are more difficult to change, resulting in higher variance of
the labor–capital ratio (Lane et al. 1998). Given our interest
in IT outsourcing, we focus on the labor–IT capital ratio.
Since outsourcing has a significant impact on a firm’s labor
composition (Hsieh and Woo 2005), IT outsourcing may help
firms respond to external shocks better by providing the
ability to more easily adjust their input mix (i.e., the ratio of
labor to IT capital). Greater variations in this ratio may
indicate that firms are already flexible in adapting to a volatile
external environment. Therefore, we expect to see that firms
with high volatility of the labor–IT capital ratio are less likely
to rely on external services providers. Alternatively put, firms
may be more likely to outsource IT functions when the firm
or its IT organization is not efficient enough to respond to
environmental changes (Apte and Mason 1995; Slaughter and
Ang 1996).