A Review of The IT Outsourcing Literature
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A REVIEW OF THE IT OUTSOURCING LITERATURE: INSIGHTS FOR PRACTICELACITY, MARY C., SHAJI A. KHAN, AND LESLIE P. WILLCOCKS. "A REVIEW OF THE IT OUTSOURCING LITERATURE: INSIGHTS FOR PRACTICE." THE JOURNAL OF STRATEGIC INFORMATION SYSTEMS 18.3 (2009): 130-146.
PREPARED BY: RIRI KUSUMARANI
COURSE : MIS , SPRING 2017
OFFERED BY : PROF HANGJUNG ZO
OVERVIEW This paper is a meta-analysis research which gather 191 previous studies in the IT Outsourcing literature from mid 90’s to late 2000s.
Trends in IT Outsourcing research is summarized into 6 main topics
4. Success Factors
5. Client & Supplier Capabilities6. Other
Models
IT Outsourcing
1. Determinants
2. Strategy
3. Risks & Mitigation
• Which types of Firms are more likely to outsource IT?
• What is the Strategic Intent behind ITO decisions?• What are the strategic effects of ITO decisions?
• What are the risks of IT Outsourcing?• How are IT Outsourcing risks mitigated?
• Which practices increase the likelihood of ITO Success?
• Which Capabilities do client firms need to develop to successfully engage ITO suppliers?• Which capabilities do client firms seek in an ITO Supplier?
• How do Other models of ITO makes practice different?
I. DETERMINANTS OF ITO
RQ: Which types of Firms are more likely to outsource IT?
Financial Attributes Size Attributes Industry AttributesPoor Financial Performance
Mixed Findings Mixed Findings
Firm Profitability, Return on Assets, Earning per share, Operating expenses etc
Larger firms & Smaller Firms, Larger IT Department Size & Smaller IT Department size; No relationship between
Industry’s term operationalization is mixed : public vs private, categories of industries
Insight
2nd Generation ITO
II. STRATEGYRQ: What is the Strategic Intent behind ITO decisions?
What are the strategic effects of ITO decisions?
Strategic Intent
Realizing the Intent is Difficult
Effect
Mixed Findings
Reducing cost appeared as important driver for majority of firms.
Firm-Level performance was measured using stock price performance and financial performance
Insight
Small effects created
3 Strategic Intents were addressed : IS improvement , Business Impacts and Commercial Exploitation (Diromualdo and Gurbaxani 1998).
Content of ITO Announcement can affect Stock-price performance
The main challenge is how to isolate the effect of ITO on firm-level performance.
III. ITO RISKS & MITIGATION• RQ: What are the risks of IT Outsourcing?
How are IT Outsourcing risks mitigated?
11 Risks of outsourcing were discussed in which general conclusion can be drawn that client is accountable for a successful ITO (Earl 1996). However, risks that comes from supplier were also identified (Table 3).
Studies have also covered risk mitigation advices on each types of ITO Risk including specific type of ITO (offshore or BPO)
The best way to mitigate risk is through experience.
• Which practices increase the likelihood of ITO Success?
IV. Success Determinants
ITO Decision
Relationships between ITO decisions (Degree of outsourcing, top management commitment, evaluation process) made and their subsequent outcomes.
Contractual Governance
Linkage between Contract detail, type, duration and contract size to ITO success were coded.
Relational Governance
Management of client-supplier relationships.
This includes trust, norms, open communication, open sharing of information, mutual dependency and cooperation
Degree of Outsourcing
The amount of outsourcing as indicated by percentage of IT budget outsourced and/or the type and number of IS functions outsourced.Too much outsourcing was associated with lower level of success.
Higher satisfaction appear when firms outsource their system operations and telecommunication instead of applications development, end user support and system management
Top Management Commitment
Critical for ITO success in term of client satisfaction, offshore project success and overall outsourcing success
Supplier Selection Evaluation Process
Consistent predictor of contract price outsourcing decision, expected cost saving being realized and the achievement of outsourcing success in general
Contract DetailsThe number of degree of detailed clauses in the outsourcing contract.
Examples : prices, service levels,benchmarking, warranties and penalties for non-performance.
Higher level of details led to higher level of ITO success.
Contract TypeDifferent forms of contracts used in outsourcing.
Examples : customized, fixed, time and materials, fee for service and partnership based contracts.
Contract DurationShort-term contracts had higher frequencies of success than long-term contracts.
Contract SizeExample : Contracts measured in Dollars
Larger contracts had higher frequencies of success than smaller contracts
ITO Decision & Contractual Governance
Matched ITO Decision with contractual governance lead to higher levels of ITO success.
Attributes
Trust, norms, open communication, open sharing of information, mutual dependency and cooperation.
Higher levels of all attributes are associated with higher levels of ITO success.
Insight
Contractual & Relational Governance
Acts as Complements , ITO Success are greater when both contractual complexity and relational governance were greater.
• Which Capabilities do client firms need to develop to successfully engange ITO suppliers?• Which capabilities do client firms seek in an ITO Supplier?
V. Client & Supplier Capabilities
Client Supplier
IS Human resource capability : the ability to identify, acquire, develop and deploy human resources to achieve its organizational objective.
Clients achieve higher ITO Success when supplier staff turnover was low and the supplier assigned the most capable people to the clients account.
Insight
Important to both parties : IS Technical / methodological capability.
Inter-related capabilities were also found as important (Feeny and Willcocks 1998): IT personnel career development , methodology development and dissemination and client relationship management.
Supplier management capability : the extend to which a client organization is able to effectively manage outsourcing suppliers
• How does other ITO Models differ?
VI. Other ITO Models
Offshore Application Service Provision Business ProcessThe practice of hiring an external organization to perform some business functions in a country different than existing .Also known as “Offshoring”
Example: Dell offshore outsourcing call center to India in 2011
Example : Companies choose ASP to obtain access for expensive software
Suppliers hosted and rented standard applications to clients over the internet.Also known as “Netsourcing”
Supplier taking over client’s business process within functions.
Challenges
More challenges because of Time Zone & Cultural Differences, Need for More controls, Knowledge Transfer Difficulties, The need for detailed requirement specification, geographically dispersed teams.
Most of All : High Transaction CostTo overcome this issue, clients need to commit a high enough volume of work offshore to ensure total cost savings
Practices & Capabilities
The use of middleman , special interfaces between client and offshore supplier employees, the use of liaisons.
Trends?
Companies might ended up selling their IT capabilities to offshore suppliers.
Example : Citigroup sold its IT captive center to Tata Consultancy Services.
Challenges
Suppliers had difficulty generating revenues due to contracts value were too small, duration too short, marketing cost to educate clients were high, margins from reselling propriety software were thin.
Needy clients also create higher transaction costs of serving.
Probabilities for risks to occur increases because of immature suppliers, immature customers and immature technologies
Practices & Capabilities
Clients choose to ‘netsource’ applications that were perceived as non-strategic and technically certain.
Clients can also achieve higher success with netsourcing if they have realistic expectations and have already conquered learning curve through prior experience
Trends?
Traditional IT Suppliers also offer
C
• BPO becomes the newest trend in IT Outsourcing.
• As processes are moving into more standardized forms , BPO will become
increasingly commoditized.
• Therefore, BPO is more suitable to firms that already have a well-defined, self-
contained, modular, IT-enabled and easily measurable processes.
• BPO Success can be measured by indicators such as cost reduction, flexibility to
include quality improvements, realized core competence focus and realized strategic
advantage
Thank You