The Productivity Benefits of IT Outsourcing

This paper examines the productivity benefits of IT outsourcing in the credit union industry, using data on the population of U.S. credit unions from 1992-2005. Within-credit union switching from internal IT to outsourced IT reduces operating costs by roughly 30%, once they control for the endogeneity of switches. Less productive firms are more likely to outsource in the cross-section, and more likely to exit. The reorganization from internal to external IT production is responsible for as much as $6 billion in annual cost savings for the industry.