Published on: Mar 3, 2016
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Managerial Accountants’ IT Outsourcing Decisions: An Experimental Study of the Effect
of CIO reputation and Institutional Isomorphism
Jennifer Blaskovich, Ph.D.,CPA
University of Nebraska-Omaha
College of Business
Omaha, NE 68182
Natalia Mintchik, Ph.D.
University of Missouri-St. Louis
College of Business
St. Louis, MO 63121
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
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
A ten-fold increase since 1995.
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
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
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.
We are grateful to the Foundation for Applied Research at the Institute of Management Accountants for
providing access to these participants.
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 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,
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
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.
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
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,
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
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).
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:
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
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>
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
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.
checks and gathers demographic data. Appendix A presents an example of the
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
SaaS is on the rise and thus, is a relevant and timely topic that will potentially affect
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
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
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.
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.
Logistic regression is suggested as the most appropriate model for data with a dichotomous dependent
variable (Pedhazur 1997).
Manipulation checks in the post-experimental questionnaire indicate statistical significance in the
that the probability of the null hypothesis that all model coefficients are zero is below
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
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.
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.
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
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
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’
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Descriptive Statistics - Participants
Panel A: Industry frequencies
Industry Frequency Percent
Manufacturing 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 Percent
0-1000 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 Percent
None 40 7.77%
Low 221 42.91%
Moderate 203 39.42%
Extensive 51 9.90%
Proportion of Participants Recommending Outsourcing
Panel A: Model Fit Statistics
Intercept Intercepts and
Criterion Only Covariates
Akaike Information Criterion 630.341 614.071
Score Statistic 634.585 631.048
Log-likelihood Ratio 628.341 606.071
Panel B: Testing Global Null Hypothesis that All Model Coefficients are Zero
Two-tailed p-value for
Test Statistic DF
Log-likelihood Ratio 22.2692 3 <.0001
Score 23.0049 3 <.0001
Wald 22.1531 3 <.0001
Panel C: Binary Logistic Regression using Recommendation to Outsource as DV
B S.E. Wald DF
CIO reputation 1.141 3 16.202 1 <0.001
Peers’ ITO 0.052 5 0.033 1 0.855
Reputation*Peers’ ITO -0.683 5 2.986 1 0.084
Constant -1.267 0 36.351 1 <0.001
Panel D: Odds of Participants Recommending Outsourcing
t- p-value (two- Odds
Fixed factor Comparison statistic tailed) ratio
Low CIO No Known Peers' ITO vs.
reputation Known Peers' ITO -2.3 0.0216 0.532
High CIO No Known Peers' ITO vs.
reputation Known Peers' ITO 0.18 0.855 1.053
No Known Peers’ Low CIO reputation vs. High
ITO CIO reputation 1.67 0.096 1.582
Known Peers’ Low CIO reputation vs. High
ITO CIO reputation 4.03 <0.0001 3.13
Proportion 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%
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
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.
CIO Reputation Manipulation
1. High Reputation Condition
In 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 Condition
In 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 Outsourcing
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-
2. Known Peer Outsourcing
Based 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:
update to internal switch to web-based
client-server infrastructure infrastructure
2. How confident are you in your recommendation? 5-point scale from 1 (not at all
confident) to 5 (extremely confident)