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INFORMATION TECHNOLOGY OUTSOURCING
AdvancesinManagementInformationSystems AdvisoryBoard EricK.Clemons UniversityofPennsylvania ThomasH.Davenport AccentureInstituteforStrategicChange and BabsonCollege VarunGrover ClemsonUniversity RobertJ.Kauffman UniversityofMinnesota JayF.Nunamaker,Jr. UniversityofArizona AndrewB.Whinston UniversityofTexas
INFORMATION TECHNOLOGY OUTSOURCING SUZANNE RIVARD BENOIT A. AUBERT EDITORS
AM S ADVANCES IN MANAGEMENT I N F O R M AT I O N S Y S T E M S VLADIMIR Z WASS SERIES EDITOR
M.E.Sharpe Armonk, New York London, England
Copyright©2008byM.E.Sharpe,Inc. Allrightsreserved.Nopartofthisbookmaybereproducedinanyform withoutwrittenpermissionfromthepublisher,M.E.Sharpe,Inc., 80BusinessParkDrive,Armonk,NewYork10504. LibraryofCongressCataloging-in-PublicationData ReferencestotheAMISpapersshouldbeasfollows: Barthélémy,J.Population-levellearningandtheevolutionofIToutsourcingdecisions.S.RivardandB.A. Aubert,eds.,InformationTechnologyOutsourcing,Volume8(Armonk,NY:M.E.Sharpe,2008),25–35. ISBN 978-0-7656-1685-2 ISSN 1554-6152 PrintedintheUnitedStatesofAmerica Thepaperinthispublicationmeetstheminimumrequirementsof AmericanNationalStandardsforInformationSciences PermanenceofPaperforPrintedLibraryMaterials, ANSIZ39.48-1984. ~ BM(c) 10 9 8 7 6 5 4 3 2 1 ADVANCESIN MANAGEMENTINFORMATIONSYSTEMS AMISVol.1:RichardY.Wang,ElizabethM.Pierce, StuartE.Madnick,andCraigW.Fisher InformationQuality ISBN978-0-7656-1133-8
AMISVol.5:PingZhangandDennisGalletta Human-ComputerInteractionandManagement InformationSystems:Foundations ISBN978-0-7656-1486-5
AMISVol.6:DennisGallettaandPingZhang AMISVol.2:SergiodeCesare,MarkLycett,and Human-ComputerInteractionandManagement RobertD.Macredie InformationSystems:Applications DevelopmentofComponent-BasedInformationSystems ISBN978-0-7656-1487-2 ISBN978-0-7656-1248-9 AMISVol.3:JerryFjermestadand NicholasC.Romano,Jr. ElectronicCustomerRelationshipManagement ISBN978-0-7656-1327-1
AMISVol.7:MuruganAnandarajan, ThompsonS.H.Teo,andClaireA.Simmers TheInternetandWorkplaceTransformation ISBN978-0-7656-1445-2
AMISVol.4:MichaelJ.Shaw E-CommerceandtheDigitalEconomy ISBN978-0-7656-1150-5
AMISVol.8:SuzanneRivardandBenoitA.Aubert InformationTechnologyOutsourcing ISBN978-0-7656-1685-2
Forthcomingvolumesofthisseriescanbefoundontheserieshomepage. www.mesharpe.com/amis.htm EditorinChief,VladimirZwass([email protected])
CONTENTS SeriesEditor’sIntroduction VladimirZwass Acknowledgments
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1.InformationTechnologyOutsourcing:AnIntroduction SuzanneRivardandBenoitA.Aubert
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PartI.TakingStockofITOutsourcingPracticeandResearch
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2.Population-LevelLearningandtheEvolutionofITOutsourcingDecisions JérômeBarthélémy
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3.StrategicProfilesandInformationTechnologyOutsourcing BenoitA.AubertandAnne-MarieCroteau
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4.InformationTechnologyOutsourcing:QuestionsofLanguage TeresaMarconandAbhijitGopal
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PartII.TheSourcingDecision
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5.AMethodologyforITSourcingDecisions WilliamR.King
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6.InstitutionalandIndividualAntecedentsofInformationTechnologySourcing Arrangements PankajNagpalandKalleLyytinen
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7.FirmCharacteristicsandAllocationofITBudgettoOutsourcing WonseokOh
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8.InformationTechnologyOutsourcingRisk:AResource-BasedPerspective BouchaibBahliandSuzanneRivard
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9.InvestigatingTrustinOutsourcing:AStudyintheHealthCareIndustry EbrahimRanderee,RajivKishore,andH.RaghavRao
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PartIII.ManagingtheOutsourcingRelationship
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10.ManagingtheISOutsourcingRelationship KimLangfield-SmithandDavidSmith
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viCONTENTS
11.VendorCommitmentinanASPOutsourcingContext:AComparative EvaluationoftheRolesofPowerandPartnership MatthewSwinarski,RajivKishore,andH.RaghavRao
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12.GovernanceofComplexITOutsourcingPartnerships ErikBeulenandPieterRibbers
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13.CoordinationofComplexInformationSystemDevelopmentProjects: ACaseStudyofFinnishUniversities AnttiNurmi,PetriHallikainen,andMattiRossi
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PartIV.HolisticViewofITOutsourcing
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14.ManagementofOutsourcedISDevelopmentProjects:TheRoleofSocial CapitalandIntellectualCapital RajivSabherwal
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15.ContractinginITOutsourcing:HierarchicalandPsychologicalContractual ElementsasKeyManagerialGovernanceMechanisms ChristineKohandSoonAng
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16.TheOffshoreOutsourcingLandscape:HistoricalDevelopmentand ChallengesfortheISDiscipline BeenaGeorgeandRudyHirschheim
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EditorsandContributors SeriesEditor Index
323 329 331
SERIESEDITOR’SINTRODUCTION VLADIMIRZWASS,EDITOR-IN-CHIEF
Itis,inasense,naturalforanenterprisetoseekmarketpowerandattempttogaineconomies ofscaleandscopethroughsizeanddirectcontrolofresources.Internalcorporategrowth,with corporatehierarchiessubmittinglargeswathsofeconomicactivitiestotheirplans,wasthepredominantbusinesstrendduringmuchofthepastcentury(Chandler,1977).Verticalintegration andtheinternalizationofbusinessfunctionsandprocessesarefeaturesofsuchexpansion,still practicedtodaybyanumberofmajorcorporations.Asaniconicillustrationofthislineofmanagerialthinking,FordMotorCompanyownedarubberplantationinBrazilinthepastcentury,the bettertosupplyitsowntireplants(Dempsey,1994). Overthepastfivedecades,theadvancingtechnologiesoftransportation,communication,coordination,andcontrolhavebroughttheabilitynotonlytodispersecorporateoperationsaround the globe, but also to externalize them to advantage. In particular, advanced information and communicationtechnologieshavemadeitadvantageousformanyfirmstoorganizetheiractivitiesaroundtheircorecompetencies,theactivitiestheydobest,andtogotothemarketfortheir noncorebusinessprocesses.Ofcourse,externalizingbusinessprocessesisbasedonlong-term relationshipswiththeprocesssuppliers.Asinanysuchrelationships,discernmentintheselectionofvendors(orpartners,assomechoosetoperceivethem)hastobefollowedbygreatcarein contractingandbywell-honedregimesofgovernanceandmonitoring. Thedeploymentofmoderninformationtechnologies(IT)hasloweredthetransactioncostsof marketaccess,thatis,thenonproductioncostsofsearchingforasupplier,contracting,monitoringperformance,andcoordinatinginterorganizationalactivities.Inmanyindustries,ashifthas occurredtowardspecialization,withtheaimofdevelopingthecapabilitiestooperateandinnovateinnarrowermarketplaces(HagelandBrown,2005).Withstrategicoutsourcing,companies concentratetheirresourcesontheactivitiesinwhichtheycan“achievedefinablepreeminence andprovideuniquevalueforcustomers”(QuinnandHilmer,1994,43).Theappropriateuseof externalsuppliersofbusinessprocesseshasbecomeattractiveinoverallorganizationalgovernance. Clemons,Reddi,andRow(1993)haveshownthattheuseofITlowerscoordinationcostswhilenot increasingtransactionriskswhenacarefullyselectedsmallsetoflong-termsuppliersisinvolved. Asaconsequence,weseetheemergenceofnetworksofcooperatingfirms,oftenconcentrated aroundahubcompany(suchasIntel,forexample),andofprocessspecialists(suchasFedExin logistics).Businessvalueisdeliveredtothecustomersbyavirtualsupplier,madeupofthefirms whoseactionsarecoordinatedbyafocalfirmwiththeheavyuseofIT. Speedisamajorfactor.Theresourcesownedbyanindividualfirmareveryoftennotsufficienttoaddressamarketplaceopportunitywithinthetimewindowthatgoeswithit.Building upworld-classcapabilitiesinlogistics,processingoffinancialtransactions,orITmanagement takesyears.Thespeedofaction,bothpacedandenabledbyIT,necessitatescollaborationacross corporateboundariestorapidlycombinethecompetenciestocreatetherequisitecustomervalue. vii
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Firmsthatareunabletomobilizetheresourcesofothersinacommoneffortloseinthecompetitive marketplace.Thisspeedimperativeextendstoinnovation,withtheever-shorterproductcycles andevermoretime-drivenbusinessprocesses.Tothriveisthisbusinessenvironment,Procter& Gamble,forinstance,hasadoptedthestrategyofopeninnovation,ineffectgoingtothemarket formuchofitsresearchanddevelopment(HustonandSakkab,2006). Theprogressingdevelopmentofinformationeconomies,characterizedbytheever-greaterdigitizationofproductsandbythepreponderanceofknowledgeworkwithdigitaltoolsandmedia,has acceleratedthetrend.Thepoliticalandeconomicliberalizationaffectinglargespansoftheworld duringthelastdecadeofthetwentiethcenturyhasfosteredanoverlappingtrendtowardoffshoring,whichistransferringcorporatebusinessprocessesabroad,often(butcertainlynotalways)on anoutsourcedbasis.TheproliferationoftheInternet–Webcompoundhasfurtherfacilitatedthe outsourcingofbusinessfunctions,astheybecomeuniversallybuiltaroundWeb-enabledsystems. Inamoreprofoundway,spreadinguniformenterprisesystemsandotherplatformITfostergreater uniformityinworkpracticesandbusinessprocessesaroundtheworld.World-classprocessesare availableworldwide,ofteninregionswithsuperiorcapabilitiesorlowercoststructures,andtheycan beincorporatedintoglobalsupplychainsandwebsowingtotheInternet–Webinfrastructure. Outsourcing,thetransferofanorganization’sbusinessfunctiontoanexternalvendor,hasbecomeabroadbusinessdevelopment.ITisboththemeansofoutsourcingand,asthisAdvancesin ManagementInformationSystems(AMIS)volumeanalyzesthoroughly,itsobject.IToutsourcing isanimportantpartoftheglobaltrend,asitbothdeterminesthegovernanceofavitalorganizationalfunctionandinfluencestheprocessesofexploitationandexplorationinallotherfunctions ofanenterprise.IndissectingIToutsourcing,theeditorsofthepresentvolumeofAMIS,Suzanne RivardandBenoitA.Aubert,haveadmirablyfulfilledthemissionoftheseries.Theyhaveframed thedomainofresearchandpracticebroadly,andassembledandguidedanoutstandingteamof authors.Theypresenttothereadernotonlythemostrecentresearchworkandactionableconclusionsbutalsoresearchmethodsthatwillservetogeneratenewresultsinthefuture.Indeed, thevolumebringsoutthecomplexitiesofIToutsourcing.Beyondthat,theauthorsbringtobear agreatvarietyoftheoreticalperspectivesthatundoubtedlywillbetakenupinthefuturebythe researcherswhowillbuildonthiswork. Althoughthecontractingofvariousinformationsystem(IS)subfunctionstoexternalvendors hasalwaysbeenapartoforganizationalITprovisioning,themomentousdecisionofEastman KodakCompanyin1989tooutsourceitslargeISfunctionhasfocusedourfieldonthepotential, andonthepitfalls,ofoutsourcing.Indeed,byconsideringtheroleofITinoutsourcingandof outsourcinginISgovernance,ourdisciplinehasovertheyearsproducedmanyimportantresults. Toindicatethescopeofworkinthearea,Iwillmentiononlysomeofthemhere.Thereadersof thevolumewill,ofcourse,gainafardeeperandmoreextensiveview. ThemotivationsforIToutsourcingvary.Yet,theymostfrequentlycenteroncostcontainment andmanagerialcontrol,financialinfusionintothecompanysheddingitsITowingtothetransfer ofresources(suchasdatacenters)totheoutsourcer,andattemptstogainaccesstosuperiorIT expertiseandmanagementskills(LohandVenkatraman,1992).Agreatvarietyofoutsourcing scopesandcontractingpracticeshasbeenidentified(LacityandWillcocks,1998).Newoutsourcing modesareemerging,suchasuse-basedservicesofutilityproviders,includingapplicationservice providersandbusinessserviceproviders.Furtherprogressmaybeexpectedwithservice-oriented architectures,relyingonWeb-accessiblestandardizedsoftwarecomponentsforthesupportof businessfunctions. Sincetheoutsourcerincurssignificantfront-endcosts,contractualarrangementsaregenerally long-term,affordingtheoutsourceranopportunitytorecoupexpenditures.Long-termcontracting
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hastobedoneskillfully,combiningguaranteeswithflexibilityacrosspotentialmajortechnological discontinuities(imagineaten-yearoutsourcingcontractsignedin1990!).Thetermandstructureof theoutsourcingarrangementhaveasignificanteffectonitssuccess(Lee,Miranda,andKim,2004). Themanagementoftheoutsourcingrelationship,includingsuchfactorsasinformationsharing,trust- andcommitment-building,andincentivealignment,arecrucialfactorsofsuccess(LeeandKim, 1999).Offshoreoutsourcingrequiresspecialcareinstructuringtospreadtherisks,avoidexcessive costsowingtomicromanagement,andprotectintellectualproperty(RottmanandLacity,2006). Byitsverynature,outsourcingcarriessignificantrisks,asitresortstothevagariesofthemarket,asopposedtotheinternalmanagementofITbyafirm.Agreatmeasureofdecisionmaking isbeingtransferredtotheoutsidesupplier.Therisksmaybeclassifiedasstrategic,operational, geopolitical,andthoseattendantontheatrophyofavitalfunction(Aron,Clemons,andReddi, 2005).Equitymarketsarequitediscerninginidentifyingcertainclassesofrisksincurredbyclientcompaniesandinactingaccordinglywhenvaluatingthem(Oh,Gallivan,andKim,2006). Althoughavarietyofrisk-containmentmeasuresareemployed,rangingfromspecializedcontractingprocessesthroughcontinuingqualityassuranceandmanagerialandprofessionaloversight, inherentrisksremain.Comprehensiverisk-managementpoliciesaresuccessfullydeployedby variousfirms(Aubert,Patry,andRivard,2005).Fromtheorganizationallearningandinnovationperspectives,firmsthatarestrategicallydependentoninformationsystemsrunadangerof fallingbehindinunderstandingandexploitingtheintricateinterdependenceamongIT-basedand otherfunctionalprocesses.ForcompaniesstrategicallydependentonthedeploymentofIS,itis vitallyimportanttoconsideroutsourcinggovernanceandmonitoringonthestrategiccorporate level(NolanandMcFarlan,2005).Themajoroutsourcingalternativesshouldbeundertakenwith considerationsthatgowellbeyondshort-termcostsavings,andwithaviewtowardthelong-term competitivenessoftheenterprise. Alltold,thestudyofIToutsourcingisthestudyofmajoroptionsinorganizationalITservice delivery. The profusion of alternatives and the complexity of outsourcing relationships make IToutsourcingatrulyimportantfieldofstudywithintheISdiscipline.Emergingtechnologies increasethecomplexityofthisdeliveryandbearever-newoptions.Beyondthat,itistobenoted thatthestudiesofIToutsourcingpublishedherecancross-pollinatetheresearchworkongeneral business-processsourcingandonstrategicalliancesintheeraofglobalization.Theworkofthe editorsandtheauthorsofthepresentvolumeisaworthycontributiontothisresearch. REFERENCES Aron,R.;Clemons,E.K.;andReddi,S.2005.Justrightoutsourcing:Understandingandmanagingrisk. JournalofManagementInformationSystems,22,2(Fall),37–55. Aubert,B.A.;Patry,M.;andRivard,S.2005.Aframeworkforinformationtechnologyoutsourcingrisk management.DataBaseforAdvancesinInformationSystems,36,4(Fall),9–28. Chandler,A.D.1977.TheVisibleHand:TheManagerialRevolutioninAmericanBusiness.Cambridge,MA: HarvardUniversityPress. Clemons,E.K.;Reddi,S.P.;andRow,M.C.1993.Informationtechnologyandtheorganizationofeconomic activity:The“movetothemiddle”hypothesis.JournalofManagementInformationSystems,10,2(Fall), 9–35. Dempsey, M.A. 1994. Fordlandia, Michigan History (July–August).Available at www.michiganhistory magazine.com/extra/fordlandia/fordlandia.html(accessedJuly28,2006). Hagel,J.,IIIandBrown,J.S.2005.TheOnlySustainableEdge:WhyBusinessStrategyDependsonProductiveFrictionandDynamicSpecialization.Boston:HarvardBusinessSchoolPress. Huston,L.andSakkab,N.2006.Connectanddevelop:InsideProcter&Gamble’snewmodelforinnovation. HarvardBusinessReview,84,3(March),58–66.
xSERIESEDITOR’SINTRODUCTION Lacity,M.andWillcocks,L.P.1998.Anempiricalinvestigationofinformationtechnologysourcingpractices: Lessonsfromexperience.MISQuarterly,22,3(September),363–408. Lee,J.andKim,Y.1999.EffectsofpartnershipqualityonISoutsourcingsuccess:Conceptualframework andempiricalvalidation.JournalofManagementInformationSystems,15,4(Spring),7–28. Lee,J.;Miranda,S.;andKim,Y.2004.IToutsourcingstrategies:Universalistic,contingency,andconfigurationalexplanationsofsuccess.InformationSystemsResearch,15,2(June),110–131. Loh,L.andVenkatraman,N.1992.Determinantsofinformationtechnologyoutsourcing:Across-sectional analysis.JournalofManagementInformationSystems,9,1(Summer),7–24. Nolan,R.andMcFarlan,F.W.2005.Informationtechnologyandtheboardofdirectors.HarvardBusiness Review,83,10(October),96–106. Oh,W.;Gallivan,M.J.;andKim,J.W.2006.Themarket’sperceptionofthetransactionalrisksofinformation technologyoutsourcingannouncements.JournalofManagementInformationSystems,22,4(Spring), 271–303. Quinn, J.B. and Hilmer, F.G. 1994. Strategic outsourcing. Sloan Management Review, 35, 4 (Summer), 43–55. Rottman,J.andLacity,M.2006.ProvenpracticesforeffectivelyoffshoringITwork.SloanManagement Review,47,3(Spring),56–63.
ACKNOWLEDGMENTS WearegratefultoVladimirZwass,editor-in-chiefoftheAdvancesinManagementInformation Systems(AMIS)series,forhavinginvitedustobecomeeditorsofthismonograph.Wealsowish tothankHeatherSmithforhervaluableassistanceinpreparingthisintroductorychapter.Finally, ourwarmestthanksgototheauthorsfortheirgenerosityandefficiencythroughouttheprocess. Becauseoftheirexpertiseinthefield,weareconfidentofthequalityofthisvolume.Becauseof theirenthusiasm,thepreparationofthemonographwasamostpleasurableendeavor.
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INFORMATION TECHNOLOGY OUTSOURCING
CHAPTER1
INFORMATIONTECHNOLOGYOUTSOURCING AnIntroduction SUZANNERIVARDANDBENOITA.AUBERT
Inthelate1980s,whentheterminformation-systems(IS),orinformation-technology(IT),outsourcing wasaneologism,somebelievedthephenomenonitselfwasafadthatwouldsoonfallintooblivion. YetsometwodecadesafterthefirstmajorIToutsourcingagreementwasannounced,thenumberof firmsthatdecidetotransfertheirITassetsandservicestoexternalsupplierscontinuestoincrease. Intermsofscience,fifteenyearsisindeedashortperiodoftime.Yet,duringthatperiod,thequantity andvarietyofstudiesonIToutsourcinghavebeenimpressive.Therearetwoexplanationsforthis situation.First,IToutsourcingisamultifacetedphenomenonthatcanbeviewedfromavarietyof theoreticalperspectives,forexample,transactioncosttheory,agencytheory,resource-basedtheory, institutionalanalysis,andriskmanagement,tonameafew.Second,thephenomenonitselfchanges, raisingnewresearchquestions.Forinstance,adecadeagoapplicationserviceprovisioningwasnot evenconsideredasanoutsourcingalternative,andweheardverylittleaboutoffshoreoutsourcing. Theyarenowcommonoptionsofferedtoorganizations,andtheyraisenewresearchissues. Thisabundantandvariedresearchfallsintotwobroadstreams:studiesthataimatunderstanding andexplainingtheoutsourcingdecisionandstudiesthatfocusonthemanagementoftheoutsourcingrelationship.Studiesinthefirststreamofresearchareaimedatprovidingabetterunderstandingoftheantecedentsofanoutsourcingdecision(betheyeconomic,political,orinstitutional), ofsourcingalternatives(insourcing,totaloutsourcing,selectivesourcing,offshoreoutsourcing, ASP,andthelike),orofthedecisionprocessitself.Studiesthatbelongtothesecondstreamaim atunderstandingthemanagementofoutsourcingrelationships.Someproposemodelsthatdepict theevolutionofIToutsourcingrelationshipswhileothersattempttoidentifydriversforsuccessful relationshipmanagement,betheysuccessfactorsormanagementmechanisms. ThemainobjectiveofthisvolumeistoencapsulatecurrentknowledgeandcontributetothebuildingofacumulativeresearchtraditioninthedomainofIToutsourcing.Todoso,thevolumehasbeen dividedintofourparts.Thefirstexaminespastandcurrentresearchandsuggestsnewapproachesfor betterunderstandingthisphenomenon.ThesecondandthirdpartsexploretheITsourcingdecisionand themanagementofoutsourcingrelationships,respectively.Thefourthandfinalpartpresentschaptersthat adoptaholisticperspectivetoanalyzeIToutsourcingandlookatfuturetrendsinoutsourcingresearch. PartI.TakingStockofITOutsourcingResearch ThefieldofIToutsourcingresearchisanevolvingone,notonlybecauseofnewpracticesbut alsobecauseourmethodologiesforstudyingthisphenomenonarebecomingmorerefinedover 3
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time.Todate,academicshavetakenafairlyfocusedapproachtothefactorsinvolved,concentratinglargelyontheeconomicsofsourcing(i.e.,costs,risks,andresources),typesofoutsourcing arrangements(e.g.,totaloutsourcing,partialoutsourcing),andthetypesofoutsourcingcontracts (e.g.,detailed,general)aswellastherelationshipitself.Today,lookingbackonfifteenyearsof ITsourcingresearch,wearecomingtorecognizethatwehavejustscratchedthesurfaceofour understandingofthesemethods. IToutsourcingisaworthwhileresearchtopicforthreereasons.First,itisofintrinsicinterest inandofitself.Itisanewanddifferentmeansofdeliveringorganizationalproductsandservices andthereforevaluabletounderstand.Thechaptersinthissectionintroducethereadertonovel perspectivesontheshapeandmeaningofIToutsourcinginorganizations.InChapter2,Jérôme Barthélémyexploresthequestionofwhetherornotanentirepopulationoforganizationscanlearn howtomanageoutsourcingbetterovertime.InChapter3,BenoitA.AubertandAnne-MarieCroteauexplorehowfirmstrategyaffectskeyoutsourcingissues.Chapter4,byTeresaMarconand AbhijitGopal,introducesustohowlanguageshapesourunderstandingoftheworldofoutsourcing.Thissectioninvitesconsiderationofnewwaysofviewingtheoutsourcingphenomenon,not bydenigratingwhathasbeendonetodatebutbywideningthescopeofwhatisinvolvedandby trainingnewlensesonourcurrentunderstandingofthistopic. Second,IToutsourcingisalsoa“fieldwithinafield”inthatitispartofthelargerarenaofIT management,andlikethisbroadersubject,itischangingrapidlyastechnologyenablesnewways ofworking,createsentirelynewproductsandservices,andchangesthecompetitivelandscape.As asubsetofthislargertopic,outsourcingresearchcanthereforeilluminatenewandfruitfulways oflookingatandunderstandingthewholefield,particularlyitsdynamics,whicharebothexciting toobserveandfrustratingtopindown.Thissectionpresentssomechallengingandprovocative ideasforstudyingIToutsourcingthatalsohaveapplicabilitytoresearchinthebroaderfieldofIT management.Chapter2takesustoanewlevelofanalysis—theentirepopulationoforganizations. Chapter3incorporatesnewtheoreticalperspectivesandintroducesustothedynamicnatureof thisfield.Chapter4showsushowtheverylanguageweusedrivesourpractices. Third,IToutsourcingrepresentsthevanguardofsomeneworganizationalmodels,characterized bymoreopenandporousboundaries,interorganizationalcollaborationandlearning,andincreasing globalization.Whatislearnedaboutstudyingthisphenomenoncaninformandguideourunderstandingofthechangesinstorefororganizationsasawholeandhowtheycannavigatethrough potentialdifficultiestoachievesuccessfuloutcomes.Learning,strategy,andlanguagehavenot typicallybeenstudiedinoutsourcing,yeteachofthesechaptersshowshowoneoftheseconcepts canandshouldaffectthenatureandtrajectoryofoutsourcinginorganizationsandpossiblyother neworganizationaltrends.Thesechaptersencourageacademicstoexpandtheirmethodological basesoforganizationalresearchandbetterunderstandhownewknowledgeisproduced.Theyalso pointthewaytonewlevelsofanalysisanddifferentwaysofstudyingorganizationaldynamics. Chapter2illustrateshowpopulation-levellearningcanbestudiedandshowshowthislevelof analysiscaninformusinnewways.Chapter3demonstrateshowmultipletheoreticalperspectives canbeintegratedinaresearchmodelandsuggestshowdynamicscanbestudied.Finally,Chapter 4introducesnewwaystointerpretamultiplicityofstakeholderperspectivesandillustratesways inwhichtheroleoflanguagecanbeproductivelyresearched. Chapter2:Population-LevelLearningandtheEvolutionofITOutsourcingDecisions Cananentirepopulationoforganizations“learn”asagroup?ThisisthequestionJérômeBarthélémysetsouttoexploreinChapter2ofthisvolume.Theorysuggeststhatpopulationsoforgani-
INFORMATIONTECHNOLOGYOUTSOURCING:ANINTRODUCTION5
zationscanlearnfromexperienceinoneofthreeways.First,individualorganizationscaneach learnfromtheirdirectexperiencewithaphenomenon,forexample,outsourcing.Second,theycan learnfromimitatingwhattheyknowofotherorganizations’experiences(i.e.,interorganizational learning),or,third,asetoforganizations(e.g.,inanindustryorgeographicregion)canlearnfrom anothersetoforganizations. Whilethispremiseistheoreticallycompelling,thelittleempiricalresearchthathasbeendone inthisareahasyieldedmixedresults.Oneofthereasonsforthis,Barthélémycontends,isthat thesestudieshavefocusedonwhetherornotproductivitygainscanbetransferredfromonefirm toanother,notonwhatwaslearnedorhowitwaslearned.Ashepointsoutinthischapter,organizationscananddosometimeslearnthewrongthingsfromothers’experiences,particularlyifthe learningisfromindirectsources,suchasthetradepressorconsultants,whichoftentendtoward optimisticreportsorconcentrateonthewrongreasonsforsuccess. ResearchonIToutsourcingisnottypicallydoneatthislevelofanalysis,yetithasthepotential toyieldsignificantinsightsnotonlyintooutsourcingasaphenomenonbutalsointoorganizational behavioringeneral.The1989contractbetweenKodakanditspartners—IBM,DEC,andBusinesslandInc.—iswidelyacceptedasatippingpointintheuseofoutsourcinginorganizationsin thatitlegitimatedthepracticeamonglargefirms.Barthélémy’sgoalinthischapteristoshownot onlythatIToutsourcinghasgainedwideracceptancesincethisdate,butalsothatorganizations’ understandingofhowbesttoundertakeithasbeenprogressivelyrefinedsincethen.Whilethis propositionappearsintuitivelyobvious,ithasneverbeendemonstrated. UsingthepopulationoforganizationsthatoutsourceallorpartoftheirITastheunitofanalysis, thischapterpresentsandtestsfourpropositionsonwhatorganizationshavelearnedaboutoutsourcingovertime.Theseexaminewhichactivitiesorganizationschoosetooutsource,howthey selectvendors,howcontractsaredeveloped,andfinally,theoverallsuccessoftheoutsourcing effort.Barthélémy’sfindingsshowthattheoutsourcingvendor-selectionprocessandcontracting processeshaveindeedevolvedtobecomemoreelaborate,demonstratingthatpopulation-level learningtookplaceovertheten-yearperiodsurroundingthe1989watershedpoint.Healsoshows thatorganizationsweremoresuccessfulinoutsourcingwhentheywaiteduntilasufficientstock ofknowledgeaboutitwasaccumulatedbythepopulationasawhole. Thischapter’sconclusionsaresignificantfortworeasons.First,itconvincinglydemonstratesthe importanceandvalueofstudyingorganizationallearningatthisunitofanalysis,notonlyinthefield ofIToutsourcing,butalsoinotherareasinwhichorganizationslearnfromeachother.Understanding thepopulationoforganizationsisbecomingincreasinglyvitalasboundariesbecomemoreporous andopentonewideasfromtheoutsideandasorganizationalpartnershipsforlearningbecomethe normratherthantheexception.Second,itprovidesevidencethatfirstmoversinoutsourcinghavenot seemedtoenjoyadvantagesoverlatermovers.Thisnotonlyhasimplicationsforcompaniesseeking toinnovateintheoutsourcingarena(e.g.,globalsourcing),butalsosuggeststheacceptedwisdom thatinnovationinITyieldsacompetitiveadvantageneedstobemorecarefullystudied. Chapter3:StrategicProfilesandInformationTechnologyOutsourcing Thischapterlooksatanotherneglecteddimensionofthenatureanddynamicsofoutsourcing decisions—organizationalstrategy.Althoughstrategyistheelementthatdistinguishesoneorganizationfromanotherandguidesbothanorganization’sstructureandperformance,theinfluence ofstrategiccharacteristicshaslargelybeenignoredinoutsourcingresearch.Todate,studieshave exploredIToutsourcinglargelyfromtheperspectiveofthecharacteristicsofoutsourcingtransactioncostsorhowoutsourcedresourcesaretobeused.
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BenoitA.AubertandAnne-MarieCroteausuggestthatafirm’sstrategicpositionshouldaffecttwokeyoutsourcingquestions:WhichITactivitiesshouldbeoutsourced?andhowshould IToutsourcingcontractsbestructured?Inaddition,outsourcingdecisionsmustbedynamicthey postulate,becauseasfirmsandindustriesmature,strategiesalsochange,therebyinfluencingthe nature and type of outsourcing desired.The authors examine several ways in which different strategicchoicesmightaffecttheseorganizationaldecisions. Currentoutsourcingresearchsuggeststhatoutsourcingactivitiesarecomparablebetweenorganizations.Theauthorsfeelthatourunderstandingofoutsourcingdecisionscouldbeimproved byconsideringthestrategictypeofanorganization.Theyillustratetheirpropositionbyexamining twofundamentallydistinctstrategies—defendersandprospectors—thatcouldaffectoutsourcing behavior. AubertandCroteaupostulatethatthesestrategicprofileswillalsobeassociatedwithdifferent typesofoutsourcing.Defenderswilltendtochoosemoretraditionaloutsourcingcontractsthat aremorepredictableandstresseconomiesofscaleandlowerprices.Prospectors,willbemore inclinedtosignpartnershipcontracts,whichwillhaveahigherlevelofincompleteness. Thischaptermakestwoimportantcontributionstooutsourcingresearch.First,itpresentsa theoreticalfoundationforaddressinganorganization’sstrategicprofilewhenstudyingoutsourcing decisionsandmakesacaseforlookingatoutsourcingfromahigherlevelofanalysisthanearlier transaction-basedresearch.Indoingso,italsorecognizesthatsourcinghasbecomeanimportant variableinhowdifferentfirmspursuetheirbusinessstrategies.Second,itproposesadynamic modelforunderstandinghowandwhyanorganizationwillchangeitssourcingdecisionsover timeasitsstrategicpositionwithinanindustrychangesandasanindustrymatures. Chapter4:InformationTechnologyOutsourcing:QuestionsofLanguage ThefinalchapterinthissectionexploresanotherlargelyuntappedavenueofresearchintoIT outsourcing,thatis,howlanguageshapesourunderstandingofthisphenomenon.AuthorsTeresa MarconandAbhijitGopal,notethatlanguageisusedtocreateandconstructsocietalawareness, anddoesnotsimplymirroranobjectivereality.Theysuggestthatnotonlydoesourlanguagename objectsandconcepts,itisalsoawayofunderstandingtheworldthatexcludesotherviewsofitand helpsshapeourpractices.Therelationshipbetweenlanguageandpracticesisparticularlyvitalto understandinfieldswherenewpracticesaredevelopingandnewlanguageisbeingcreated. Neologisms,thatis,newwordsorexpressions,areaparticularfeatureoftheworldofinformationtechnology,ofwhichoutsourcingisasignificantpart.MarconandGopalpointoutthatthe creationandevolutionofthesewordsisareflectionofcurrentpracticesandconcerns.Theyargue thattheconstantinterplaybetweenlanguageandpracticecanbealensthroughwhichtheoutsourcingphenomenonmaybestudied.However,researchersinthisfieldhavenotyetadoptedthemore nuancedmethodologiesthatthestudyoflanguageoffers.Therefore,theserepresentanopportunity tobringnewperspectivestooldproblems.Suchapproachestoresearchwillnotleadtopredictive models,butcanofferanewformofgeneralizabilitybasedonreaders’interpretations. Toillustratethismethodologicalapproach,theauthorsreanalyzeanethnographiccasestudy ofoutsourcinginaFortune500companycompletedin2000.Atthisfirm,workactivitieswere classifiedeitherasa“commodity”oras“value-adding.”Allcommodityworkwastargetedfor outsourcing.MarconandGopalshowthatdistinguishingbetweenthesetwotypesofwork(as opposedtoclassifyingworkinotherways)helpedshapetheperceptionsofthosedoingitand affectedhowtheworkitselfwasaccomplished.Forexample,commodityworkwasassignedto contractors,whilevalue-addedworkwasgiventointernalemployees.
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Interestingly,thecontractorsdidnotagreethattheirworkwasacommodityandtheyactively soughtwaystoavoidinvolvementinroutineworkandtodeveloppracticesthatwouldenhance theirstatusasconsultantsandprofessionals.Thisledtostrugglesbetweenemployeesandcontractorsovertheworktheywereexpectedtodoandalsoshapedhowcontractorsmadechoicesabout theirdailypracticesandcareerdevelopment. Theauthorssuggestthatlanguagecanbeusedtohelpbetterunderstandsomeofthechallenges companiesencounterinIToutsourcinganddemonstrateanewapproachforanalyzingthisand otherorganizationalphenomena.Whiletraditionalwisdominoutsourcingresearchsuggeststhat successderivesfromeffectivecontractsandrelationships,theauthorsproposethatlanguagecan beusedtoteaseoutsomeofthedeepercomplexitiesandchallengesfacingorganizationsandnew approachestoaddressingthem. Thechaptercallsforincreasingmethodologicalsophisticationandnewdirectionsforinquiryin IToutsourcingresearch.Suchnuancedapproacheshavenotyetbeenusedinthisfield.Yetthese havetheabilitytomuchbetterinterpretthemultiplicityofvoices—theirpositions,interests,and concerns—involvedinoutsourcing.Alinguisticapproachalsoenablesresearcherstobettertheorize andunderstandchange,whichisessentialtounderstandinganactivityasdynamicasoutsourcing.Finally,theauthorssuggestthatlinguisticsensitivitywillhelpresearchersdeconstructthe knowledge-productionprocesswherebyconsultants,thetradepress,andresearchersthemselves createnewcategoriesofunderstanding,whichinturnaffecthowweactintheworld.Marconand Gopal’sappealforreflexivityinoutsourcingresearchimpliesthatourunderstandinginthisarea hasreachedyetanothertippingpoint.Wehavecometoaplacewhereacademicscannotmerely actasamirrortoreflectapreconstructedviewoftheworld.Wecannowbegintounderstandhow languageandpracticesinteracttocreatenewversionsofreality. PartII.TheSourcingDecision Deciding whether or not to outsource all or part of an IT activity is an important managerial function,andseveralstudieshavebeendevotedtobetterunderstandingtheantecedentsofthis decision. To date, these studies have been grounded in theories from industrial organization, mainlytransactioncosttheoryandagencytheory.Whilethistheoreticalgroundingcontinuesto beimportantinhelpingtoexplainoutsourcingdecisions,thechaptersofthissectiondemonstrate hownewandimportantperspectivescontributetobroadenourunderstandingofhowandwhy sourcingdecisionsaremade. Allofthechaptersarguethatourtheoriesandconceptualizationsneedtoberefinedandenhanced.InChapter5,WilliamR.Kingtellsusthatwhathastraditionallybeenseenasabinary yes/nodecisionistodaybeingfragmentedintoseveraldifferenttypesofsourcingoptions,each ofwhichisappropriateforaparticulartypeofITactivity.InChapter6,PankajNagpalandKalle Lyytinenshowhowmacro-andmicro-organizationaltheory(i.e.,institutionaltheoryandrolebasedtheory)canbeusedtogethertoshedlightonwhysimilarorganizationschoosedifferent sourcingarrangements.WonseokOhdemonstratesinChapter7thatseveralkeyorganizational characteristicsaffecthowmuchoutsourcingafirmchoosestouse.InChapter8,BouchaibBahli andSuzanneRivardexpandthenotionofIToutsourcingriskusingresource-basedtheory,and introducethenotionofacapabilitygapinresourcesasakeyelementofrisk.Finally,inChapter 9,EbrahimRanderee,RajivKishore,andH.RaghavRaoexaminetheroleoftrustandprivacyin outsourcingdecisionsandsuggestwaysthatthesecanbeintegratedintocurrenttheoryandmore carefullyconceptualized. Someofthesechaptersalsoextendourunderstandingofthesourcingphenomenontoinclude
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someofitsnewerdimensions.InChapter5,forexample,Kingpresentsaframeworkfordistinguishingamongfourdifferentsourcingoptions—outsourcing,insourcing,strategicalliances,and internalmarkets.Thisreflectsthefactthatsourcingisbecomingamorecomplexdecisionthat istakingonstrategicimplications.Echoingthis,Chapter8looksspecificallyatthedimensions andrisksinvolvedinstrategicoutsourcingspecificallytobetterunderstandhowthismightaffect anorganization’scompetitiveadvantage.Inthefinalchapterofthissection,Randeree,Kishore, andRaolookatthedecisiontouseanapplicationserviceprovider(ASP)andatthefactorsthat areimportantindoingso. Thissectionoffersmanyfruitfulnewavenuesofresearchintosourcingdecisionmaking.The chaptersalsoprovidepractitionerswithamorethoroughunderstandingofthefactorsthatcontributetoeffectivedecisionsandprovideusefulguidanceconcerningsomeoftheimplicationsand risksofthesedecisions.Inreadingthem,bothresearchersandpractitionerswilldevelopanew appreciationforthecomplexityofsourcingdecisionmakingandthevalueofthoroughlythinking throughtheconcepts,risks,andscopeinvolved. Chapter5:AMethodologyforITSourcingDecisions Inthischapter,WilliamR.KingoutlinesapracticalframeworkformakingsourcingdecisionsinIT. Basedonhisexperiencesasaconsultantanddrawingextensivelyfrombestpracticesintheliterature,heprovidesaguidelineforchoosingbetweenfourbroadsourcingalternatives:outsourcing, insourcing,internalmarkets,andstrategicalliances.Whileitdoesnotmakethesourcingdecision easyorstraightforward,thisframeworkhasbeendesignedtoensurethatallrelevantaspectsofa sourcingdecisionareaddressedanddocumentedbeforeitismade. Thefirstimportantpointtonoteaboutthischapteristhatitlooksatsourcingdecisionsnot outsourcingdecisions.Sourcinghasnowbecomeamuchmoreelaborateandgranularprocess inmanycompaniesandismovingawayfromthe“tooutsourceornottooutsource”questionto howandwhereITresourcesandservicesshouldproperlybedeployed.Thekeyquestion,nowis toassesswhetherornotaparticularITactivitymightcurrentlybe,orhasthepotentialtobe,a corecompetenceoracriticalsuccessfactor(CSF)fortheorganization. Kingthenclarifiesthesetwocomplexconceptsonwhichthesourcingdecisionistobemade anddiscussestherelationshipbetweenthem.WhileideallyanITactivitywouldclearlybeacore competenceand/oraCSF,inreality,theyarenot.Astheauthorreiteratesseveraltimesinthis chapter,thesourcingdecisionisrarelyclear.Thisiswhyitisbestmadebyagroupofbusiness andITexecutivesworkingtogetherovertime.Jointdecisionmakingtendstoleadtobetterand morewell-thought-outsourcingdecisions.Ratherthanbeingachecklist,theframeworkshould beusedasaguidetostimulatethinkingabouttheissuesinvolvedandtoexaminepathsthatmight otherwisegounexplored.Thishighlightsasecondimportantpointaboutthesourcingdecision—that itisajudgmentcallbymanagersandmustberelatedtothecompany’sstrategyandcapabilities. Forexample,evenwhereastrategicallianceisdesirable,asinthecaseofanITactivitythatis bothapotentialcorecompetencyandapotentialCSF,theorganizationmaynothavetheability todevelopandsustainthischoice.Thus,differentorganizationscouldmakedifferentjudgments insimilarconditions. Thefive-stepmethodologyoutlinedisthethird,andbynomeanstheleastimportant,contributionofthischaptertoourunderstandingofsourcingdecisions.Kingnotesthateachsteptypically requiresmorethanayes/noanswer.Forexample,thefirststepistoidentifyanITactivitythatis acandidateforsourcing.Doingthisinvolvesdevelopingadeepunderstandingofhowthetarget activitycontributestotheorganization’scurrentandfuturestrategiccapability.Followingthisap-
INFORMATIONTECHNOLOGYOUTSOURCING:ANINTRODUCTION9
proachtosourcinghasseveraldimensionsthatmaynotinitiallybeappreciatedbyeitherexecutives orresearchers,andidentifyingtheseunderlinesthetruebusinessvalueofmakingappropriatesourcingdecisions.Useofasourcingframeworkforcesexecutivestobemorethoroughintheprocess andtofullyidentifytheimplicationsoftheirdecisionandotherpotentialproblemsthatmayarise. Furthermore,itcanidentifyactivitiesthatarevitaltotheorganization’scurrentandfuturesuccess andinwhichfurtherinvestmentsneedtobemade.Finally,becausethemethodologyfocusesattentionontheorganizationalmodelofthefuture,ittendstoshednewlightonthevalueofITactivities andcreatenewunderstandingaboutorganizationalstrategyinthemindsofexecutives.Inproviding managersaguideline,andnotacookie-cutterformula,formakingsourcingdecisions,Kingillustrates themultiplicityoffactorsthatcontributetoderivingtruebusinessvaluefromsourcing. Chapter6:InstitutionalandIndividualAntecedentsofInformationTechnology SourcingArrangements Thischapterexploresthesourcingdecisionfromaverydifferentperspectivethantheprevious one.PankajNagpalandKalleLyytinenaskthequestion:WhydosimilarITactivitiesinfirms becomesubjecttodifferentsourcingarrangements?Likeotherauthorsinthisvolume,theynote thatmostcurrenttheoryonoutsourcingcannotaccountforthesedifferences.DifferentITsourcing arrangementshavebeenobservedinpracticebutthereasonsfortheseorganizationaldecisions havebeeninadequatelytheorized. Toaddressthisgapbetweentheoryandpractice,theauthorsadopttwodifferentbutcomplementary lenses with which to explore the IT sourcing decision.The first, institutional theory, suggeststhatdifferentorganizationalchoicesareinfluencedbyinternalandexternalforcesthat leadmanagerstounintentionallymaketheirorganizationssimilartoothers.Thistheorysuggests thatITsourcingchoiceswillvaryaccordingtothecostandnoncostpressuresontheorganization. Thesepressuresincludesuchfactorsas:thedegreeofITcomplexity,maturityofthetechnology, availabilityofeconomicbenchmarks,participationofexecutivesininterorganizationallearning opportunities,dependenceonthefinancefunction,andbudgetaryrestrictions.NagpalandLyytinen thenexaminehowtheseelementsmightbeexpectedtoinfluenceanorganization’schoiceofone oftwocontrastingsourcingmodels:acost-centermodeldesignedtoachieveefficiencyanda service-centerdesigncreatedtoimproveusersatisfaction.Theypresentaseriesofpropositionsas tohowsuchinstitutionalinfluencescouldbeexpectedtoaffectthechoiceofoutsourcingmodel. Insummary,theysuggestthatgreateruncertainty,moreoutsidelearningopportunitiesandless dependenceonfinancewillbeassociatedwithservice-centersourcingmodels. The theoretical lens is then reversed to explore how role theory might influence sourcing decisions,bylookingathowthedegreeofroleautonomyoftheITmanagercouldinfluencethe modelselected.Usingthesametwocontrastingsourcingmodels,theauthorspostulatehowthe degreeofinfluenceofotherinternalfunctionsontheITmanager,themanager’slengthoftenure, andthestrengthofanorganizationalculturecouldaffectthefreedomanITmanagerwillhave tomakesourcingdecisions.Theyanticipatethatgreaterroleautonomywillbeassociatedwith service-centersourcingmodels. Whileeachoftheselensesisinterestinginthatitsuggestsnewwaysofthinkingaboutthe sourcingdecision,NagpalandLyytinen,thenintegratetheirthoughtstoshowhowmacro-and micro-leveltheorizingmightbecombinedintoamorecomprehensiveviewofsourcingpractices. Theysuggestthatgreaterroleautonomywillbeassociatedwithmoreflexiblesourcingstructures andthatthese,inturn,willbelinkedtogreatersourcingsuccess.Importantly,theauthorsnote that such a rich, multitiered approach to theorizing about sourcing decisions will help future
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researchersmovebeyondtherelativelyunidimensionalapproachesothershavetakeninthepast (i.e.,cost-relatedcriteriainlow-uncertaintyenvironments).Theycorrectlypointoutthatasthe attentionofpractitionersandresearchersmovestowardachievingagreaterunderstandingofthe businessvalueofIT,thereisaneedforfuturesourcingresearchtorecognizeandtheorizeabout morerealisticandcomplexscenarios.Itisonlywhentheseareavailablethatbettermetricsof sourcingeffectivenesswillbeabletobedeveloped. Chapter7:FirmCharacteristicsandAllocationofITBudgettoOutsourcing Thischapter,byWonseokOh,providesaclearandthoroughdiscussionofthetheoryandempirical researchthathavebeendonetodatetoaddressthequestionofwhysomefirmsspendproportionallymoreoftheirITbudgetsonoutsourcingthanothers.Assuch,itwillbeausefulresourcefor otherswhowishtounderstandhowpreviousresearchershaveexaminedthisquestionandthe theoriesonwhichtheirworkisbased. Ohsuggeststhatthereisstillamultitudeoflargerorganizationalfactors,whichbothdrive andconstrainsourcingchoices,thatarestillnotwellunderstood.Henotesthehugevariationin howmuchFortune500organizationsspendproportionallyonIToutsourcing—rangingfrom6 percentto80percentinthelate1990s.Suchlargedifferencescannotbeexplainedbyasingle variablebutaremuchmorelikelytoarisefromnumerousfactorsworkinginconjunctionwith eachother.Drawingfrommultipletheoreticalstreams,heexaminesanumberofthesefactors andpresentspropositionsastohowtheymightaffectafirm’spropensitytooutsourcemoreor lessofitsITservices. Hepostulatesthattwosetsoforganizationalfactorswillinfluenceanorganization’sIToutsourcingintensity.Organizationalrisk,whichincorporatesuncertainty,agencyrisk(i.e.,theconflictof interestbetweenanorganization’sshareholdersandmanagement),andoperationalinefficiency, isdiscussedfirstindetail.Then,thesizeofafirm’stechnologicalresources(asreflectedinits research and development [R&D] intensity and its IT intensity) and their relationship to the amountofoutsourcingdoneareexamined.Foreachvariable,OhhypothesizeshowIToutsourcingintensitywillbeaffected. Followingthiscarefulreasoning,Ohthenteststheeffectofhismodelagainstadatabaseof 128firms.AftercontrollingforthenumberofITemployees,firmsize,andindustry,hedemonstratesthatfouroutofthesefiveorganizationalvariablesarerelatedtothedegreeofIToutsourcingintensity.OnlyITintensity,thatis,theproportionalamountanorganizationspendsonIT,is unrelated.Together,theindependentvariablesinthismodelexplain37percentofthevariance inIToutsourcingintensity.Interestingly,afirm’swillingnesstoinvestinR&Dandoperational inefficienciesarepositivelyrelatedtoIToutsourcingintensity,whileuncertaintyandagencycosts arenegativelyrelatedtothisvariable. Oh’sstudyconvincinglyillustratestheimportanceofbetterunderstandingfirmcharacteristics inIToutsourcingresearch.Henotesthatmorediversetheoreticalfoundationsareneededtobetter explorethisphenomenonandhelpmanagersmakeoptimalsourcingdecisionsfortheirfirms.His carefuloperationalizationofhisvariablesdemonstratesclearlyhowresearcherscanempirically explorenewperspectivesinIToutsourcing.Hisstudyalsostressestheimportanceofdetermining anoptimalbalancebetweenoutsourcingandinsourcingandhighlightstheneedtobetterunderstandhowfirmscanattainthis.Whiletransactioncosteconomicscontinuestobeanimportant foundationforresearchinthisarea,Ohconcludesthatbecauseeachfirmisdifferentinitsability tooptimizethebenefitsandminimizetherisksassociatedwithIToutsourcing,firmcharacteristic variablesareimportantforunderstandingandultimatelyguidingsourcingdecisions.
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Chapter8:InformationTechnologyOutsourcingRisk:AResource-BasedPerspective Thischapterfocusesonaparticularbutverysignificantaspectofthesourcingdecision—theriskinvolved. Eventhoughoutsourcingisnowwidelyusedinorganizations,approximately30percentofcontractsare terminated,whileanother25percentarerenegotiatedwithintwoyearsoftheirinception.Authors,BouchaibBahliandSuzanneRivardnotethatwhilethenotionofriskexposureisbroadlyusedintheresearch, ithasbeeninadequatelyconceptualized.Asaresult,thereisaneedtoclarifytheconceptsinvolvedin outsourcingriskexposure.Thiswouldnotonlyfacilitateempiricalresearchbutalsoestablishafoundation thatcouldbeabaseforrefiningourtheoreticalandpracticalunderstandingofthenatureofoutsourcing risk.AkeygapinourunderstandingrelatestotheriskofoutsourcingstrategicITactivities. Theauthorsdefineriskexposureastheintersectionoftheprobabilitythatanundesirableoutcome (e.g.,majorcontractualamendments)willoccurandtheconsequences(e.g.,financialloss)ofsuchan occurrence.Theybrieflyoutlinethefourmajorriskscenariosthathavebeenidentifiedforoutsourcing todate.Thesenegativeeventsarenot“actsofGod”butarewithintheclient’scontrol.Therefore,risk mitigationmechanismscanbeadoptedtoreducethelikelihoodthataparticularscenariowilloccur. Themajorityofthischapterthenbuildsonthesefundamentalconceptsofriskexposureand riskmitigation.ExtendingtheconceptofriskexposuretotheoutsourcingofstrategicITactivities, BahliandRivardapplyresource-basedtheorytoexplainhowfirmscreatecompetitiveadvantage throughbuildingorganizationalandITcapabilities.Anorganization’sabilitytoassemble,integrate, anddeployvaluedresourcesisenhancedthroughitsroutines,activities,andprocesses.Competitive advantageoccurswhenothersarenotabletousetheirresourcesinthesamewayortothesame extenttoexploitanopportunityorneutralizeathreat. Toexploittheirstrategicresources,companiesmustdevelopandisolatethem.Often,thisinvolves acquiringcomplementaryresourcesandcapabilitiesthattheydonothavein-house.Outsourcingallowsorganizationstofillgapsintheirresourcesandcapabilitiesthroughpartnershipsandcontracts. HowfirmsacquireandleveragebothinternalandexternalITresourcesandthecomplementarity betweenthemissignificantlyrelatedtofirmperformance.Therisksofmismanagingcapabilitygaps arethereforeimportanttounderstandandmitigate.However,ourcurrentunderstandingoftherisks involvedisunclearandconfused.BahliandRivardnotetwodistinctscenariosthatcouldoccurwhen outsourcingstrategicresources.First,afirmmaylosesomeofitscapabilitiesthroughoutsourcing. Second,outsourcingincreasestheriskthatacompetitorwillgainaccesstothesecapabilities.Clearly, transferringstrategicresourcestoathirdpartycarriesahighriskoflossofcompetitiveadvantage. Theauthorsthenexaminepossiblemitigatingmechanismsthatcouldbeadoptedtoisolatetheresourceandreducetheriskinvolved,suchasrestrictiverulesorkeepingsomeresourcesin-house. Bothpractitionersandacademicshaveyettofullyexplorethesemechanisms. Byextendingourunderstandingofoutsourcingriskexposuretostrategicresources,theauthors havemadetwoimportantcontributionstoresearch.First,theyclarifytheconceptsneededtocreateariskassessmentframeworkinthisarea.Second,theyidentifyanddescribetheconceptofa capabilitygap,whichhelpsusbetterunderstandthenatureofriskexposureinstrategicoutsourcing.Takentogether,thesesuggestwaysinwhichthenewphenomenonofstrategicoutsourcing canbebettermanagedandstudied. Chapter9:InvestigatingTrustinOutsourcing:AStudyintheHealthCareIndustry Thefinalchapterinthissection,byEbrahimRanderee,RajivKishor,andH.RaghavRao,focuses on a particular type of outsourcing in a particular industry. It explores both theoretically and empiricallytheuseofapplicationsserviceprovisioningintheCanadianhealthcareindustry.In
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additiontoexaminingthedriversbehindtheselectionofanASP,italsolooksattheelementsof trustandprivacyandtheirimportanceinthissourcingdecision. Thisstudyisgroundbreakingforanumberofreasons.First,becauseIToutsourcinginthehealth careindustryhasnotbeenwellresearched,theauthors’effortsattempttorectifythisomission.Second, ASPsareamongthenewermodelsofsourcingsothisworkcontributestoourgeneralunderstandingofthisfieldandofthefactorsthatinfluencethedecisiontouseanASP.Third,itinvestigatesthe roleoftrustandprivacyinthischoice—bothsignificantconcernsinanyoutsourcingrelationship, butparticularlyinhealthcare.Fourthandfinally,itpresentsandtestsanewstagedmodelofASP adoptionthathassignificantpotentialforthefuturestudyofITsourcingingeneral. Theauthorsintroducethischapterwithawell-roundeddiscussionoftheirresearcharena,that is,theuseofASPsinhealthcare,andtheobstaclesthathavepreventedtheirmorewidespread adoption,particularlyastheyrelatetotrust.Theythencomprehensivelyexplorethetheoryand researchdonetodateonthenatureoftrustintheoutsourcingrelationship,bothpriortothefinalizationofthisrelationshipandafterward. Theresearchmodelitselflooksattheinfluenceofproductioncosts(i.e.,thecostofhardware, software,andpersonnel);theavailabilityofslackresources;transactioncosts(i.e.,coordination, monitoring,negotiation,andgovernance);assetspecificity(i.e.,theuniquenessofafirm’sIT);and supplierpresence(i.e.,theavailabilityofreputablevendorswithtrackrecords)onthedecisionto chooseanASPtodeliverITproductsandservices.Itthenfurtherexplorestheeffectoftrustand privacyconsiderations,bothdirectlyontheASPselectiondecisionandindirectlyasamoderating influenceontransactionandproductioncosts. Datawerederivedfromamailsurveyofhospitalexecutivesandyieldedasmallsample(eightynineresponses).Interestingly,theresearchersappliedaseven-stageadoptionmodeltotheirdata analysis.Themodel’sstagesincluded:awareness,interest,evaluation,trialandreject,commitment, limiteddeployment,andgeneraldeployment.Respondentsrepliedwiththeirconcernsbasedon theircurrentstageofadoption.Thisenabledaricheranalysisofresultsthanwouldhavebeen possiblewithasimplebinaryadoptionvariable. TheresultsshowthathightransactioncostsnegativelyaffectthedecisiontoselectanASP. Highassetspecificitypositivelyaffectstransactioncostswhilethepresenceofreputablevendors withtrackrecordsisseentolowertransactioncosts.Interestingly,productioncostsdidnotaffect thedecisiontouseanASP.Whenthedirectinfluenceofprivacyandtrustwereexamined,itwas foundthatthepresenceoftrusthadaslightpositiveinfluenceonthissourcingdecision,while privacyconcernsdidnotinfluenceitatall,nordidtheyhaveamoderatinginfluence. Theauthorsconcludethatprivacyandtrustneedtobemorefullyconceptualizedinfuturesourcing research.Forexample,itmaybethatcurrentlegislationforcesvendorstoensureprivacyconcernsare fullyaddressedpriortoadoption.Or,governancemechanismsbuiltintocontractsmayadequatelyaddresstrustissues.Theynotethattheirfindingssuggestthatthematuringoutsourcingmodelmayhave shiftedthefocusoforganizationsfrommake-versus-buyquestionstotheissueoftransactioncosts. TheyconcludethatthedecisiontouseanASPappearstofollowanadoptionpatternsimilartomore traditionalformsofoutsourcing.Overall,thisresearchisvaluablebothforwhatitfoundandwhatit didnotfindaboutthisformofsourcing;itsmethodologicalcontributiontothestudyofsourcing;and thegreaterlightitshedsontheroleoftrustandprivacyinmakingthesourcingdecision. PartIII.ManagingtheOutsourcingRelationship FollowingadecisiontooutsourcesomeorallofitsITfunction,boththeclientorganizationand thevendor(s)involvedmuststructureandmanagetheirrelationshiptosuccessfullyachievetheir
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mutualandspecificobjectives.Asallofthechaptersinthissectionpointout,buildingandmaintainingasuccessfuloutsourcingrelationshipistheresultofmuchhardworkonthepartofboth parties.Inearlyoutsourcingresearchandpractice,itwasexpectedthatthelegalandeconomic conditionsbuiltintothecontractwouldbeadequateforasuccessfuloutcome.Asthechapters inthissectionpointout,whilethesearecertainlyimportantprerequisitesforsuccess,thereare manyadditionalfactorsthatcontributetowardensuringthatthisrelationshipachievesexpected businessgoals. Thechapterspresentedheremakeanumberofcontributionstowardourunderstandingofthis newandcomplexrelationship.First,theysimplyexamineitasaninternationalphenomenon.The researchstudiescomefromAustralia,Asia,Europe,andNorthAmericaanddemonstratetheglobal natureoftheoutsourcingtrend.Second,theyapplynumeroustheoreticallensestotherelationship. Thefirstandlastchaptersexaminetheneedforcontrolandcoordinationinoutsourcing.Kim Langfield-SmithandDavidSmithusecontroltheorytoexplorewhetherornotcontrolisdifferentinanoutsourcingrelationshipthaninanin-houseone.AnttiNurmi,PetriHallikainen,and MattiRossiapplyadifferentbutcomplementarylens,coordinationtheory,tobetterunderstand theformalandinformaldynamicsoftheoutsourcingrelationship. Theothertwochaptersalsouseavarietyoftheoreticalperspectivesbut,inaddition,demonstratehowmultiplelensescanbeappliedtogethertoproduceamoreintegratedpictureofthe outsourcingrelationship.InChapter11,MatthewSwinarski,RajivKishoreandH.RaghavRao adoptnewviewsfrombotheconomic-basedtheoriesandtheinterorganizationalrelationshipliteraturetoexaminetheinfluenceofclientpoweroveravendorandpartnershipqualityonvendor commitmenttotheoutsourcingrelationship.AndinChapter12,ErikBeulenandPieterRibbers integratestrategic,economic,andsocial/organizationtheoriestobetterconceptualizethefactors thatleadtoIToutsourcingsuccess. AnotherstrengthofthissectionistheexaminationoftheIToutsourcingrelationshipfrom anumberofmethodologicalperspectives.Chapters10and12adoptacomparativecasestudy methodology;chapter11usesanexperimentalapproach;andchapter13usesalongitudinalcase study.AlsointerestingarethedifferentdimensionsoftheIToutsourcingphenomenonstudied. Severalchapters,notablychapters11and12incorporatethevendorperspectiveintheirunderstandingofwhatmakesasuccessfuloutsourcingrelationship.Thevendorpointofviewhasbeen largelyunstudiedbyresearcherstodate.Finally,thelastthreechapterslookatnewerandmore complexoutsourcingrelationships(chapters13and14)andattheASPoutsourcingrelationship (chapter12). Takentogether,thesechaptersshednewlightonhowbesttomanagetheIToutsourcingrelationship.Whiletheyextendourunderstandingofthisphenomenon,theyalsopointoutnewareas forresearch,introducenewconceptsandmethodologies,andenhanceexistingconceptualizations.Inaddition,theyprovideusefulandpracticalinsightsforpractitionersintonewwaysthat organizationscanmaketheiroutsourcingrelationshipsmoresuccessful. Chapter10:ManagingtheISOutsourcingRelationship Thischapterprovidesacomprehensivelookattherelationshipbetweentheorganizationandthe outsourcer.AuthorsKimLangfield-SmithandDavidSmithconductedcasestudiesontheissues thatariseinthisrelationshipinthreepublicsectorfirmsinAustralia.Inparticular,theyinvestigated howoutsourcingrelationshipsinIScanbemanagedtoachievecontrol.Theynotethattherehas beenlimitedresearchtodateinthisaspectofoutsourcing,althoughithaslongbeenknowntobe asignificantriskfactor.
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Whilemuchstudyhasbeendoneofthesourcingdecisionitself,lessisknownaboutthesuccessfulmanagementoftheoutsourcingrelationshiporabouthowtoachieveeffectivecontrol. Intheircasestudies,theauthorsexaminewhetherthemanagementaspectsandcontrolissuesof thisrelationshiparedifferentforoutsourcedISfunctionsthanin-houseones.Becauseoutsourcingextendsorganizationalboundaries,aneworganizationalformiscreatedintheprocess.This modelmorecloselyresemblesapartnershipthanatraditionalcustomer–supplierrelationship.This analogyismoretrueofISoutsourcingrelationshipsthanitisofothers,giventhehighdegrees ofuncertainty,largecosts,speedandflexibility,andheterogeneityofactivitiesinvolved.These factorscreatecomplexinterdependenciesbetweenanorganizationandoutsourcer. Through detailed interviews with the managers involved in each outsourcing contract and examinationofcompanydocumentsandmediareports,Langfield-SmithandSmithfirstdescribe eachfirm’smotivationforoutsourcingandthecriteriainvolvedinthesourcingdecision.They thenturntothekeyissuesthataroseineffectivelymanagingthisrelationship.Theyidentifya rangeofissuesthatappeartobecommontoallthreefirms,thoughindifferentwaysandindifferentdegrees.Theseinclude: • • • • • • • •
Inadequatecontractspecification Unrealisticinitialexpectationsofperformanceimprovements Differentorganizationalcultures Thelossofskillsandknowledge Ineffectivecommunicationandinformation-sharingprocesses Inadequateperformancemeasuresandincentives Anabsenceoftrust,and Adversereactionsofemployees
Ofthese,thefirstthree,aswellasineffectivecommunication,appeartobethemostsignificant challengesintheoutsourcingrelationshipforbothorganizationsandoutsourcers.Foreachissue, theauthorsoutlinepossiblecausesandexaminetheapproachesthatwereusedtoaddressthem. Interestingly,asorganizationswrestlewiththeseissues,theyareusingpreciselythesametypes ofskillsthatshouldbeappliedtomanagingin-houseISfunctions,accordingtothemanagersinterviewed.Itwasbecauseofthecorporateboundariesinvolvedinestablishingandmaintainingan outsourcingrelationshipthattheneedforimprovedcontrolsquicklybecameapparentinallthree organizations.Asaresultoftheeffortputintomanagingtheseissues,theirorganizationsappeared ultimatelytoendupwithgreatercontroloverIT,andnotlesscontrol,ashasbeenpreviously supposed.Furthermore,theformalcontrolsandsystemsforincreasedaccountabilitythatwere implementedweremorerigorousthantheonesusedin-house.Theauthorsthereforesuggestthat theirresearchraisesanewquestionaboutthenatureofcontrolintheoutsourcingrelationship,that is,whyareorganizationsbetterabletoenforcecontrolswhenoutsourcingandnotin-house? Chapter11:VendorCommitmentinanASPOutsourcingContext:AComparative EvaluationoftheRolesofPowerandPartnership Inthischapter,researchersMatthewSwinarski,RajivKishore,andH.RaghavRaoalsoexamine thedualityoftheoutsourcingrelationship.Theirstudyofvendorcommitmentinthisrelationship seekstomorecompletelyunderstandthefactorsthatcontributetofullvendorcommitmenttoa client.De-escalationofvendorcommitmenthasbeenpreviouslyshowntounderminetheeconomic andtechnicalbenefitsofoutsourcing.Earlierresearchhasfoundthatclient–vendoreconomicsand
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clientdependenceonavendorareimportantfactorsintherelationshipbuthasgenerallyignored therelationaldynamicsinvolved.Asaresult,wehaveonlyalimitedviewofhowbesttomanage IToutsourcingrelationships. Thisresearchexaminestwofurtherreasonsforvendorcommitmentthatarelargelyunderthe controloftheclient—powerandpartnership.Usingasinglemodel,itcomparesbothtounderstand whichonebetterexplainsvendorcommitmenttotheoutsourcingrelationship.Italsointegrates andsynthesizeswhatweknowfromcompetingtheoreticalframeworkstoprovidedeeperinsights intothisimportantrelationship. Thefirstinfluenceonvendorcommitmentstudiedisvendorperceptionsoftheclient’spowerover them.Inmanynewerformsofoutsourcing,wherefewercompaniesareseekingservices(e.g.,asin ASPs),aserviceprovidermaybehighlydependentonaclientbecausetheorganizationrepresents asubstantialportionofitsbusiness.Wherethisisthecase,vendorcommitmenttotherelationship wouldlikelybehigh.Thesecondsourceofvendorcommitmentexploredisvendorperceptionsof thequalityoftheclient–vendorpartnership.Partnershipqualityisbasedonmutualtrust,satisfaction, communication,andcooperation.Whereaserviceprovider’sperceptionofpartnershipqualityis high,vendorcommitmenttotheoutsourcingrelationshipisalsolikelytobehigh. Theresearchteamconceptualizedcommitmenttotherelationshipashavingthreedistinctdimensions:willingnesstoinvestcapitalandeffortinit;positivebeliefsabouttherelationship;and theexpectationthattherelationshipwillcontinue.TheyselectedtheASParenainwhichtostudy thesefactorsbecauseitisanewformofoutsourcing,andthereforeanareainwhichclientpower overavendormightbeimportant.Inaddition,therehavebeenveryfewstudiesofpartnershipin theASPoutsourcingcontext. Unusually,theauthorschoseanexperimentaldesignwithwhichtotesttheirtheories,usinga role-playexercisewheresubjectsactedasaccountmanagersforanASPcompany.Manipulation ofthetwovariablesinvolved—partnershipqualityandpower—wasaccomplishedbyproviding thesubjects(MBAstudentsandseniorundergraduates)withaletterdescribingdifferentdimensionsofthesevariableseitherfavorablyorunfavorably.Subjectswereprovidedwithalistofitems (presentedasrecommendations)correspondingtoeachaspectofthecommitmentconstruct.They wereaskedtoindicatehowmuchtheyagreedordisagreedwitheach. Theirresultsshowthat42percentofthevarianceinthevendorcommitmenttotheoutsourcing relationshipisexplainedbythesetwovariables.Interestingly,theresearchersfoundthatpartnershipqualityhadamuchstrongerinfluenceoncommitmenttotherelationshipthanclientpower. Theinteractionbetweenpowerandpartnershipwasalsoimportant.Theyparticularlynotedthe sizeoftheeffectofpartnershipqualityonvendorcommitment,giventhatthestudy’sdefinition ofpartnershipdeliberatelydidnotincludeanyeconomiccomponents. Thischaptermakesanumberofcontributionstoresearchandpractice.First,itexaminesnew dimensionsoftheclient–vendoroutsourcingrelationship,thatis,partnershipquality,clientpower, andvendorcommitment.Second,itlooksspecificallyattheASPmodelofoutsourcing,which hasbeenlittlestudied.Third,itintegratesalternativetheoreticalperspectivesandshowshowthis approachcanincreaseourunderstandingoftheoutsourcingrelationship.Fourth,itintroducesan interestingmethodologicalapproach,alaboratoryexperiment,tooutsourcingresearch.Finally,it suggestsnoneconomicwaysthatclientscanincreasevendorcommitmenttotheirorganizations. Chapter12:GovernanceofComplexITOutsourcingPartnerships InanotherlookatthedualityoftheIToutsourcingrelationship,ErikBeulenandPieterRibbers’s studyofgovernancepracticesincomplexIToutsourcingpartnershipsexplorestheroleofthese
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practicesinachievingsuccess.Thischapterisrichwithinsightsintothefactorsthatcontributeto asuccessfulrelationshipandmorefullycharacterizestheseelementsforboththeclientandthe supplier.BasedoncasestudiesinavarietyofEuropeanorganizations,thechapterfleshesoutthe relativelylimitedresearchthathasbeendonetodateandpresentsseveralbuildingblocksnecessaryfordevelopingasoundIToutsourcingrelationship. GovernanceinIToutsourcingisdesignedtoensurethattheITservicesdeliveredaddvalue tothebusinessandthatanyITrisksaremitigated.Becausetwoorganizationsareinvolved,both havegoalstheywishtoachieve,whichmaynotbealigned.Governanceassistsinensuringthat bothclientsandsuppliersarebetterabletomeettheirgoalsandthus,haveasuccessfulrelationship.FollowingadiscussionofITgovernanceandtheclient–supplierrelationship,theauthors describe the nature of complex IT outsourcing relationships. These are defined as multisite, multivendorpartnershipsinvolvingmultipleservicesandahighcontractvalue.Theauthorsthen introduceseveralelementsfromthreedifferenttheoreticalapproaches—strategy,economic,and social/organizational—tohelpthemidentifyrelevantgovernancefactors. Tenfactorswereidentifiedfromthesetheoriesandwerecombinedintoaconceptualmodelof theclient–supplierrelationship.Somefactorswererelevanttotheoutsourcingcompany;others tothesuppliercompany.Severalfactorsaffectingtherelationshipitselfwerealsodetermined. To explore their importance to the success of complex IT outsourcing partnerships, Beulen andRibberscompletedcasestudiesinfourteenfirmsallusingasingleoutsourcer,conducting interviews,andanalyzingdocumentsandarchivaldata.Ofparticularinterestarethecriteria theyestablishedfordeterminingasuccessfulIToutsourcingrelationship.Thesearemuchmore comprehensivethanothermeasuresofsuccessandincludefivequantitativeandfivequalitative metrics.Tobedeemedasuccess,anoutsourcingpartnershiphadtomeetatleasteightofthe tencriteria. Thebalanceofthechapterexaminestheimportanceofthetengovernancefactorsthatthey identifiedfromtheliteratureandsupportstheirsignificanceintheIToutsourcingrelationshipwith evidencefromtheircasestudies.Theauthorsfoundthatthepresenceoftwogovernancefactors intheclientfirmisimportant—ITstrategyandinformationmanagement.Theynotethatneither oftheseisoutsource-ableandbothwerepresentinallcases.Fromthesupplierpointofview,a well-definedITstrategyandanadequatecontractandaccountmanagementcapabilityareseen asprerequisitestosuccess. Sixgovernancefactorsareimportanttotherelationshipbetweenthepartners.Properlystructuredcontractsandsuccessmetricsarethefoundationofallsuccessfulpartnerships.However, thisstudyfoundthatcontractsareoftennotabletoreflectanddealwiththedynamicsofthese relationships.Contractflexibilitywillbekeytofuturesuccess,theypredict.Othersuccessfactors includeregularreportingandcommunicationatthestrategic,tactical,andoperationallevelsof thepartnerorganizations.Annualauditsshouldbebuiltintogovernanceaswell.Interestingly,the researchersidentifybothtrustandexperienceinmanagingIToutsourcingpartnershipsascritical toasuccessfulrelationship.Whiletrusthasbeenexploredinthecontractnegotiationphase,it isalsonecessaryformaintainingrelationships,theynote.Andanimportantelementoftrustis equalitybetweenthepartners.Lackofexperienceonbothsidesoftherelationshipwasidentified asaseriousthreattoitssuccess. Thedescriptiveframeworkpresentedinthischapteridentifiesmanyoftheelementsnecessaryforasuccessfulpartnership.TheauthorsconcludethatmanagingcomplexIToutsourcing partnershipsisnotaneasyjob.Theyalsonotethatsuccessisseriouslyinhibitedbythelimited experienceofthepartnersandalsobythegrowinglistofnationallawsandregulationsthataim toregulategovernanceandaccountability.
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Chapter13:CoordinationofComplexInformationSystemDevelopmentProjects:ACase StudyofFinnishUniversities Inthefinalchapterofthissection,researchersAnttiNurmi,PetriHallikainen,andMattiRossi describethecoordinationmechanismsusedinacomplex,multistakeholderoutsourcingproject. Theirworkisadetailed,longitudinalcasestudyoftheeffortsovertenyearsofmultipleFinnish universitiestodevelopacommonstudentrecord.Theauthorsfocusparticularlyonhowcoordinationtheoriescanhelpusunderstandthemanagementofdependenciesovertimeinthishighly complexrelationship. Sinceinformationsystemschangeandevolveduringtheirlifecycles,itisreasonabletosupposethat differentmethodsandtoolswouldbeneededtomanagethemindifferentstagesandcircumstances. Coordinationtheorysuggeststhatfourdifferentcoordinationmechanismsarepossible:standards (therulesaboutperformingatask),plans(thegoalstobeachieved),formalmutualadjustment,and informalmutualadjustment.Thefirsttwomechanismsaremorestructuredandprescribedthanthe lasttwo.Theauthorsnotethatcoordinationmechanismshavenotbeenexaminedforeitherinternal oroutsourcedsystemsdevelopmentprojects.Theoryalsosuggeststhatcoordinationmechanisms evolveovertime.Aneventwilltriggerachangeintheattributesofaproject,whichwill,inturn, triggerachangeinthecoordinationmechanismsneededtomanageit. Theoutsourcingrelationshipdescribedinthiscaseisacomplexoneinthatitinvolvesmany clientsandmanyvendors,someofwhomchangedoverthecourseoftheproject.Asaresult,the researchersbelievetheoutcomeoftheprojectwaslikelyinfluencedbythecontextinwhichthe relationshipstookplace.Theresearchersetouttoanswerthreequestions:Whatwerethecoordinationmechanismsusedinthiscase?Whatissueshavehadaneffectonthemechanismsused?And, howdidcoordinationevolveoverthedifferentphasesofsystemdevelopment? Theprojectstudiedbeganin1995withagroupoffiveuniversitiesandtwovendorsandhas continueduntilthepresent.Overtime,eightmoreuniversitiesjoinedthegroupandthevendors involvedchanged.Coordinationbetweenthevendorsandtheuniversitieswasmanagedbyamediatingconsortium,whoseprimaryresponsibilitywasthissystemsdevelopmentproject.Through interviewsanddocumentanalysis,theauthorsdescribewhathappenedineachofthesixstagesof systemdevelopment,theissuesfacedbytheconsortiumindealingwithboththevendorsandthe universitypartners,andthemechanismsemployedtoensurecoordination.Theyalsolookedforkey eventsthatmighthavechangedtheproject’sattributes,andhence,itscoordinationmechanisms. Thisresearchshowsthatcoordinationmechanismsdoindeedchangeovertime.Theproject beganwithinformalmutualadjustmentmechanisms(e.g.,meetings)butthesegraduallymatured andmoreformalmechanisms(i.e.,standardsandplans)begantobeused.Furthermore,coordinationbecamemoreimportantasthenumberofstakeholdersincreasedandtheirrelationships becamemorecomplex. Twoimportantnewfindingshaveemergedfromthisresearch.First,theresearchteamidentifiedanewconcept—theneedtocompromise—whichischaracteristicofallstagesinthistypeof systemdevelopmentandwhichaffectsthenumberofcoordinationmechanismsusedandtheneed forcoordination.Second,thisstudydemonstratestheimportanceoftheconceptofdependence inthecoordinationmechanismsselected.Astheprojectdeveloped,stakeholderdependenceon eachotherdecreasedandthegoalsofthepartnersdiverged.Thisledtothenecessityofestablishingmoreformalcoordinationmechanismstoholdthepartnershiptogether.Thiscaseopensnew theoreticalavenueswithwhichtoexploreincreasinglycomplexoutsourcingrelationships.Italso suggestsaframeworkforbetterunderstandingofhowtheoutsourcingrelationshipwillchange overtimeandthefactorsthatarenecessarytokeepitsuccessful.
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PartIV.HolisticViewofITOutsourcing ThissectiontakesastepbackfromspecificaspectsoftheIToutsourcingrelationshipandlooksat howIToutsourcingisevolvingandatsomeofthefactorsthatmaybeimportanttounderstanding itinthefuture.ThethreechaptersinthissectionrecognizethatIToutsourcingisadynamicfield andthatourunderstandingandresponsetoitmustbecomeincreasinglysophisticated.Whetherat aprojectleveloranITfunctionlevel,therearenewtrendsandconsiderationsthatmustbetaken intoaccountbybothmanagersandacademics. Weareonlyjustbeginningtounderstandtheroleandimportanceofsocialandintellectual capitalindevelopingorganizationalcapabilitiesandsustainingcompetitiveadvantage.InChapter 14,RajivSaberwahlprovidesanin-depthanalysisofhowthesetwofactorscanbothpromotethe successfuldeliveryofanoutsourcedISprojectandhavelonger-termbenefitstothefirm.Hepoints outthatasourappreciationofthevalueofsocialandintellectualcapitalgrows,wecanexpectto seemanagersandorganizationsmakedecisionsaboutoutsourcingprojectmanagementusinga muchbroadersetofcriteriathaninthepast. AttheITfunctionallevel,inChapter15,ChristineKohandSoonAngpresentanexpanded viewofthecontractualelementsinvolvedinIToutsourcingincorporatingbothhierarchicalgovernancemechanismsandpsychologicalcontractobligationsintoaframeworkforIToutsourcing success.Theysuggestthatorganizationsareincreasinglyrecognizingtheseelementsasvitalto futureoutsourcingperformance.Firmsmustthereforeseektofindwaystobetteraddressbothin theiroutsourcingcontractsandatalllevelsoftheoutsourcingrelationship—strategic,tactical, andoperational. At a different level of analysis, Beena George and Rudy Hirschheim suggest—in Chapter 16—thatoffshoreoutsourcingisatrendthatisheretostay.Theyexaminethereasonsbehindthis trendandthechallengesthatremaininbuildingasuccessfuloffshoreoutsourcingpartnership. Moreimportant,however,theybelievethatoffshoringsignalsabroaderchangeinhoworganizationsperformITwork.Theycallforagreaterrecognitionbybothmanagersandpractitionersof theimplicationsofthesetrends. Identifyingtrendsandpredictingtheirtrajectoriesisadifficulttask.Thesechapterssuccessfully managethisbygroundingtheirconclusionssolidlyinexistingresearch.Neverthelesstheyallsuggestthatourunderstandingoftheoutsourcingphenomenonisbynomeanscomplete.Chapter14 arguesforadeeperappreciationofthecomplexfeedbackmechanismsinvolvedinoutsourcedIT projects.Chapter15contendsthatfutureorganizationswillneedamuchmorenuancedapproach tooutsourcedrelationshipsthatreflectamorecomplexunderstandingofthefactorsthatmotivate flexibilityandagility.Chapter16callsforaredesignoftheISdisciplinealtogether.Whileonly timewilltellifthesetrendsareassignificantassuggested,thissectionleavesthereaderand researcherwithmuchfoodforreflection. Chapter14:ManagementofOutsourcedISDevelopmentProjects:TheRoleofSocial CapitalandIntellectualCapital Inthischapter,RajivSabherwalreflectsonwhathehaslearnedfromthein-depthanalysisof eighteenlargeoutsourcedinformationsystemsdevelopment(OISD)projectsaroundtheworld. Hesuggeststhatasoutsourcingoftheseprojectsisbecomingmorefrequentinorganizationsand morecriticaltotheirsuccess,ourunderstandingofthefactorsthathelpthemachieve“project deliverables”needstobecomemorerefined.Indeed,howwedefineprojectdeliverablesneedsto bereexaminedtoincludemorethanshort-term,“ontime,onbudget”considerations.Hisproposed
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emergentmodeloftherelationshipbetweenprojectmanagementmechanismsandprojectdeliverablesthereforeincludesintegratingtherolesthatsocialandintellectualcapitalplayovertime. Inallinformationsystemsdevelopment(ISD)projects,projectmanagementmechanismsare important to ensuring project performance. These have been characterized as mechanisms of control,thatis,thosethathelpensurethatindividualsactconsistentlywiththeobjectivesbeing pursued,andcoordination,thatis,thosethathelpensurethatworkisnotdoneredundantlyandit getshandedoffexpeditiously.CoordinationisespeciallydifficultonOISDprojectsbecauseteams tendtobecomprisedofdiverseindividualsacrosstwoormoreorganizations,witheachorganizationhavingitsowngoals,sharedlanguage,andbeliefsystems.Theseconceptsarecomplementary andcanbesupportedthroughsimilarmechanisms. Sabherwal then explores the effect of these mechanisms on project performance, which is definedasbothlong-andshort-termprojectdeliverables.Healsosuggeststhatshiftingproject managementmechanismscanleadtoeitherincreasedordecreasedsocialandintellectualcapital andconsequently,togreaterorreducedprojecteffectiveness.Socialcapitaldescribestheactive connections between people. Positive social capital suggests that trust, mutual understanding, andsharedvaluesandbehaviorsexistonateam.Buildingsocialcapitalisespeciallyimportant onOISDprojects,whichbringtogetherindividualswhoaretotalstrangers,whomaynevermeet, andwhoareexpectedtoworkinahigh-stressenvironment.Sabherwalthenoutlinesthewaysthat socialcapitalcanbeexpectedtoimprovebothprojectefficiencyandeffectiveness,supportinghis reasoningwithexamplesfromcasestudies. Intellectualcapitaldescribestheknowledgeandknowingcapabilitythatresideacrosstheorganizationsinvolvedinaproject.Ittoocanfacilitateprojectperformanceinthatthedistinctivethoughtworld, unfamiliarlanguage,anddisparateverbalskillsoftheparticipantsrepresentobstaclestosuccess. Gapsinintellectualcapitalcanleadtomultiple,conflictinginterpretationsofspecificationsandthe systemdevelopmentprocess.Sabherwalgoesontonotethewaysthatdifferentprojectmanagement mechanismscanpromoteorinhibitthedevelopmentofintellectualcapital. Aswellasintroducingstrongevidencefortheimportanceofsocialandintellectualcapitalinthe OISDrelationship,theauthorexploresanumberofotherinteractionsthataffecttherelationship betweenprojectmanagementmechanismsandprojectdeliverables.Heexaminestherelationship betweensocialcapitalandintellectualcapitalandtheimportanceoffeedbackpaths.Understandingreverseeffectsineverydimensionofthisrelationshipisimportant.Forexample,successfully demonstratinginterimdeliverablescanaffecttrust,knowledgesharing,andtheemphasisthatis placedonprojectcontrolandcoordination.Finally,heexaminestheroleoffourcontingencyfactors(projectcomplexity,criticality,relationshipstructure,andinterorganizationaldifferentiation) ontheselectionofprojectmanagementmechanisms. Inadditiontoprovidingreaderswithabetterunderstandingofthefactorsinvolvedinensuring anOISDproject’ssuccess,Sabherwaldescribesnewwaysinwhich“success”shouldbeviewed byorganizationsinanoutsourcingrelationship.Bothsocialandintellectualcapitalcanleadto additionalbenefitsfortheorganizationinboththeshortandlongterm.Thisbroaderviewwill providemanagerswithinsightsintowaystheycanembedthedevelopmentoftheseelements withintheirnormalprojectmanagementpractices.Italsopointstoanewneedtobalanceshort- andlong-termobjectivesbecauseoftheirfutureimpactsoncapabilities.Interestingly,itsuggests viewingprojectmanagementmechanismsasaportfolioofpracticesthatcanbeuseddynamically asneedsandprojectdeliverablesdictate.Finally,thischapterdocumentstheimportanceoffeedbackpathsandmodelsandillustrateshowtheyworkinanOISDproject.Sabherwal’sresearch paintsaclearpictureofhowourunderstandingofOISDisevolvingtowardmoresophisticated managementofandresearchontheseprojects.
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Chapter15:ContractinginITOutsourcing:HierarchicalandPsychologicalContractual ElementsasKeyManagerialGovernanceMechanisms InChapter15,researchersChristineKohandSoonAngexploretheimportanceofthecontract inIToutsourcingsuccess.However,unlikepastresearch,whichhaslargelyfocusedonthelegal structuresinvolved(e.g.,productandservicespecifications,pricing,paymentschedules,andcontractduration),theirresearchfocusesontheothercomplementaryelementsthatareessentialfora successfuloutsourcingrelationship.Furthermore,whileexistingresearchisessentiallyone-sided, KohandAngcallforamorebalancedunderstandingofthisrelationship—onethatconsidersthe needsofboththeclientandthevendorinvolved. The authors suggest, based on their own previous empirical research, that outsourcing successisnotonlytheresultoftheanalysisandlegalcontractingthatgoesintotherelationshipbutalsoinvolvestwoadditionalsetsoffactors.Thefirst,collectivelycalledhierarchical elements,addressesthegovernancemechanismsthat,ifincorporatedintoacontract,assist inthecontrolandcoordinationoftherelationship.Fiveelementsareimportant:command structuresandauthoritysystems,rule-basedincentivesystems,standardoperatingprocedures, non–market-based pricing systems (to accommodate uncertainties), and informal dispute resolutionmechanisms.Together,theseelementscanhelpafirmachieveflexibility,effectiveriskmanagement,andcontrol.Failuretoincorporatetheseelementshasbeenshownto contributetooutsourcingfailures. Thesecondsetoffactorsrelatestothetwoparties’unspokenorpsychologicalcontract.Koh andAngpointoutthatnotalloutsourcingobligationsaremadeexplicitinawrittencontract.There arealsomanyimplicitobligationsinanoutsourcingrelationshipthatexistonlyinthemindsof thepeopleinvolved.Thesedrivetheirbehavior,regardlessofwhatiswritteninthelegalcontract. Thereareanumberofreasonswhythisisthecase—mostrelatingtothefactthatbecauseofthe complexityoftherelationshipandthemultiplestakeholdersinvolved,formalcontractualprovisionstendtodifferfromtheirday-to-dayexecution.Theauthorscitetheirownrecentresearch, which shows the critical role this psychological contract plays in a successful IT outsourcing relationship. Theresearchersidentifysixvendorobligationsandsixclientobligationsthatmustbefulfilled iftherelationshipisgoingtobesuccessful.Forexample,clientsexpectvendorstoassignhigh qualitystafftoworkonaprojectandtominimizestaffturnover.Fortheirpart,vendorsexpect clientstounderstandandarticulateexplicitlyandcomprehensivelytherequirementsfortheservices coveredbytheproject.Theconceptofapsychologicalcontractisimportantbecauseitdrawsour attentiontothefactthatnotallpromisesareincorporatedintoatypicallegalcontract.Thus,the moreorganizationsworkonclarifyingtheseunwrittenpromisesandmakingthemexplicit,the greaterthelikelihoodthattherewillbeasuccessfulrelationship. Hierarchicalandpsychologicalfactorstendtooverlapinsomewaysbutarenotsynonymous. Instead,theycomplementeachother.Theauthorscontendthatbothshouldbeincorporated intoanintegratedconceptualframeworkofthefactorsthatcontributetoIToutsourcingsuccess.Suchaframeworkmakesseveralcontributionstowardresearchandpractice.First,it incorporatesthevendor’sperspectiveintheoutsourcingrelationship,whichhasbeenlargely missingfromresearchtodate.Second,itbetterrepresentsconceptuallythefactorsthatare important to a successful relationship. This lays the groundwork for designing better and morecomprehensivegovernancemechanismsforIToutsourcingcontracts.Finally,itopens thedoortofutureresearchandbetterunderstandingoftheroleoftheseelementsinIToutsourcingsuccess.
INFORMATIONTECHNOLOGYOUTSOURCING:ANINTRODUCTION21
Chapter16:TheOffshoreOutsourcingLandscape:HistoricalDevelopmentandChallenges fortheISDiscipline ThefinalchapterinthisvolumeexaminesthenewestandpotentiallymostdisruptiveformofIT outsourcingtodate,thatis,thetrendtooffshoreoutsourcing.AuthorsBeenaGeorgeandRudy Hirschheimlookbrieflyatthehistoryofoutsourcingingeneral—fromitsrootsinRomantimes untilthepresent—andthenmorecloselyexamineoffshoreoutsourcing.Theybelievethetrend towardoutsourcingindifferentgloballocationsis“inexorable”butbringsauniquesetofchallengestoallpartiesinvolved. Bywayofintroducingthesechallenges,GeorgeandHirschheimdescribethegrowthandevolutionofIToutsourcinganditsprimarydrivers.Inthelate1980s,outsourcingarrangementstended tobefairlysimple.Onevendorwouldprovideasinglebasicfunctiontoacustomer,forexample, facilitiesmanagement.Overtime,morecomplexarrangementshavedevelopedinvolvingmultiple vendorsandmultipleclientsandmoresophisticatedpartnershipsandalliances.Companiesare alsobecomingmoreselectiveinwhattheyoutsource.Interestingly,aslongastheimpactswere limitedtotheclientandvendorfirms,outsourcingwasbarelynoticedbythepublicpress. Thissituationhaschangedwiththegrowthinoffshoreoutsourcing.Aswithearlierformsofoutsourcing,aprimarydriverofthistrendistheneedtocutcosts.However,companiesarealsofacing increasingpressuresfromglobalizationandthelackoftrainedprofessionalsathome.Inaddition, theauthorsnotethe“bandwagoneffect”thathaspromptedothercompaniestoexplorethisoption. Asaresult,intheUnitedStates,offshoreoutsourcingisgrowingatafasterpacethanotherforms. GeorgeandHirschheimthendescribehowIndiacametobethedominantforceinthismarket. India’scapabilitiesinthisfieldhavebeenrecognizedsincethe1980sbutthecurrentwaveof offshoreoutsourcinggotitsimpetusfromtwofactors.TheY2KphenomenonandthelackofIT professionalstocompletetheremediationworkinvolvedledmanyorganizationstolookoffshore. Atthesametime,improvementsintelecommunicationsreachedalevelwhereitwaspracticaland cheapertodothisworkelsewhere. SeveralfactorshavecontributedtoIndia’ssustainedsuccessinthisfield.Theauthorsnote thatthecountry’scompetitiveadvantageliesintheeffectivenessandefficiencyofitscultural, economic,andsocialinstitutions.Theirsuccess,inturn,isbasedonthecapabilitiesofindividualsandtheirstrongemphasisonformaleducation.Keyindividualswithfar-reachingvisionand entrepreneurialspirithaveplayedasignificantroleinIndia’spresentposition.Expatriateshave helpedtocreateandsustainlinkagesbetweenclientcompaniesandvendors. Therearestillmanychallengesinusingoffshoreoutsourcingsuccessfully.Therearefourmajor categoriesofconcern.Culturalfactorsleadtodifferencesinpracticesandcommunicationbetween clientsandvendors.Geographicaldistancecanresultinadditionalcostsandcoordinationproblems acrossmultipletimezones.Thequalityoftheinfrastructureavailableandensuringsecurityin vendorlocationscanalsobeaconcern.Finally,organizationsmayfaceemployeeresistanceand negativepublicitywhenmovingITworkoffshore. Theauthorsbelievethatoffshoreoutsourcingisatrendthatisheretostay.Theynotethatfew researchersandpractitionershavefullyconsideredtheimplicationsofthistrend.Thischapter suggeststhatITasadisciplinewillhavetoevolveinresponseandmayevolvedifferentlyin WesternandEasterncountries.Westernorganizationsanduniversitiesmightdowelltofocuson differentiatingthemselves,forexample,byconcentratingonenablingbusinessprocesses,contract management, and IT strategy. Eastern ones may take leadership in software development and management.Suchtrendscannotbeignoredbyourinstitutionsiftheywanttoplayaleadership roleinthechangesthatareoccurringinthisfield.
22 RIVARD AND AUBERT
CONCLUSION Asthereaderwillfind,muchcanbelearnedfromthechaptersthatmakeupthismonograph.First, severalofthechaptersintroducethereadertonovelperspectivesontheshapeofIToutsourcing arrangements,whetherthisisapplicationserviceprovisionandoffshoringorhierarchicaland psychologicalcontracting.Second,severalofthechapterscontributetoourbetterunderstanding oftheoutsourcingdecisionbyidentifyinganarrayofsourcingalternatives—outsourcing,insourcing,internalmarkets,andstrategicalliances—alongwithaframeworkforchoosingamongthe alternatives,analyzingthedecisionthrougharisk-managementlensorbytakingintoaccount thecriticalnotionoftrustbetweentheparties.Third,thechaptersinthemonographanalyzeIT outsourcingthroughseveralconceptuallenses—population-levellearning,strategicmanagement, institutionaltheory,transactioncost,andagencytheory,tonameafew—providingamultifaceted, hence richer, portrayal of the phenomenon. Last, but not least, the variety of methodological approaches—fromhistoricalanalysistoexperimentation,fromlanguage-centeredapproachto survey,andfromcontentanalysisofqualitativedatatostructuralequationmodeling—contributes torichnessinunderstandingthatnosinglemethodcouldprovide.
PARTI TAKINGSTOCKOFITOUTSOURCING PRACTICEANDRESEARCH
CHAPTER2
POPULATION-LEVELLEARNINGANDTHE EVOLUTIONOFITOUTSOURCINGDECISIONS JÉRÔMEBARTHÉLÉMY
Abstract:Thischaptercontendsthattherehasbeenaprogressiverefinementofinformationtechnology(IT)outsourcingsincethemid-1980s.Specifically,itisproposedthattheevolutionand progressiverefinementofIToutsourcingpracticescanbeattributedto“population-levellearning.”Population-levellearningisalearningphenomenonthatoccursatthelevelofapopulation oforganizationsthroughmechanismssuchasselectiveimitationandinferentiallearning.Four featuresofIToutsourcingarestudiedindetail:(1)outsourcingscope,(2)vendorselection,(3) outsourcingcontract,and(4)outsourcingoutcome. Keywords:InformationTechnology,ITOutsourcing,Population-LevelLearning INTRODUCTION Informationtechnology(IT)outsourcingcanbedefinedas“thesignificantcontributionbyexternal vendorsinthephysicaland/orhumanresourcesassociatedwiththeentireorspecificcomponentof theITinfrastructureintheuserorganization”(LohandVenkatraman,1992,356).IToutsourcing isnotanewphenomenon.“Timesharing,”whichinvolvespurchasingcomputertime,wasvery popularinthe1960sand1970s.Fromthemid-1980son,however,anewtypeofIToutsourcing startedspreading.ThereareatleastfourdifferencesbetweenthisnewtypeofIToutsourcing andmoretraditionalIToutsourcing(Cheon,Grover,andTeng,1995).First,outsourcingisno longerrestrictedtosmallandmedium-sizedfirmsthatdonotpossesstheirownITinfrastructure. Second,firmsoutsourceanincreasinglylargerangeanddepthofservices.Third,personneland equipmentarefrequentlytransferredtothevendor.Fourth,thenatureoftherelationshipwiththe vendorevolvestowardpartnerships. OutsourcinghasreceivedalotofattentionfromtheITliterature.Thefirststreamofresearch investigatesthedeterminantsoftheIToutsourcingdecision.Indeed,whydofirmsoutsourceIT atsuchanunprecedentedratewhenIThasneverbeenmorecriticaltofirmperformance?The majordeterminantsincludethegapbetweenactualanddesiredITperformance(Teng,Cheon, andGrover,1995),transactioncostsandproductioncostsconsiderations(AngandStraub,1998), interactionsbetweeneconomicandinstitutionalfactors(AngandCummings,1997)andcompeting insightsfromthetransactioncost,knowledge-based,agencyandmeasurementliteratures(Poppo andZenger,1998).Thesecondstreamofresearchfocusesonvendormanagement.Severalpapers haveexploredtheimplicationsofpartnershipsonoutsourcingsuccess(Grover,Cheon,andTeng, 1996;Lee,2001;LeeandKim,1999).Theimpactoftransactioncostsonthetermsandmanagementofthecontracthasalsobeeninvestigated(Aubert,Rivard,andPatry,1996). 25
Figure 2.1 IT Outsourcing and Population Level Learning Model 26 BARTHÉLÉMY Figure2.1 ITOutsourcingandPopulationLevelLearningModel
Fewer “total outsourcing” decisions Selective imitation
More elaborate vendor selection processes
Improved outcomes
Inferential learning
More elaborate contracts
WhiletheIToutsourcingphenomenonstarteddevelopinginthemid-1980s,itreallytook off after the very much heralded contract between Kodak and its vendors (IBM, DEC, and Businessland Inc.) in 1989. Loh andVenkatraman (1992) found that this landmark deal legitimizedthepracticeofIToutsourcingamongFortune500firms(i.e.,the“Kodakeffect”). Inotherwords,theadoptionrateofthisnewbusinesspracticequicklyincreasedafterKodak hadannounceditsdeal.MyaimistobuildontheworkofLohandVenkatraman(1992)andto showthatIToutsourcinghasnotonlygainedwideracceptancebutalsohasbeenprogressively refinedovertime. This idea has occasionally been hinted at in the IT outsourcing literature. For instance, DiRomualdoandGurbaxani(1998,68)suggestedthat:“Themotivationsforoutsourcingare evolvingfromaprimaryfocusoncostreductiontoanemergingemphasisonimprovingbusiness performance.”However,theprogressiverefinementofIToutsourcingpracticeshasneverbeen reallyelaboratedon.InastudyofU.S.andU.K.firms,LacityandWillcocks(1998)observed thattheoutcomeofIToutsourcingeffortsimproveovertime.Twoexplanationswereoffered forthisempiricalobservation.First,richermarkets(i.e.,alargernumberofITsuppliers)may havehelpedremovesmall-numberbargainingproblems(Williamson,1996).Second,customersmayhavebecomeincreasinglyproficientwithoutsourcing.However,LacityandWillcocks (1998,365)donotreallyexplainwhy“customersarelearningtomakebetterdecisionsand negotiatemorefavorabledeals.”ApotentiallyvaluabletoolforexaminingwhyandhowIT outsourcingpracticeshaverefinedsincethemid-1980sis“populationlevellearning”(Miner andHaunschild,1995). Thechapterisorganizedasfollows.First,Ipresentthepopulation-levellearningconcept.Second,Iderivepropositionsregardingtheimpactofpopulation-levellearningonfourkeydimensions ofIToutsourcing:(1)outsourcingscope,(2)vendorselection,(3)outsourcingcontract,and(4) outsourcingoutcome(seeFigure2.1).Third,Ipresentsomepreliminaryevidenceof“population levellearning”usingasecondarydatabaseofsixty-oneoutsourcingefforts.Theimplicationsof thefindingsarediscussedinthefourthsection.
POPULATION-LEVELLEARNINGANDITOUTSOURCINGDECISIONS27
THEORETICALBACKGROUND TheConceptofPopulation-LevelLearning Theliteraturegenerallydistinguishesthreelevelsoflearning.First,authorssuchasArgyrisand Schön(1978)contendthatonlyindividualscanlearn(i.e.,individuallearning).Second,authors suchasCyertandMarch(1963)arguethatorganizationsarealsolearningentities(i.e.,organizationallearning).Thetermscollectiveminds(WeickandRoberts,1993)andorganizationalminds (SanderlandsandStablein,1987)havebeenusedtodescribeorganizationsaslearningentities. Third,entirepopulationsoforganizationsmaylearn.ThoughauthorssuchasLevinthalandMarch (1993)andLevittandMarch(1988)havenotedthepotentialforpopulation-levellearning,there hasbeenlimitedtheoreticalandempiricalworkonthistopic. AccordingtoMinerandHaunschild(1995,118),population-levellearningcanbedefinedas a“systematicchangeinthenatureandmixoforganizationalactionroutinesinapopulationof organizations,arisingfromexperience.”Threedifferentprocessescanleadtooutcomesatthe populationlevelaspopulation-levellearning“canarisefromtheexperienceoforganizationsand populationsasawhole.”(MinerandHaunschild,1995,119).First,organizationsinthepopulation maylearnontheirown(i.e.,organizationallearning).“Learningbydoing”(Arrow,1962)isa classicwayfororganizationstolearnbythemselves,throughdirectexperience.Second,organizationsinthepopulationmaylearnbyimitatingotherorganizations(interorganizationallearning). Learningbywatchingothers,throughindirectexperience,isaphenomenonknownasvicarious learning(Huber,1991).Third,anentirepopulationoforganizationsmaycollectivelylearnby imitatinganotherpopulation.AclassicexampleofsuchcollectivelearningistheSEMATECH researchconsortium,whichresultedfromtheAmericansemiconductorindustry’sobservationof Japaneseresearchconsortia. Twomajortheoreticalapproachesusepopulationoforganizationsastheirunitofanalysis: population ecology (Hannan and Freeman, 1977) and neoinstitutional theory (DiMaggio and Powell,1983).Whilepopulation-levellearningisrelatedtoboth,italsohasdistinctfeatures.Contrarytopopulationecology,population-levellearningfocusesonchangesinroutinesratherthan onthesurvivalofonetypeoforganizationattheexpenseofothers.Institutionaltheorycontends thatorganizationsreplicatecommonroutinestogainlegitimacyratherthantoachievetechnical results.Contrarytoneoinstitutionaltheory,population-levellearningpostulatescomplexlearning mechanismsinwhichtheefficiencyandeffectivenessofroutinesalsodeterminewhetherthey willbesubsequentlyadoptedbyorganizations.AccordingtoMinerandHaunschild(1995,150): “Becauseofitsimportantanddistinctroleinemphasizinginstitutionalrationality,neoinstitutional theoryhasdownplayedtheoccurrenceof(such)technicalrationalityanditsongoinginteraction withinstitutionalrationality....Populationlevellearningconfirmsanddrawsoninstitutional research,buttakesasaprimaryconcerntheinteractionofinstitutionalandtechnicalrationalities overtime.” Ontheempiricalside,fewstudiesdocumenttheoutcomeofpopulation-levellearning.Argote, Beckman,andEpple(1990)foundthatshipyardsthatbeganproductionlateweremoreproductive thanthosewhostartedearlier.However,onceproductionbegan,theydidnotappeartobenefit fromtheexperienceaccumulatedatotheryards.WhileDarr,Argote,andEpple(1995)foundthat pizzastoresbenefitedfromproductionexperienceatotherstores(providedtheywereownedby thesamefranchisee),JoskowandRose(1985)foundnoevidenceofindustryexperiencetransfer inthecaseofcoal-burningpower-stationconstruction.Inarecentstudyoftheharddiskdrive industry,McKendrick(2001)foundthat—throughaprocessofselectiveimitation—firmsfromthe
28 BARTHÉLÉMY
samecountryinitiallyadoptedsimilarglobalstrategies.However,practiceswithinthisindustry tendedtoconvergeovertime. Ascanbeseenabove,empiricalresultsaremixed.Moreover,mostoftheseempiricalstudies examinewhetherproductivitygainsresultingfromexperiencecanbetransferredfromonefirmto another.Theydonotfocusonwhatwaslearnedandhowitwaslearned.Onlythemostrecentone (i.e.,McKendrick,2001)describeswhatwasactuallylearnedthroughpopulation-levellearning. Population-LevelLearningProcesses Inthissection,Istudythemajorprocessesthroughwhichpopulation-levellearningoccurs:selectiveimitationandinferentiallearning.Ialsodescribethemechanismsthroughwhichknowledge actuallydiffuseswithinapopulationoforganizations:contacttransmissionandbroadcasttransmission(MinerandHaunschild,1995). SelectiveImitationandInferentialLearning Selectiveimitationmeanscopyingonlytheroutinesthatarethoughttohavebeensuccessfulin otherorganizations.Throughselectiveimitationofthebestroutines,significantimprovements canariseatthepopulationlevel.AnexampleinIToutsourcingisthe“bestofbreed”approach initiallydevelopedbyBritishPetroleumExploration(BPX).Intheearly1990s,BPXoutsourced tothreevendorssimultaneously,usingSemaGrouptomanageitsdatacentersandcommercial engineeringapplications,ScienceApplicationsInternationalCorporationtomanageitsdistributed computerservicesandscientificapplications,andSyncordiatomanageitstelecommunications network.Asthispracticeapparentlyturnedouttobesuccessful,itwassubsequentlyadoptedby firmssuchasDuPontandJ.P.Morgan,forinstance(DiRomualdoandGurbaxani,1998).Inother words,thesefirmsselectivelycopiedasuccessfulpracticepioneeredbyBPXwhentheydevised theirownIToutsourcingstrategy. Itisimportanttonotethatselectiveimitationisnotnecessarilyimmunefromsuperstitious learning.SuperstitiouslearninghasbeendefinedbyLevittandMarch(1988)ascopyingroutines thoughttohavesuccessfuloutcomeswhiletheyhadnothingtodowiththeobservedoutcomes. Forinstance,thenotionthatoutsourcingvendorsarepartnersandthatcontractsshouldplayonly aminorrolewaspopularizedbythelandmarkdealbetweenKodakanditsthreevendors(IBM, DEC, and Businessland Inc.).As the relationships between Kodak and its vendors were both cooperativeandbasedonloosecontracts,itwaswronglyinferredthattightcontractswerenot necessaryinIToutsourcing.However,agoodcontractisessentialbecauseithelpsestablisha balanceofpowerbetweentheclientandthevendor(LacityandHirschheim,1993aand1993b). Insum,organizationsmaycopyroutinesthatappeardesirablebutareunrelatedtotheoutcomes theyexpect. Beyondsimplycopyingallegedlysuccessfulroutines,firmsmayusetheexperienceofothers asasubstitutefortheirown“learningbydoing.”AccordingtoMinerandHaunschild(1995,126): “Ininferentialorganizationallearning,theorganizationusestheexperienceofotherorganizations asanaturalexperiment,anddrawsconclusionsfromwhichitbothadoptsandavoidsroutines.”For instance,manyearlyIToutsourcingoperationsentailedthetransferoftheentireITdepartmentto anoutsidevendor.Asmostofthese“totaloutsourcing”effortsfailed,companiesthatoutsourced latercouldeasilyderivefromthesefailuresthatkeepingasufficientlevelofexpertisewithinthe firmwasnecessary(Lacity,Willcocks,andFeeny,1996).Insum,firmsmaydevelop“bestpractices”usingnotonlytheexperienceofsuccessfulfirms,butalsotheexperienceoflesssuccessful
POPULATION-LEVELLEARNINGANDITOUTSOURCINGDECISIONS29
ones.WhilesuccessfulIToutsourcingcasessuggestwhatshouldbedone,lesssuccessfulones suggestwhatshouldbeavoided. ContactandBroadcastTransmission Thediffusionofroutinesamongorganizationsoccursthroughtwomainmechanisms:contact transmissionandbroadcasttransmission(MinerandHaunschild,1995). Withcontacttransmission,thepotentialuserofaroutinedirectlyacquiresnewknowledgefroma prioruser.Contacttransmissionfrequentlyoccursthroughinterpersonnelcontact.AnexampleinIT outsourcingiswhenachiefinformationofficer(CIO)offersface-to-faceadvicetoanotherCIOabout thebenefitsofdraftingadetailedcontractratherthanacceptingthevendor’sstandardcontract. Ontheotherhand,broadcasttransmissiondoesnotrequiredirectcontactbetweenorganizations. Withbroadcasttransmission,learningoccursthroughobservationofsuccessfulorganizations. Informationcanbeobtainedfromawiderangeofmediaincludingconferencesandarticlesinthe tradepressorthemanagerialliterature.Consultingfirmsalsoplayanimportantroleindeveloping anddisseminating“bestpractices.”Thus,theimitationof“bestpractices”cantakeplacewithout interpersonalcontact.Thisphenomenonisknownas“observationallearning”(Greve,1998). Finally,itisimportanttonotethatbroadcasttransmissionismorelikelythancontacttransmission toleadtosuperstitiouslearning.Forinstance,thetradepressisgenerallyoverlyoptimisticabout IToutsourcingbecauseoperationsarereportedduringthe“honeymoonperiod”(i.e.,justafterthe contracthasbeensigned)(LacityandHirschheim,1993b).Aface-to-faceconversationwithaCIO oftenleadstoamorebalancedassessmentofthesituationthananarticleinthepress. THEIMPACTOFPOPULATION-LEVELLEARNINGONIT OUTSOURCING Inthissection,Ideveloppropositionsregardingtheimpactofpopulation-levellearningonIT outsourcingpracticesandoutcomes.Contrarytomostempiricalstudies(see,forinstance,Argote, BeckmanandEpple[1990];Darr,ArgoteandEpple[1995];Epple,ArgoteandDevadas,[1991]), Istudythecontentoflearningandnotonlyitsimpactonproductivity.Asmyunitofanalysisisa populationoforganizations,Idonotdealwithfirm-levelissuessuchastheimpedimentsto“best practices”transferwithinfirms(Szulanski,1996). If the premise is that population-level learning is the cause of changes in IT outsourcing practices,itisimportanttohaveacleardefinitionofwhatapopulationoforganizationsactually means.Inthischapter,thepopulationiscomposedoftheorganizationsthatoutsourceallorpart oftheirIT.Whiletheseorganizationsdonotnecessarilybelongtothesameindustryorgeographic area,theyhaveoneimportantthingincommon:theyuseexternalvendorstomanageallorpart oftheirIT. OutsourcingScope FirmsthatcontemplateoutsourcingtheirIThavetwobasicoptions.First,theymayoutsourcetheir entireITactivity,apracticeusuallyreferredtoastotaloutsourcing.Second,theymayoutsource onlypartoftheirITactivity.Lacity,Willcocks,andFeeny(1996)havecoinedtheexpression “selectiveoutsourcing”todescribethispractice.FirmsmayalsosetuptheirownITsubsidiary insteadofcontractingwithavendor.Thissituation,whichisreferredtoasquasi-outsourcingby BarthélémyandGeyer(2005),isoutsidethescopeofthischapter.
30 BARTHÉLÉMY
ITisahighlyheterogeneousfunction.Whilesomecomponentsarecommodities(e.g.,data centers,telecommunicationsnetworks,andPCs),someothersaremorespecific(e.g.,applications development,systemdesign,andsystemsintegration)(Teng,Cheon,andGrover,1995).Selective IToutsourcinghasbeenreportedtohavehighersuccessratesthantotalIToutsourcingduetothis heterogeneity.SpecificITactivitiesshouldnotbeoutsourcedbecausevendorsmaystandardize themtotheextentthattheuniqueneedsoftheclientarenolongermet(AngandCummings,1997). OutsourcingspecificITactivitiesisalsodangerousbecauseitcreatesadependencesituationthat maybeexploitedbythevendor(Williamson,1996).Ontheotherhand,“selectiveoutsourcing meetscustomers’needswhileminimizingtherisksassociatedwithtotaloutsourcingapproaches” (Lacity,Willcocks,andFeeny,1995,13). Throughpopulation-levellearningandinferentiallearningfromtotalIToutsourcingfailures,it shouldbecomeincreasinglyclearthatthispracticemustbeavoided.Thisshouldeventuallyresult inadecreasingproportionoftotalIToutsourcingeffortsovertime. Proposition1:Population-levellearningshouldresultinfewertotalIToutsourcingefforts. VendorSelectionProcess Selectingagoodvendor,withaproperfit,iscrucialforIToutsourcingsuccess.Theeasiestoption istoaccepttheofferofavendorwithoutanyrequestforproposal.Amorerefinedwayconsistsin requiringformalbidsfromseveralvendorsandcomparingthemwithinternalITcosts.Aneven morerefinedwayconsistsinaskingtheinternalITdepartmenttodevelopaformalbidalongwith potentialoutsidevendors(LacityandWillcocks,1998). Throughpopulation-levellearningandselectiveimitationofthemostsuccessfulorganizations, thevendorselectionprocessshouldbecomeincreasinglyelaborateovertime.Thoughdevising anelaboratevendorselectionprocessiscostly,ithelpsavoidevenmorecostlyproblemslater, suchashavingtoswitchvendorsbecauseofpoorperformance(Barthélémy,2001).Tobringin thenecessaryexpertise,legalandtechnicalexpertsmaybeused.Itmayalsobeworthhiring peoplewhohavebeeninvolvedinIToutsourcingmanagement.Thoughthisexperienceisrarely statedinrésumés,firmsmaylookforpeoplewithexperienceinmanagingjointventuresorleadingcross-functionalteams(UseemandHarder,2000).Thankstopopulation-levellearningand selectivecopyingof“bestpractices,”Iexpectelaboratevendorselectionprocessestobecome increasinglycommon. Proposition2: Population-levellearningshouldresultinmoreelaboratevendorselection processes. OutsourcingContract ThecontractisakeyelementinIToutsourcingrelationshipsasithelpsprotecttheclientfrompotentialopportunismbythevendor.Indeed,itmaybe“theonlymechanismthatestablishesabalance ofpowerintheoutsourcingrelationship”(LacityandHirschheim,1993a,24).Themajorissuewith anycontractisthatitwillneverbeabletoanticipateallpotentialcontingencies.Thus,thevendor maytakeadvantageoftheincompletenessofthecontracttoengageinopportunisticbehavior. TherearetwowaystodealwiththeincompletenessofIToutsourcingcontracts.First,short-term contractsmaybeused,whichmakesitpossibletouseup-to-dateinformationwhenthecontract isrenewed.However,theuseofshort-termcontractscanalsoleadtovendoropportunism.Thisis
POPULATION-LEVELLEARNINGANDITOUTSOURCINGDECISIONS31
highlylikelywhenspecificassetshavebeenengaged,makingtheclientvulnerabletothethreat ofnonrenewal(Williamson,1996).Second,contractincompletenessmaybeminimizedbyincorporatingelaborateclauses,whichwilleventuallymakeitmoredifficultforvendorstoengagein opportunisticbehavior.Whiledraftinganelaboratecontractiscostly,additionaltimeandexpense earlyonhelpsavoidcostlyproblemslater,suchashavingtorenegotiatethecontractorconstantly monitorthevendortogettheneededperformance(Barthélémy,2001). Thankstopopulation-levellearningandcontacttransmission,Iexpectcontractualexpertiseto spreadamongthepopulationoforganizationsthatoutsourcetheirIT.Legalexpertsshouldcontributetothediffusionof“bestpractices”withinthepopulationbyinteractingwiththeirclients’ internallegaldepartments(LacityandHirschheim,1993b). Proposition3: Population-levellearningshouldresultinmoreelaboratecontracts. OutsourcingOutcome Aspopulation-levellearningoccurs,“bestpractices”regardingoutsourcingscope,vendorselectionprocess,andoutsourcingcontractshouldbecomeincreasinglycommon.Ifpopulation-level learningleadstotheselectionofthebestroutines,overallsatisfactionwithIToutsourcingoperationsatthepopulationlevelshouldimprove.Inotherwords,IToutsourcingshouldincreasingly liveuptotheexpectationsthatfirmshavewhentheymaketheirdecision.Theseexpectationsfit intothreebroadcategories:economic,technological,andstrategic.Economicmotivationsreferto thepossibilityofloweringcoststhroughaccessingtheeconomiesofscaleenjoyedbyspecialized vendors.Technologicalmotivationsrefertoaccessingthevendor’smoreadvancedtechnology. Strategicmotivationsrefertousingoutsourcingtohelpfocusresourcesonthecorebusiness. Proposition4: Population-levellearningshouldresultinmoresuccessfulIToutsourcing efforts. PRELIMINARYEVIDENCEOFPOPULATION-LEVELLEARNING Toprovidepreliminaryevidenceofpopulation-levellearning,Iuseasecondarydatabaseof61IT sourcingdecisionsmadeintheUnitedStatesandintheUnitedKingdombetween1984and1994. ThesedatawerecollectedbytwoprominentITresearchersthroughface-to-faceinterviewswith 145businessexecutivesin40organizations(mainlyFortune500andFinancialTimesEuropean 1,000firms).Theyfocusonthedawnoftoday’sIToutsourcing(immediatelybeforeandafter the1989dealbetweenKodakanditsvendors).Thus,theycanhelpusexploretheextenttowhich IToutsourcingnotonlygainedwideracceptance,butalsorefinedafterthislandmarkdeal(Loh andVenkatraman,1992). OutsourcingScope LacityandWillcocks(1998)distinguishthreetypesofsourcing:(1)totaloutsourcing,(2)total insourcing,and(3)selectiveoutsourcing.Here,Ifocusontheforty-sixtotaloutsourcingandselectiveoutsourcingeffortscontainedinthedatabase.Contrarytomyexpectations,thechi-square analysisshowsnosignificantdifferencebetweenthescopeofIToutsourcingeffortsbefore1989 andafter1989(x 2=0.01,p>0.05).Thus,selectiveoutsourcingdoesnotseemtobemorewidespreadafter1989thanitwasbefore1989.
32 BARTHÉLÉMY Table2.1
OutsourcingScope
Selectiveoutsourcing Totaloutsourcing Total
Before1989 9 4 13
After1989 23 10 33
Total 32 14 46
(χ2=0.01,p=0.975)
Table2.2
VendorSelectionProcess
Noformalbid Comparevendorbidwithcurrentcosts Comparevendorbidwithinternalbid Total
Before1989 7 10 2 19
After1989 4 31 7 42
Total 11 41 9 61
(χ2=6.62,p=0.036)
VendorSelectionProcess Intheirdatabase,LacityandWillcocks(1998)measuretheextenttowhichthebiddingprocedure issophisticatedusingthreecategories:(1)noformalbid,(2)vendorbidcomparedwithcurrent costs,and(3)vendorbidcomparedwithinternalbid.Thechi-squareanalysisshowsthatthereis asignificantdifferencebetweenthetypesofbidsusedbefore1989andafter1989(x 2=6.62,p