Competition, Speculative Risks, and IT Security Outsourcing

Information security management is becoming a more critical and, simultaneously, a challenging function for many firms. Even though many security managers are skeptical about outsourcing of IT security, others have cited reasons that are used for outsourcing of traditional IT functions for why security outsourcing is likely to increase. Our research offers a novel explanation, based on competitive externalities associated with IT security, for firms' decisions to outsource IT security. We show that if competitive externalities are ignored, then a firm will outsource security if and only if the MSSP offers a quality (or a cost) advantage over in-house operations, which is consistent with the traditional explanation for security outsourcing. However, a higher quality is neither a prerequisite nor a guarantee for a firm to outsource security. The competitive risk environment and the nature of the security function outsourced, in addition to quality, determine firms' outsourcing decisions. If the reward from the competitor's breach is higher than the loss from own breach, then even if the likelihood of a breach is higher under the MSSP the expected benefit from the competitive demand externality may offset the loss from the higher likelihood of breaches, resulting in one or both firms outsourcing security. The incentive to outsource security monitoring is higher than that of infrastructure management because the MSSP can reduce the likelihood of breach on both firms and thus enhance the demand externality effect. The incentive to outsource security monitoring (infrastructure management) is higher (lower) if either the likelihood of breach on both firms is lower (higher) when security is outsourced or the benefit (relative to loss) from the externality is higher (lower). The benefit from the deman