Insights from a Real Options Approach to Evaluate IT Sourcing Decisions

The trend for businesses to outsource information technology (IT) resources remains a relevant topic among IS researchers (Hirschheim and Lacity 2000, Kern & Blois 2002, Yost & Harmon 2002, Dibbern et al. 2004). While much has been written about outsourcing, the literature is relatively sparse when contemplating the issue of how organizations actually make their IT sourcing decisions. These sourcing decisions present the firm with opportunities such as abandonment, expansion, and deferment, that provide management the flexibility to improve their sourcing portfolios in the future. Real options theory has proven useful for valuing investments in IT infrastructure because it assigns value to future potential (Benaroch and Kauffan 1999, Taudes et al. 2000). This real options approach (ROA) is a promising technique for obtaining insights to sourcing decisions under uncertainty. This paper will relate the benefits of using real options analysis to evaluate the 5 stages of the IS outsourcing decision identified by Dibbern et al. (2004).