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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 Assistant Professor University of Nebraska-Omaha College of Business Omaha, NE 68182 402-554-3984 jblaskovich@unomaha.edu Natalia Mintchik, Ph.D. Assistant Professor University of Missouri-St. Louis College of Business St. Louis, MO 63121 mintchikn@umsl.edu 1

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. 2

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 3

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. 4

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, 5

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 6

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 7

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, 8

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 9

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: 10

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. 11

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 12

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 13

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. 14

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 15

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. 16

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 17

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 18

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. 19

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TABLE 1 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% 24

TABLE 2 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 reported statistics 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 Two-Tailed p-value B S.E. Wald DF 0.28 CIO reputation 1.141 3 16.202 1 <0.001 0.28 Peers’ ITO 0.052 5 0.033 1 0.855 0.39 Reputation*Peers’ ITO -0.683 5 2.986 1 0.084 0.21 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 25

Known Peers’ Low CIO reputation vs. High ITO CIO reputation 4.03 <0.0001 3.13 TABLE 3 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% 26

APPENDIX A Experimental 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. 27

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- based structure. 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: Recommend Recommend 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) 28

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