Outsourcing IT and Technological Differentiation: Evidence from Digital Startups

Abstract

Does outsourcing IT impact a startup’s ability to differentiate itself and grow? With the advent of cloud services, firms are licensing IT instead of developing IT in-house. Despite this growing trend, we know little about how early-stage resource acquisition decision affects technology adoption, product differentiation, and longer-term performance. When firms outsource their IT, they develop a supplier relationship with a cloud services provider and receive valuable resources related to their cloud provider’s platform. However, cloud suppliers control which resources they create and share, which technologies they suggest, and how well technologies fit with their platform, potentially impacting product differentiation. Using panel data on app-developing startups, I find that startups outsourcing to cloud platforms adopt more technologies. When outsourcing, development tools that programmers use to code an app become more similar to other startups, saving time by avoiding compatibility issues. On the other hand, data analytics capabilities become more diverse, enabling startups to cultivate more robust data, which aids in product differentiation and startup growth.