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To outsource or not to outsource: Examining the effects of outsourcing IT functions on financial performance in hospitals

Menachemi, Nir; Burkhardt, Jeffrey; Shewchuk, Richard; Burke, Darrell; Brooks, Robert G.

Features

Background: Outsourcing of information technology (IT) functions is a popular strategy with both potential benefits and risks for hospitals. Anecdotal evidence, based on case studies, suggests that outsourcing may be associated with significant cost savings. However, no generalizable evidence exists to support such assertions.

Purpose: This study examines whether outsourcing IT functions is related to improved financial performance in hospitals.

Methodology: Primary survey data on IT outsourcing behavior were combined with secondary data on hospital financial performance. Regression analyses examined the relationship between outsourcing and various measures of financial performance while controlling for bed size, average patient acuity, geographic location, and overall IT adoption.

Findings: Complete data from a total of 83 Florida hospitals were available for analyses. Findings suggest that the decision to outsource IT functions is not related to any of the hospital financial performance measures that were examined. Specifically, outsourcing of IT functions did not correlate with net inpatient revenue, net patient revenue, hospital expenses, total expenses, cash flow ratio, operating margin, or total margin.

Practice Implications: In most cases, IT outsourcing is not necessarily a cost-lowering strategy, but instead, a cost-neutral manner in which to accomplish an organizational strategy.

Nir Menachemi, PhD, MPH, is Assistant Professor, Florida State University College of Medicine. E-mail: nir.menachemi@med.fsu.edu.

Jeffrey Burkhardt, PhD, is Associate Professor, Department of Health Services Administration, University of Alabama at Birmingham.

Richard Shewchuk, PhD, is Professor, Department of Health Services Administration, University of Alabama at Birmingham.

Darrell Burke, PhD, is Assistant Professor, Florida State University College of Information.

Robert G. Brooks, MD, MBA, is Professor and Associate Dean for Health Affairs, Florida State University College of Medicine.

© 2007 Lippincott Williams & Wilkins, Inc.