2007; Carr 2005; Hirschheim and Lacity 2000). In

the year 2000, more than half of the IT services purchased in North America were

outsourced (Progent Corporation 2002), and by 2009, the ITO market is forecasted to

reach 760 billion1 (Potter and Brown 2006). This process of change in organizational IT

infrastructure has significant implications for managerial accounting. First, the

recommendation of senior accounting executives for or against IT outsourcing is usually

1 A ten-fold increase since 1995.

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critical to the final organizational choice (Renner and Tebbe 1998, DeLoof 1995).

Accordingly, the managerial accounting professionals shoulder the responsibility for its

ultimate success or failure. Second, ITO is a resource allocation decision which has long-

term implications for the organization (Domberger 1998). Thus, it is much like capital

budgeting, which is widely accepted as a managerial accounting responsibility (Dempsey

2003; Lamminmaki 2008). Third, the adoption of the Sarbanes-Oxley Act and related

regulations has made the effectiveness of IT controls a major compliance issue (Bradford

and Brazel 2007). Regardless of the IT infrastructure, compliance remains the ultimate

responsibility of the organization, and most directly, the managerial accounting function.

Finally, ITO necessarily involves outsourcing some or all of the infrastructure of the

accounting information system, which directly impacts the managerial accounting

function. Despite the relevance of ITO for managerial accountants, research to examine

the intersection of management accounting and outsourcing is lacking. Our study

addresses this concern by investigating managerial decision-making in this evolving

environment.

Given that a poor decision can seriously harm an organization, it is important to

understand the ITO determinants. Prior empirical studies in the business, IT, and

managerial accounting literatures have generally focused exclusively on the cost drivers.

However, researchers who have analyzed extensive interview data consider this view too

simplistic and emphasize the existence of other critical factors, both internal and external

to the organization. The purpose of this study is to investigate the role of two such

factors. Specifically, we explore the joint effect of the Chief Information Officer’s

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reputation (an internal force) and industry peers’ actions (an external force) on

managerial accountants’ recommendations to outsource IT.

Utilizing resource-based theory, we focus on the impact of the CIO’s reputation

because research suggests that firms with high quality internal IT personnel have less

incentive to outsource (Roy and Aubert 2002). Additionally, insights from descriptive

interview-based ITO studies indicate that the reputation of the executive responsible for

the organization’s IT function, the CIO, is often a catalyst in ITO decisions (Willcocks

and Sykes 2001; Lacity and Hirschheim 2000). We then draw upon institutional theory to

examine the ITO decision when the reputation of the CIO is low. The theory predicts that

when faced with uncertainty, organizations will mimic the decisions of other

organizations (DiMaggio and Powell 1983). The ITO decision is risky and the outcome is

uncertain, especially when there is a doubt about the ability of the chief IT officer to

fulfill promises. Therefore, we expect that when the reputation of a CIO is low,

executives will follow the path of industry peers in their outsourcing choices.

Five-hundred-fifteen members of the Institute of Management Accountants (IMA)

participated in the study.2 We hypothesized and found an ordinal interaction between CIO

reputation and peers’ actions. Specifically, when CIO reputation was low, management

accountants who received information that industry peers have outsourced were more

likely to recommend outsourcing than those whose peers have not outsourced. However,

for those with a high reputation CIO, there was no difference between the

recommendations of those whose peers have outsourced and those whose peers have not.

2 We are grateful to the Foundation for Applied Research at the Institute of Management Accountants for providing access to these participants.

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In the following sections of this paper, we provide a review of the prior literature

and the theoretical foundation for our research hypotheses. We then describe our

experiment, present results, and conclude with a discussion of our findings.

II. LITERATURE REVIEW AND THEORETICAL FOUNDATION

Early information systems research points to reductions in operating costs as the

primary driver of ITO (Ang and Straub 1998; Grover, Cheon and Teng 1996; Teng,

Cheon and Grover 1995). More recently, however, researchers have proposed that this

view is much too narrow and does not fully explain the ITO decision (e.g., Laing et al.

2007, Tiwana and Bush 2007). These researchers argue that cost estimates are

notoriously unreliable and subjective, and thus, while cost is used to justify the decision,

it is not the primary determinant (Olson 2007; Lacity and Hirschheim 1993). Yet,

identification of other drivers remains a controversial and under-explored topic in the

business, IT, and managerial accounting literatures. We propose and investigate two such

additional factors. First, we draw on the resource-based theory of the firm to predict that

an internal factor, the CIO reputation, will affect the ITO decision. Second, we use

institutional theory to predict the effect of an external force, industry peers’ actions, on

the decision.

Resource-Based Theory

The resource-based theory (RBT) of an organization defines a firm as a collection

of productive resources and capabilities (Cheon, Grover, and Teng 1995). These

resources and capabilities can be broadly defined as “bundles of tangible and intangible

assets, including a firm’s management skills, its organizational processes and routines,

and the information and knowledge it controls” (Barney, Wright, and Ketchen 2001,

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625). This perspective stresses the importance of analyzing not only the existing

resources and capabilities, but also the gaps in resources and capabilities. Resource gaps

are differences between desired capabilities and actual capabilities (Stevenson 1976,

Grant 1991). Organizations fill gaps through either the development and maintenance of

internal firm resources or the external acquisition of complementary resources (Grant

1991). RBT suggests that organizations should keep in-house all activities for which they

possess strategic resources and capabilities, while outsourcing activities for which they

lack the resources and capabilities necessary to obtain expected performance (Alvarez-

Suescun 2007). A handful of studies have addressed ITO from a resource-based

perspective (Cheon, Grover, and Teng 1995; Teng Cheon, and Grover 1995; Roy and

Aubert 2002; Alvarez-Suescun 2007). These studies find that to the extent that internal IT

capabilities fall short of expectations or needs, organizations will look toward

outsourcing to fill the gaps.

In examining the strength or weakness of an organization’s internal IT resources

and capabilities, IS researchers have shifted their attention from the IT architecture to the

IT personnel because IT personnel offer the greatest contribution to the maintenance of

competitive position (Powell and Dent-Micallef 1997; Alvarez-Suescun 2007). When IT

personnel have established efficient business processes and strong relationships within

the organization, internally-housed IT functions can perform more efficiently and

effectively than an outside vendor (Alvarez-Suescun 2007). Furthermore, organizations

with strong IT personnel capabilities have the incentive of maintaining IT in-house,

which offers control, process confidentiality, and independence from external suppliers

(Roy and Aubert 2002). Firms with weak IT personnel capabilities are faced with the

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choice of investing relatively more dollars toward strengthening internal resources or

outsourcing to an IT vendor.

An important determinant of an organization’s overall IT personnel capabilities is

the reputation or capability of the CIO. Although many individuals may comprise the IT

function, the CIO is primarily responsible for the functioning of the organization-wide IT

infrastructure (e.g., Lacity and Hirschheim 2000; Willcocks and Sykes 2001).

Researchers in IS/IT have highlighted and emphasized the role of the CIO in the ITO

process (e.g., Lacity and Hirschheim 1993; Lacity and Hirschheim 2000; Willcocks and

Sykes 2001). Specifically, the prior track record or reputation of the CIO is found to be

an important determinant in the decision. Lacity and Hirschheim (2000) define the impact

of the CIO’s reputation on the CEO’s preference toward IT-sourcing. Through a series of

case studies, their research illustrates situations where the CIO exploits outsourcing bids

to enhance his/her credibility with the CEO; and where the CEO dismisses the

outsourcing option at the very beginning of the evaluation process due to high CIO

reputation. Willcocks and Sykes (2001) provide similar insights on the role of CIO

reputation in outsourcing decisions from the context of an ERP investment. Their study

describes an ERP project in which the CEO decides to invest in ERP without looking for

meaningful CIO input. This usually happens in the situation when the “IT function has a

poor track record” (p.34) and investment in ERP is believed to be a method for replacing

the “IT headache”. Thus, the CIO is the primary representative of an organization’s IT,

and is often the catalyst for ITO decisions.

Institutional Theory

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When considered in isolation, RBT provides a rational, efficiency-driven

perspective of the ITO decision. However, while we draw upon this to explain some

motivation behind ITO, we do not assume that it offers a full explanation. RBT predicts

that an organization seeks to remain competitive by exploiting its pool of resources and

capabilities. When appropriate capabilities are not present within the organization,

managers will look to fill these gaps. RBT does not predict how organizations will fill

gaps, only that gaps must be filled through internal development or external acquisition if

the organization is to remain competitive. We link RBT to institutional theory to explore

this issue.

DiMaggio and Powell (1983), in their conceptualization of institutional

development, pioneered the notion of institutional isomorphism: a process by which

different organizations become similar to each other in terms of organizational culture,

structure, technology, and other comparable aspects; and explained why this homogenous

or isomorphic tendency increases with the life of the organization. Contrary to

competitive isomorphism (Hannan and Freeman 1977), which justified this similarity

through the natural selection process of organizations better suited to a changing

environment, institutional isomorphism addresses homogenization as a response to

socially prescribed dictates, standards, or expectations about what an organization should

do. DiMaggio and Powell emphasize that institutional isomorphism enhances an

organization’s legitimacy within its environment, but not necessarily its efficiency

(achievement of the goal with the least possible resources). They contend that although

some organizational practices or strategies may not be rational for many individual

organizations, the mere fact that they are sanctioned or accepted by a social structure,

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environment, or industry increases their likelihood of adoption. Indeed, organizations

may suffer negative associations with regard to performance, but positive associations

within sociological structures (Powell 1995; Montes and Jover 2004).

DiMaggio and Powell (1983) identify three conceptually different mechanisms

that contribute to organizational similarity – coercive, normative, and mimetic. Coercive

isomorphism encourages homogenization through the power held by an organization’s

constituents (e.g., customer, supplier, or regulator). These external pressures force firms

to alter established practices in order to comply with the demands of the powerful

constituent (Tuttle and Dillard 2007). Normative isomorphism results from

professionalization. Organizations become similar because, for example, management is

comprised of individuals who have become “virtually indistinguishable” (DiMaggio and

Powell 1983, 153) through the standardization of educational systems, trade associations,

and professional certifications.

Mimetic isomorphism, the focus of this study, occurs when organizations respond

to uncertainty by mimicking the actions of other organizations. Actions taken by other

organizations increase the legitimacy of that strategy, often in the absence of any

evidence that the strategy improves efficiency (DiMaggio and Powell 1983; Powell 1995;

Lu 2002). Prior research has found mimetic isomorphic tendencies in various types of

managerial decisions, including market entry (Haveman 1993; Lu 2002), corporate

performance and CEO pay structures (Staw and Epstein 2000), and ERP assimilation

(Liang et al. 2007).

Mimetic isomorphism is particularly applicable for managerial decisions

involving the adoption of technology. Research indicates that when technology is new

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and the environment is ambiguous, organizations make decisions to match those of

industry peers (Caldas and Wood 1999; Liang et al. 2007). In a case study of ERP

implementations, for example, Caldas and Wood (1999) found that 77% of the 28

organizations studied cited ‘following the trend’ as a primary reason for adopting ERP.

Isomorphic theory explains that uncertainty regarding the effects of such adoptions

makes mimicking peers’ actions the safe choice (Benders et al. 2005).

Hypothesis

Together, institutional isomorphism and RBT provide the research predictions of

the present study. In the context of recommending an ITO strategy, we contend that as

management accountants evaluate the proposals, their recommendation to outsource will

depend jointly on (1) the internal resource capabilities represented by the CIO’s

reputation and (2) the actions of industry peers. We consider a setting in which the

organization must address an outdated IT infrastructure – a resource gap. The

management accountant is expected to provide a recommendation on upgrading the in-

house system or outsourcing to a Software-as-a-Service (SaaS) provider. As stated

previously, research indicates that firms with strong IT capabilities have the incentive of

retaining IT in-house (Roy and Aubert 2002). Thus, when the internal capabilities of the

CIO appear sufficient to ensure successful upgrading in-house, the accountant is less

likely to look to outsource. On the other hand, insufficient CIO capabilities generate

greater uncertainty, and consequently, the management accountant will respond to this

uncertainty by following the actions of industry peers. This discussion leads to our

expectation of an ordinal interaction, stated as follows:

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H: When the CIO reputation is low, management accountants whose industry

peers have outsourced are more likely to recommend outsourcing than those

whose peers have not. However, when the CIO reputation is high, there is no

difference between the recommendations of those whose peers have outsourced

and those whose peers have not.

III. PARTICIPANTS, EXPERIMENTAL MATERIALS, AND PROCEDURES

Participants

Experimental materials were provided online to members of the Institute of

Management Accountants. The IMA distributed an invitation to participate with a link to

the experimental materials to its regular US members, excluding academics, students, and

consultants. Five hundred and fifteen subjects fully completed the experimental

materials.3 More than half (64%) of the participants are male, 78% of the participants

have more than 10 years of business work experience, and 43% (26%) of the participants

hold CMA (CPA) licenses. Table 1 provides detailed data about the industry and

organization size in which our participants are employed and self-reported extent of the

outsourcing in their organizations.

< Insert Table 1 here>

Experimental task

The experimental materials consisted of two parts. Part one discusses the

outsourcing dilemma including manipulated information regarding the two factors of

interest: CIO reputation and peer outsourcing actions. Part two contains manipulation

3 Six hundred and five subjects attempted to complete experimental materials. Many subjects completed just the first page of the experimental materials. Inclusion of incomplete responses in the main analysis does not change the reported statistical results.

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checks and gathers demographic data. Appendix A presents an example of the

experimental materials.

In particular, the outsourcing dilemma requested the participants to assume the

role of CFO and make a recommendation regarding the outsourcing of the IT

infrastructure supporting the accounting applications for a hypothetical company. The

case highlights the corporate necessity to deal with an outdated IT infrastructure and

suggests two potential alternatives: 1) upgrade current in-house structure, or 2) migrate to

a web-based, SaaS infrastructure. The case reports that the CIO prepared the estimates for

the in-house upgrade. The estimates are roughly equal to the projected costs submitted by

SaaS consultants for the web-based option. The case also emphasizes that the CIO objects

to outsourcing and would prefer to keep all of the IT architecture in-house.

We use “software as a service” (SaaS) outsourcing as the context of our

experiment. This type of service assumes the substitution of traditional accounting

applications housed on an organizations’ in-house IT infrastructure with web-based

access to accounting software for a fee. We have chosen SaaS as the context of our

experiment for several reasons. First, this type of outsourcing service and related

technology is relatively novel. Therefore, this context allows us to introduce the strong

element of uncertainty into decision-making which is critical for our tests. Second, this is

type of outsourcing especially prominent in small and medium-sized organizations. So,

our subjects should find the context relevant and familiar for them. Third, business press

suggests that this type of outsourcing is often initiated by business rather than by IT

executives. So, the context will sound realistic. Finally, the business press indicates that

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SaaS is on the rise and thus, is a relevant and timely topic that will potentially affect

many organizations.

Independent and dependent variables

We use a 2 X 2 between-participants design with CIO reputation (high or low)

and peers’ outsourcing actions (no known peer outsourcing or known peer outsourcing)

as independent variables. CIO reputation was manipulated at two levels. In the high

reputation CIO condition, participants were informed that management has been satisfied

with the CIO’s leadership in the past, and two recent internal projects under his command

were completed on time and on budget. In the low reputation CIO condition, materials

pointed out the recent CIO’s failures on two important internal projects when the

products were delivered late and significantly over budget.

The variable representing peers’ outsourcing choices was also manipulated at two

levels. In the no known peer ITO condition, the background information contained the

following statement: “Based on your readings of trade publications and discussions with

fellow accountants, you are unaware of any competitors or peers who have chosen to

migrate to the web-based structure.” In the known peer ITO condition, participants were

informed that the majority of competitors and peers have chosen to migrate to the web-

based structure. However, the case also stressed that the evidence on the benefits of the

web-based structure is mixed: some managers in the industry are quite satisfied with their

decision while others are disappointed. We added the last sentence to ensure that the

manipulation reflected the peers’ choice per se rather than peers’ choice as a proxy for

outsourcing effectiveness.4

4 Son and Benbasat (2007) specifically delineate two dimensions of mimetic isomorphism: adoption among competitors and perceived success among competitors. The authors stress that these distinct dimensions exert mimetic pressure in the decision to adopt B2B e-market practices. In our study, we specifically chose to examine the influence of adoption by competitors on ITO without the confounding influence of

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Participants’ recommendations – (1) update current structure vs. (2) outsource –

serve as the dependent variable. We express this variable as dichotomous rather than as

continuous to better reflect the reality of this decision context. We also asked

participants’ about their level of confidence in their recommendation, using a 5-point

scale from 1 (not at all confident) to 5 (extremely confident). Statistical tests (not-

tabulated) revealed a lack of significant differences in subjects’ confidence across

experimental conditions within their range of choices.

IV. RESULTS

Tests of the Hypothesis

We predicted an ordinal interaction whereby a higher proportion of accountants in

the low reputation condition will recommend outsourcing when industry peers have

outsourced than when industry peers have not. However, we do not expect a similar

difference in the recommendations of accountants in the high reputation condition. We

begin our testing of this expectation with a binary logistic regression using the

recommendation to outsource as the dependent variable.5 CIO reputation and peer

outsourcing are the independent variables.6 Model fit statistics reported in Panel A of

Table 2 confirms that our factors are appropriate and add to the explanatory power of the

model: all diagnostic statistics (Akaike information criterion, score statistic, and log-

likelihood ratio) for the model that includes covariates is lower than for the model with

the intercept only. Also, all diagnostic statistics reported in Panel B of Table 2 indicate

perceived success. We believe this provides us the ability to draw clear conclusions on this dimension of isomorphism, and suggest future research to examine the influence of competitors’ perceived success. 5 Logistic regression is suggested as the most appropriate model for data with a dichotomous dependent variable (Pedhazur 1997). 6 Manipulation checks in the post-experimental questionnaire indicate statistical significance in the expected direction.

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that the probability of the null hypothesis that all model coefficients are zero is below

0.0001.

As reported in Panel C of Table 2, we find a marginally significant interaction

between reputation and peer conditions (Wald statistic = 2.986, p = 0.084). This suggests

some support for the interactive effect of the two independent variables on the

recommendation to outsource. We explore further the nature of this interaction by

calculating and examining odds ratios which play a meaningful and important role in the

interpretation of logistic regression results (Pedhazur 1997). As reported in Panel D of

Table 2, odds are roughly 1:2 that participants facing a low reputation CIO will

recommend outsourcing when industry peers have not outsourced versus when peers

have outsourced (OR = 0.53). In other words, in conditions of a low CIO reputation, the

odds of participants’ recommending outsourcing rather than internal development are

about two times greater when their industry peers’ have outsourced. However, when the

CIO reputation is high, those odds are 1:1, and knowledge of peers’ actions does not

influence participants’ decision-making (OR = 1.05). These findings suggest that peer

actions to outsource significantly influenced accountants who were faced with a CIO of

low reputation. As for the simple effect of CIO reputation, when subjects are not aware of

peers’ choices, odds are roughly 1.6:1 that they recommend outsourcing facing CIO with

some reputational issues versus highly regarded CIO (OR = 1.58). However, when

subjects know about peers’ preference toward outsourcing, odds become roughly 3:1 (OR

= 3.13) that they recommend outsourcing in low reputation CIO versus high reputation

CIO case. In other words, the poor reputation of CIO increases the odds of outsourcing

by 60 % in the absence of information about peers’ choices but by 200 % when majority

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of peers follow the outsourcing path. Overall, this is consistent with the predictions of

RBT and institutional theory.

<Insert Table 2 here>

However, because we hypothesize an ordinal interaction, inferences from

standard regression techniques may be insufficient (Bobko 1986). This may explain the

marginal significance of the interaction revealed by our binary regression testing. An

ordinal interaction occurs when the rank order of treatment effects is constant, but the

differences between the treatments are not constant. These differences vary based on the

specific pairings of the treatments (Pedhazur 1997). Specific to our study, we expected

the recommendation to outsource as consistently more likely when the CIO reputation is

low than when reputation is high. However, just how much more likely varies, depending

on the actions of peers. As reported in Table 3, the proportion of participants

recommending outsourcing in each condition supports this expectation. Under low CIO

reputation, the proportion of participants recommending outsourcing is 32% when no

peers have outsourced and 47% when peers have outsourced. Compare this with high

CIO reputation, where the proportions of participants recommending outsourcing is 23%

and 22%, no peer ITO and peer ITO, respectively. Therefore, we directly test this ordinal

interaction using the pairwise comparison technique suggested in Strube and Bobko

(1989) and discussed in detail in Elias (2004). This technique calls for a pooling of cells

with equal proportions for comparison to the cell of interest. Accordingly, we apply a

non-parametric chi-square test between the following cells: (1) low reputation/no peer

ITO and high reputation/ no peer ITO; (2) low reputation/no peer ITO and high

reputation/peer ITO; and (3) high reputation/no peer ITO and high reputation/peer ITO.

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All results were insignificant at p = 0.05. Following Strube and Bobko (1989), we then

pool the observations from these three groups. We find the proportion of accountants

recommending outsourcing for this new group is 25%. We compare this proportion to the

47% of accountants who recommended outsourcing in the low reputation/peer ITO

condition. The difference between these proportions is significant (chi-square = 4.129, p

= 0.042). This confirms the presence of an ordinal interaction: peers actions to outsource

ITO do not have an influence on accountants’ recommendations to outsource in the

presence of a high reputation CIO. However, in the presence of a low reputation CIO, it

is significantly more likely that accountants will recommend outsourcing when peers

have outsourced. This allows us to conclude support for our hypothesis.

V. DISCUSSION

We examined the effect of a CIO’s reputation and the actions of industry peers on

management accountants’ decision to outsource to a SaaS IT infrastructure. As predicted

by resource-based theory, our results indicate that the decision to outsource is

significantly affected by prior experience with the CIO. When a CIO with a strong

reputation in the organization objects the outsourcing, managerial accountants are more

likely to make a recommendation consistent with this position. Alternatively, when a CIO

has a questionable track record, managerial accountants are more willing to search for

options outside the organization, even at a risk of losing some control over the IT

infrastructure. Institutional theory predicts, and our research confirms, that managers

sometimes mimic the actions of peers when making decisions under uncertainty. This

‘follow the herd’ mentality is problematic because it implies that decisions are based on

factors other than sound organizational strategy, and because it precludes an organization

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from building its own competitive advantage. Our results indicate that managerial

accountants may fall victim to this isomorphic tendency, at least in the strategic

outsourcing context, when facing a CIO with a questionable track record.

While some observers might label such behavior as a “rational choice” given

insufficient internal capabilities, accountants should be aware that isomorphism occurred

even when the decision to mimic peers was not necessarily in the best interest of the

organization. Our design allowed us to isolate the effects of mere adoption by industry

peers, from the effects of peers’ success of such adoption. Thus, taking the position

consistent with industry peers was not the result of a rational imitation of best practices.

That said, managerial accountants appear to be generally averse to outsourcing, as

less than one-third (30%) of all participants recommended this option. This relatively low

number is somewhat surprising, in light of the emphasis on SaaS in practitioner journals.

A recent cover story in Accounting Today, for example, notes that “users and providers

alike are praising the platform (SaaS) because of its flexibility (and) strong security

backing” (Gold 2008, 1). Even more surprising is the result that only 39% of participants

faced with a low reputation CIO chose to outsource. This implies that the majority of

managerial accountants are willing to go forward with an internal IT upgrade directed by

a CIO whose past projects were completed late and over budget, rather than outsource to

a SaaS provider. This is especially relevant in the post-SOX environment where internal

controls over IT became a critical compliance issue. CIOs often lack appreciation of audit

trails and similar features of IT controls which they perceive as redundant and time-

consuming. Couple this with the questionable track record of the CIO, and the decision to

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develop the system in-house might lead to higher compliance costs and greater risk of

internal control weaknesses.

One explanation for this result is that pro-outsourcing features in the business

press reflect the views of the consulting industry rather than organizational executives

who commonly associate outsourcing with offshoring and potential job loss. An

alternative explanation might be that accounting executives have an overall tendency

toward risk aversion and avoidance of direct confrontation with another member of the

senior management team. At this stage, these are just speculations not yet supported by

empirical data. Future research might provide further insights on those important issues.

This study is subject to the typical limitations of experimental research. The

experimental materials, although designed to be as realistic as possible, cannot simulate

the rich and complex environment of a contemporary organization. In order to isolate the

effects of CIO reputation and peer actions, we held the estimated costs of outsourcing and

in-house development constant. Additionally, we examined one proxy for internal IT

resource capabilities, CIO reputation, and one dimension of institutional isomorphism,

mimetic isomorphism. Clearly, future research is needed to improve and expand on our

understanding of these and other organizational forces on management accountants’

decisions.

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TABLE 1Descriptive Statistics - Participants

Panel A: Industry frequencies

Industry Frequency PercentManufacturing 225 43.69%Retail and wholesale 27 5.24%Banking or Financial services 39 7.57%Government or Not-for-Profit 55 10.68%Services ( tourism, consulting, real estate) 87 16.89%Utilities, energy, transportation and construction 38 7.38%Telecommunications, medical equipment, pharmaceutical and biotechnology 23 4.47%Other 21 4.08%

Panel B: Organization size frequencies

Organization Size Frequency Percent0-1000 employees 257 49.90%1000-5000 employees 96 18.64%5000-10000 employees 34 6.60%More than 10000 employees 128 24.85%

Panel C: Self-reported extent of organizational outsourcing

Outsourcing extent Frequency PercentNone 40 7.77%Low 221 42.91%Moderate 203 39.42%Extensive 51 9.90%

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TABLE 2Proportion of Participants Recommending Outsourcing

Panel A: Model Fit Statistics

CriterionIntercept

OnlyIntercepts and

CovariatesAkaike Information Criterion 630.341 614.071Score Statistic 634.585 631.048Log-likelihood Ratio 628.341 606.071

Panel B: Testing Global Null Hypothesis that All Model Coefficients are Zero

Test Statistic DFTwo-tailed p-value for

reported statistics

Log-likelihood Ratio 22.2692 3 <.0001Score 23.0049 3 <.0001Wald 22.1531 3 <.0001

Panel C: Binary Logistic Regression using Recommendation to Outsource as DV

B S.E. Wald DF

Two-Tailed p-value

CIO reputation 1.141 0.283 16.202 1 <0.001Peers’ ITO 0.052 0.285 0.033 1 0.855Reputation*Peers’ ITO -0.683 0.395 2.986 1 0.084Constant -1.267 0.210 36.351 1 <0.001

Panel D: Odds of Participants Recommending Outsourcing

Fixed factor Comparisont-

statisticp-value (two-

tailed)Odds ratio

Low CIO reputation

No Known Peers' ITO vs. Known Peers' ITO -2.3 0.0216 0.532

High CIO reputation

No Known Peers' ITO vs. Known Peers' ITO 0.18 0.855 1.053

No Known Peers’ ITO

Low CIO reputation vs. High CIO reputation 1.67 0.096 1.582

Known Peers’ ITO

Low CIO reputation vs. High CIO reputation 4.03 <0.0001 3.13

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TABLE 3Proportion of Participants Recommending Outsourcing

No peer ITO Peer ITO Overall

     Low CIO reputation 38 / 119 52 / 111 90 / 230  32% 47% 39%

     High CIO reputation 35 / 153 29 / 132 64 / 285  23% 22% 23%

     Overall 73 / 272 81 / 243 154 / 515  27% 33% 30%

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APPENDIX AExperimental Materials

Name _______________________________

Background

You are the Chief Financial Officer of Components Inc., a mid-sized manufacturer of components for the automobile industry. Recently, the senior management of Components Inc. examined the status of information technology infrastructure and determined that the structure is somewhat outdated and unable to handle the growing demands of the business and ensure compliance with the Sarbanes-Oxley Act. Accordingly, an investment in the IT infrastructure is required and senior management has identified two possible options: 1) upgrade the current client-server infrastructure, or 2) migrate to a web-based, software-as-a-service infrastructure for its major accounting applications. You are asked to express your professional opinion about the impact and desirability of such a change.

Under the current structure, Components Inc. owns, maintains, and operates all hardware, software, and other network equipment necessary for the execution of its day to day operations and the maintenance of relevant accounting records. If Components Inc. decides to maintain the current structure, it will need to conduct an overhaul of its IT infrastructure and hire additional technical personnel in the IT department responsible for operation, documentation, and SOX-compliance of this IT infrastructure.

Under the web-based structure, the firm will pay a monthly usage-based subscription fee to access all financial applications (GL, AP, AR, Payroll, etc.) on the Internet. The application suite is maintained by an accounting software-as-a-service provider, FinSource Inc. Client information is stored at data centers operated by a large computer services corporation. A change to this structure is not expected to impact the duties of the accounting department. FinSource Inc assures the existence of SOX complied internal controls in its information system and guarantees to provide Components Inc with SAS 70 Type II reports on a regular basis.

FinSource has submitted a proposal to Components Inc. detailing the estimated fees for migrating to the web-based service. The Chief Information Officer of Components Inc. has developed a cost-benefit analysis for continued maintenance, operation, and upgrading of your current client-server system. Analysis of the preliminary estimates submitted by both parties suggests that the cost of the in-house system and operation is roughly equal to the fee proposed by FinSource for outsourcing over the next 5 years. Therefore, when making your recommendation you must consider the reliability of those estimates and other relevant factors.

According to FinSource, outsourcing the IT infrastructure will allow Components Inc. to concentrate on its core activities without maintaining a dedicated tech-support staff. It also allows for freedom for expansion or shrinkage as Components Inc.’s business needs change, and provides access to state-of-the-art technology. However, your Chief Information Officer suggests that outsourcing is a mistake since FinSource’s services are not flexible enough to meet all of Components Inc.’s needs. Additionally, the officer points out that FinSource professionals do not have industry-specific knowledge and that outsourcing might compromise the security and the confidentiality of Components Inc.’s data.

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CIO Reputation Manipulation

1. High Reputation ConditionIn the past, you have generally relied on your Chief Information Officer judgment on technology issues. You have been satisfied with the officer’s leadership in the past, and two recent internal projects under his command were completed on time and on budget. You also recognize that the outsourcing proposal contains some estimates that could vary from expectations.

2. Low Reputation ConditionIn the past, you have generally relied on your Chief Information Officer judgment on technology issues. However, you heard about the officer’s recent failures on two important internal projects when the products were delivered late and significantly over budget. You also recognize that the outsourcing proposal contains some estimates that could vary from expectations.

Knowledge about Peers’ Actions Manipulation

1. No known Peer OutsourcingBased on your readings of trade publications and discussions with fellow accountants, you are unaware of any competitors or peers who have chosen to migrate to the web-based structure.

2. Known Peer OutsourcingBased on your readings of trade publications and discussions with fellow accountants, the majority of Components Inc. competitors and peers have chosen to migrate to the web-based structure. However, the current evidence on the benefits of the web-based structure is mixed: some managers in the industry are quite satisfied with their decision while others are disappointed.

1. Based on the information above state your recommendation to the senior management team: should Components Inc. update its client-server infrastructure or outsource its hardware and software support by switching to the web-based “fee for service” infrastructure? Please, choose one of the following alternatives:

Recommend Recommendupdate to internal switch to web-basedclient-server infrastructure infrastructure

2. How confident are you in your recommendation? 5-point scale from 1 (not at all confident) to 5 (extremely confident)

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