Online Appendix. Reexamining the Market Value of Information Technology Events

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1 Online Appendix Reexamining the Market Value of Information Technology Events Table A-1: Descriptive Statistics for Control Firms for Outsourcing Events Market Value of Equity ($M) Market to Book Ratio N Mean Median N Mean Median Total Assets Net Income Sales Income Efficiency Sales Efficiency Table A-2: Growth in Unique Outsourcing Contracts, Customers and Vendors, Year Growth in Contracts Growth in Customers Growth in Vendors % of Total Contracts Cumulative Adoption (%) Year % of Total Customers Cumulative Adoption (%) Year % of Total Customers Cumulative Adoption (%) % 0.5% % 0.5% % 0.70% % 1.9% % 2.2% % 2.50% % 3.1% % 3.4% % 4.20% % 5.8% % 6.1% % 6.00% % 8.1% % 8.7% % 9.40% % 11.0% % 12.1% % 13.90% % 22.1% % 23.0% % 24.80% % 30.8% % 31.6% % 34.20% % 35.3% % 36.7% % 39.20% % 40.3% % 41.4% % 43.70% % 50.1% % 51.4% % 53.10% % 66.9% % 67.8% % 68.70% % 85.5% % 85.9% % 86.40% % 100.0% % 100.0% % % 1

2 Table A-3: Growth in Electronic Commerce Events, Growth in Ecommerce Initiatives Year % of Total e-commerce initiatives Cumulative Adoption (%) % 0.10% % 0.20% % 0.30% % 10.90% % 23.10% % 38.30% % 52.90% % 62.00% % 71.00% % 79.00% % 85.50% % 90.50% % 94.20% % % 2

3 Table A-4: Model of Choice of Outsourcing Contract VARIABLE COEFFICIENT DESCRIPTION ENGAGEMENT ATTRIBUTES Number Of Task Segments Task Type Total Contract Value Coordination Requirements Contract Length 0.15 ** (0.07) 0.12 ** (0.05) 0.02 (0.19) 0.09 *** (0.03) 0.00 (0.00) The total number of service segments that characterize the outsourcing initiative. For example, outsourcing of supply chain management may include procurement, logistics and fulfillment, and demand forecasting, in which case the number of service segments is three. The greater the number of service segments, the greater is the complexity of the outsourcing initiative. Task type is one of application/ network/ desktop management, end-to-end IT outsourcing, or business process outsourcing. The continuum represents increasing order of task complexity Ratio of contract value to operating expenses. Operating expenses is defined as the sum of cost of goods sold, (COMPUSTAT DATA ITEM COGS) and sales, general and administrative expenses (COMPUSTAT DATA ITEM XSGA). The greater the contract value, the greater is the complexity. Anticipated coordination requirements based on the strategic rationale for outsourcing the given business function. The outsourcing literature (e.g. Mani et al. 2013) points to eight rationales that cover the spectrum of outsourcing logics: 1. Reduction of costs 2. Improve management focus on core competences 3. Access to competitive capabilities not available in-house 3. Growth strategy 4. Speed to market 5. Access to new markets 6. Proximity to customers 7. Business transformation The rationales were assessed from the IDC description of the outsourcing initiative and the public announcement of the initiative Length of the outsourcing contract in months 3

4 FIRM ATTRIBUTES Trust Experience Uncertainty BHR Cash MVE BTM PRIOROP_PERF Constant 0.25 * (0.14) 0.00 * (0.00) 0.17 ** (0.08) (0.00) 0.00 * (0.00) 0.21 * (0.12) *** (0.00) *** (0.22) We infer trust based on the bid type, which is one of competitive, incumbent, or sole sourced. Competitive bidding suggests the absence of prior association between the firms. Incumbent bidding implies that the outsourcing firm has an existing relationship with the provider. A sole-sourced contract means that the provider is the only provider of the outsourced function. The client may enter into sole-source negotiations with an incumbent in which case the bid type is recorded as incumbent. The cumulative number of strategic alliances across a firm s life served as a proxy for the depth of its outsourcing experience. We also used the number of outsourcing relationships recorded in the IDC database to estimate the experience of the outsourcing firm. The results were largely consistent with the previous measure Variance in the outsourcing firm s return on assets (RoA) over the three years prior to the contract effective year. RoA is defined as the ratio of operating income (COMPUSTAT DATA ITEM OPITI) to total assets (COMPUSTAT DATA ITEM AT). Short-term cash needs, defined by cash and cash equivalents (average of COMPUSTAT DATA ITEMs CHEB, CHEE) as a ratio of net sales (COMPUSTAT DATA ITEM SALE). Market value of equity, defined as the product of the number of shares outstanding (COMPUSTAT DATA ITEM CSHO) and market price (COMPUSTAT DATA ITEM PRCC_C). Ratio of book value of equity (COMPUSTAT DATA ITEM BKVLPS x CSHO) to market value of equity of the outsourcing firm (SIZE above) Sales efficiency as of the year prior to implementation of the outsourcing contract. Pseudo R-Square

5 Table A-5: Announcement Period Returns for Electronic Commerce Initiatives, High Complexity Low Complexity (Low Maturity) (High Maturity) (Low Maturity) (High Maturity) (-1, +1) 1.05 * (-5, +5) * ** 0.05 * Table A-6: Long-Term Abnormal Returns for Electronic Commerce (Calendar Time Regressions) Returns N Alpha b(p) s(p) h(p) R 2 High Complexity, Low Maturity 12-month month (-1.33) (5.47) (1.19) (2.73) *** ** 0.45 (-0.51) (6.45) (0.21) (1.85) 36-month *** *** 0.56 (-0.13) (9.03) (-0.73) (2.41) Period N Alpha b(p) s(p) h(p) R 2 Low Complexity, Low Maturity 12-month month *** 0.61 * 1.33 *** 0.40 (-0.92) (5.12) (1.49) (3.13) *** *** 0.49 (-0.35) (7.52) (0.24) (3.09) 36-month ** 2.26 *** *** 0.58 (1.70) (9.77) (0.70) (4.52) Period N Alpha b(p) s(p) h(p) R 2 High Complexity, High Maturity 12-month month *** 0.88 *** (0.75) (15.43) (6.47) (-0.45) 0.00 * 1.15 *** 0.81 *** *** 0.87 (1.52) (20.10) (7.31) (-2.39) 36-month * 1.18 *** 0.85 *** *** 0.91 (1.49) (24.65) (9.20) (-3.48) 5

6 Period N Alpha b(p) s(p) h(p) R 2 Low Complexity, High Maturity 12-month month (0.25) (16.90) (6.50) (-3.36) *** 0.92 *** 0.92 *** 0.85 (0.50) (18.44) (7.45) (7.45) 36-month *** 0.89 *** *** 0.87 (0.46) (19.71) (7.70) (-4.12) 6

7 Table A-7: Ohlson Regressions of Market Prices for Outsourcing Fixed price ( ) Variable Price ( ) With Implementation Without Implementation With Implementation Without Implementation Crsp Price Coef. Coef. Coef. Coef. Book Value Per Share 1.33 *** 1.33 *** Earnings Per Share *** 5.50 *** Implementation year Dummy Constant *** *** *** *** Adjusted R-Squared N Fixed price ( ) Variable Price ( ) With Implementation Without Implementation With Implementation Without Implementation Crsp Price Coef. Coef. Coef. Coef. Book Value Per Share 0.78 *** 0.78 *** *** 0.96 *** Earnings Per Share 3.67 ** 3.64 *** *** 1.32 *** Implementation year Dummy 2.75 ** * - Constant *** *** *** *** Adjusted R-Squared N

8 Table A-8: Mean R&D and Marketing capabilities of firms in periods of low and high maturity (for outsourcing) Low Maturity High Maturity Difference (Low High) R&D Capability (Absolute) R&D Capability (Industry Adjusted) Marketing Capability (Absolute) Marketing Capability (Industry Adjusted) *** *** *** ** *** *** *

9 SEC filing of the General Motors (Client) and EDS (vendor) outsourcing deal The SEC filing by General Motors (GM) describes the contract between GM and EDS (vendor). EDS would be providing GM with (i) infrastructure (mainframe, super-computing, midrange and distributed computing hardware and software, voice, data and video communications services and networks, end-user hardware, and replacement),(ii) IT services (participating in planning infrastructure, development, implementation and maintenance, infrastructure integration, monitoring), (iii) applications software for business planning, financial, human resource management, sales, service marketing, engineering, purchasing, product control and logistics, production/manufacturing, materials management and legal, (iv) helpdesk support, (v) timesharing services, (v) data management, and (vi) disaster recovery and business continuity. This is clearly a very complex deal spanning multiple levels of the outsourcing stack. In fact, each of the above items could be a contract in its own right in a smaller deal. There are numerous and detailed clauses for termination, dispute resolution, change of requirements, and renegotiations, as would be expected of an outsourcing arrangement of this magnitude. The contract is variable price involving a "Modified Cost-Plus Pricing Methodology" and "Modified Markup Percentage". This is in line with our theoretical expectation of a complex contract being governed by a variable price contract. There is no mention of GM s capability or experience in dealing with such a complex initiative or any plan to manage this large-scale transition from insourcing to outsourcing. Some relevant parts of the SEC filing are reproduced below: Services sought from EDS 1. Infrastructure. (a) Scope. Except with respect to Plant Floor Services which are covered in Section I.A.5 below, the scope of the computing and communications infrastructure ("Infrastructure") is as follows: (1) Mainframe, super-computing, midrange and Distributed computing hardware and system software. (2) Voice, data and video communications services and networks. However, the parties mutually agree that the videoconferencing products and services included in the above shall be limited to (i) those for which terms and pricing are specified in the Videoconferencing Terms and Pricing document, dated March 29, 1996, mutually developed by GM and EDS, and (ii) those being provided to GM by EDS as of the Effective Date to the extent that, prior to the Effective Date, they were mutually treated by the parties as within the scope of Section 1.3 of the Master Agreement. (3) End-user hardware (e.g., telephones, desktop PC's, Unix workstations, 3270/5080 terminals) connected to or using the computing or communications environment described in sub-sections I.A.1(a)(1) 9

10 and I.A.1(a)(2)hereof. (4) Replacements of any of the foregoing which serve the same or comparable functions as the foregoing. C-2 (b) Services. EDS shall be responsible for meeting GM's requirements, in accordance with GM's stated IT strategies, directions, architecture and standards, for the following services applicable to the Infrastructure functions described in sub-section I.A.1(a) above: (1) Participation in the investigation of and planning for architecture and related Infrastructure technologies supporting GM's IT strategies and directions. (2) Development, implementation, and maintenance of infrastructure architecture and standards for all computing and communications environments used by EDS to provide services to both GM and EDS' other customers ("Shared Infrastructure"). (3) Participation in the development and maintenance of Infrastructure architecture and standards relating to all computing and communications environments desired by GM which are not shared by EDS' other customers ("Dedicated Infrastructure"). (4) Infrastructure capability, capacity and Configuration management for Shared Infrastructure. (5) Participation in Infrastructure capability and configuration and performance of Infrastructure capacity management for Dedicated Infrastructure. (6) Infrastructure integration, installation, and operations. C-3 (7) Infrastructure performance monitoring and improvements (without limiting GM's right to monitor performance as mutually agreed by the parties). 2. Application Software. (a) Scope. Except with respect to Plant Floor Services which are covered in Section I.A.5 below, EDS is Responsible pursuant to sub-section I.A.2(b) below for 10

11 meeting GM's requirements for the development of application software and Implementation of commercial off-the-shelf application software (with the "make or buy" decision being made by GM with input from EDS) to support the following GM business functions and processes (or their successors) and their related sub-functions and processes: (1) Business Planning. (2) Financial. (3) Human Resource Management. Aftersales. (4) Sales, Service, Marketing and (5) Engineering. (6) Purchasing. (7) Production Control and Logistics. (8) Production/Manufacturing. excluding (9) Materials Management (e.g., ISP, GPS), material handling conveyances. C-4 (10) Corporate Affairs and Legal. (b) Services. EDS shall be responsible for meeting GM's Requirements, in accordance with GM's stated IT strategies, directions, architecture and standards, for the following services in connection with application software used to support the business functions and processes set forth in sub-section I.A.2(a) above: (1) Participation in the investigation of new application software and application software technologies supporting GM's IT strategies and directions. (2) Participation in the development and maintenance of application architecture and standards. (3) Maintenance, change control, and enhancement of current and future application software. (4) Development and implementation of software interfaces. (5) Integration and operational support of current and future application software. 11

12 (6) Troubleshooting and problem resolution. (7) Output distribution (e.g., on-line, print, plot, microfiche). improvements. (8) Performance tuning and run-time (9) Development (with the "make or buy" decision being made by GM with input from EDS) and implementation of new and replacement application software. C-5 (10) Help-desk support. (11) Timesharing services. 3. Data Management. (a) Scope. Except with respect to Plant Floor Services which are covered in Section I.A.5 below, EDS will be responsible for meeting GM's requirements for the management of data used by or for applications software used to support the various GM business functions described in sub-section I.A.2(a) above. (b) Services. EDS shall be responsible for meeting GM's requirements, in accordance with GM's stated IT strategies, directions, architecture and standards, for the following data management services to support the business functions and processes set forth in sub-section I.A.2(a) above: (1) Participation in the development and maintenance of GM data standards. (2) Participation in the development and maintenance of data architecture and technical standards. (3) Implementation and maintenance of databases shared within GM and data warehouses. (4) Participation in the investigation of and planning for new data/information technologies. 4. IT-Related Services. Except with respect to Plant Floor Services which are covered in Section I.A.5 below, EDS shall be responsible for meeting C-6 GM's requirements, in accordance with GM's stated 12

13 IT strategies, directions, architecture and standards, for the following cross-functional services applicable to the business functions and processes set forth in sub-sections I.A.1(a), I.A.2(a), and I.A.3(a) above: (a) Reports on: performance status, invoice detail, scope of work detail and other descriptions related to MSA Services. (b) Investigation, acquisition, required development, maintenance and use of IT-related methodologies and tools as requested by GM. (c) Implementation of IT security controls. (d) Compliance management with respect to EDS' delivery of MSA Services in accordance with GM's stated IT strategies, direction, architecture and standards. (e) Participation in planning for business continuity services. (f) Planning for IT disaster recovery services jointly with GM. (g) Delivery of IT disaster recovery and IT-related business continuity services. (h) Participation as requested by GM in IT planning, technology assessment and other data management activities. (i) NAO COe training for the term of the current NAO COagreement, dated November 30, (j) Training in the use of EDS software and/or Technologies custom-developed by EDS for GM. C-7 (k) Backup and quality control (without limiting GM's right to assess the quality of delivered MSA Services). 5. Plant Floor Services. EDS shall be responsible for plant floor services to the extent set forth in sub-section 1.3(e) of the MSA ("Plant Floor Services"). Pricing details (d) The term "Modified Cost-Plus Pricing Methodology" shall mean the cost-plus pricing methodology set forth in Section D3.3 of this Exhibit D. 13

14 (e) The term "Modified EDS Cost" for any MSA Services shall mean the costs incurred by EDS in providing those MSA Services determined in accordance with sub-sections D3.3(c) and D3.3(d) of this Exhibit D. (f) The term "Modified Markup Percentage" shall mean, for any MSA Services provided by EDS to any GM User Organization pursuant to the Modified Cost-Plus Pricing Methodology, the percentage computed in accordance with the calculation methodology set forth in a mutually agreed policy letter for that purpose, signed prior to the Effective Date by the GM and EDS Corporate Contract Managers. 14