A Network Perspective on the Dynamics of Market Structure for Outsourced IT Services: A Bayesian Inference Approach

60 Pages Posted: 20 Jan 2015

See all articles by Yingda Lu

Yingda Lu

Rensselaer Polytechnic Institute (RPI)

Anjana Susarla

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Kiron Ravindran

IE Business School

Deepa Mani

Indian School of Business (ISB), Hyderabad

Date Written: January 5, 2015

Abstract

While considerable evidence exists on contract design for outsourced information technology (IT) services, limited work has systematically examined the partner selection strategies of firms seeking to outsource their IT services in tandem with overall dynamics in the market for IT outsourcing. Conceptualizing the set of vendor firms as an organizational field, we consider several mechanisms that influence the dynamics of vendor selection by a client firm in the market for IT services. First, we consider preferential attachment by which firms tend to prefer to contract with central vendors. Second, we consider prior interactions, which serve as an important source of information for both clients and vendors about the reliability and capabilities of their partners. Third, we consider experience and diversity-based exchange logics, whereby client firms’ benefit through the depth and breadth of experience of vendors. Finally, we consider multi-connectivity based logic of exchange wherein a client can benefit from the heterogeneity of information sources. Analyzing the dynamics of vendor selection poses a number of statistical and computational challenges in examining partner selection for a large set of vendor-client pairs. We employ big data methods to develop a new method based on discrete choice models with reduced choice sets, the Randomly Reduced Choice set with Bayesian Inference (RRCBI) to analyze the dynamics of vendor selection in the market for IT services. We employ a dataset that consists of 22039 unique contracts between 8072 client firms and 2569 vendors over a 20-year period. We find that clients seek deep relationships through continuing interactions with vendors as well as vendors with diversity and depth of experience in terms of their knowledge of market conditions, customer facing interactions and organizational processes. We also find evidence for preferential attachment and multiconnectivity based logics of exchange. Our study is the first to investigate the impact of network structure on client’s vendor selection for IT outsourcing using a longitudinal dataset. Our results strongly suggest that a network-based logic of exchange provides insight into the systematic pattern in which vendors build their competitive position and market segmentation strategies and the manner in which clients build their outsourcing portfolios. Implications for researchers and practitioners are discussed.

Keywords: Network Dynamics, Vendor Selection, Big Data, Bayesian methods, Bayesian Sampling

JEL Classification: C11, C15, C33, D23, L14, L84, M20, M55

Suggested Citation

Lu, Yingda and Susarla, Anjana and Ravindran, Kiron and Mani, Deepa, A Network Perspective on the Dynamics of Market Structure for Outsourced IT Services: A Bayesian Inference Approach (January 5, 2015). Indian School of Business Research Paper Series, Available at SSRN: https://ssrn.com/abstract=2551852 or http://dx.doi.org/10.2139/ssrn.2551852

Yingda Lu

Rensselaer Polytechnic Institute (RPI) ( email )

Troy, NY 12180
United States

Anjana Susarla (Contact Author)

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States

Kiron Ravindran

IE Business School ( email )

María de Molina, 11-13-15
Madrid, Madrid 28006
Spain

Deepa Mani

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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