Outsourcing IT in a changing world

European Management Journal Vol. 17, No. 1, pp. 64–84, 1999 1999 Published by Elsevier Science Ltd. All rights reservedPergamon

Printed in Great Britain0263-2373/99 $19.00 1 0.00PII: S0263-2373(98)00064-4

Outsourcing IT in aChanging WorldALAN SHEPHERD, UK Post Office and Templeton College, Oxford

IT outsourcing has become increasingly popular inrecent years, and is often quoted as a means ofcoping with rapid changes in technology and in thebusiness environment. In practice, however, manyoutsourcing agreements have been structured insuch a way as to inhibit, rather than facilitatechange.

This article examines the different approaches thathave been employed in a number of such agree-ments, relates these to the needs and objectives ofthe organisations’ concerns, and explores theireffectiveness in accommodating various types ofchange. 1999 Published by Elsevier Science Ltd.All rights reserved

Introduction

IT outsourcing has been the subject of significantresearch for the last five years. A recent bibliography(Lacity and Hirschheim, 1995, pp. 228–230) lists over40 publications on this topic, and there are manyothers. For practitioners too, the subject is of continu-ing importance. In 1994, a survey of 250 UK organis-ations (PA Consulting Group, 1994) showed that 80per cent had actively considered IT outsourcing andover 60 per cent had outsourced to some degree. Theworldwide IT outsourcing market was estimated at$33 billion in 1992 and $50 billion in 1994 (Willcocksand Fitzgerald, 1994, pp. 9–10) and has continued togrow subsequently at a similar rate. By 1994, vir-tually every one of the Future 500 companies wasbelieved to be actively considering outsourcing someor all of its IT (Lacity and Hirschheim, 1993, p. 4).

In spite of the enthusiasm for this approach to theprovision of IT services, it could be argued that thesuccess rate was not particularly high. Lacity andHirschheim (1993, ch. 4) reported that, of the organis-ations that they studied which had had outsourcingcontracts in place for more than two years, 60 percent were dissatisfied and 40 per cent were activelyattempting to terminate them, sometimes at consider-able cost. A later study (Lacity et al., 1995, p. 89)

European Management Journal Vol 17 No 1 February 199964

showed that 70 per cent of total outsourcing contractswere unsuccessful, although the success rate forselective outsourcing was much higher. In the UK,the PA study (PA Consulting Group, 1994) showedthat 26 per cent of the organisations that had out-sourced were attempting to bring the services backin-house, and only 5 per cent were achieving reallysubstantial benefits.

More recently there seems to have been someimprovement. Many of the problems experienced inearlier agreements (Lacity and Hirschheim, 1993) arenow well understood. A number of writers(Willcocks and Lacity, 1997; McFarlan and Nolan,1995; Lacity et al., 1995) have published substantialguidance for practitioners, and consultancy organis-ations (PA Consulting Group, 1996) have acquiredsubstantial experience in this field. It might beexpected, therefore, that early mistakes will not berepeated in more recent agreements. An examinationof the difficulties experienced, however, suggestedthat some may be rather more fundamental.

One of the reasons commonly quoted for outsourcingIT (Willcocks and Fitzgerald, 1994, p. 27) is to provideincreased flexibility to cope with changes in tech-nology and in the business environment. This isbecoming increasingly important for many organis-ations in the nineties as, if anything, the rate ofchange in both areas is accelerating. Yet, paradoxi-cally, the traditional IT outsourcing agreement asdescribed, for example, by Lacity and Hirschheim(1993, p. 3) is based upon a long-term commitmentto a fixed service, and will tend to inhibit rather thanfacilitate change. In another survey (Willcocks andFitzgerald, 1994, p. 297), only 22 per cent of IT out-sourcing projects made any provision for either busi-ness or technical change. Moreover, in the later yearsof such contracts, improvements in theprice/performance of the technology frequentlyaccrue to the supplier rather than the customer, ther-eby progressively undermining the initial economicbenefit of the deal. Even where specific provision ismade for change, it has often proved difficult tonegotiate a competitive deal halfway through a long-term contract. (Martinsons, 1993, p. 20). Moreover, it

OUTSOURCING IT IN A CHANGING WORLD

has been observed (Hendry, 1995) that outsourcingcan have hidden costs in the longer term, arisingfrom a reduced awareness of the changing environ-ment and the loss of informal mechanisms for adapt-ing to change.

Outsourcing of any sort is most straightforwardwhen the requirements are well understood and eas-ily described, the means of satisfying them is reason-ably clear, and it is easy to change to another supplierif the outcome is unsatisfactory. In the case of IT out-sourcing, it is quite probable that, for the reasons out-lined above, none of these conditions will apply.Even when the requirements and means of satisfyingthem are initially clear, they are more than likely tochange in ways that cannot readily be foreseen.Moreover, a change of supplier is likely to be far fromstraightforward, particularly where a large and com-plex IT organisation has been transferred to the ven-dor in its entirety.

In the face of these concerns, a study was initiatedat The Oxford Institute of Information Management(OXIIM) in 1995 which aimed to determine best prac-tice in catering for changes in business requirementsand available technology within outsourcingrelationships. It sought to do this by examining thedifferent approaches to outsourcing that are possible,and the change mechanisms that are potentially rel-evant to each. It soon became evident, however, thatany conclusions would only be useful if they alsotook account of the underlying philosophies whichcan motivate an outsourcing approach, and the dif-ferent types of outsourcing relationship that theymay seek to establish. For the purposes of this paper,these terms are elaborated below. It is not claimedthat these definitions have any wider currency.

The underlying philosophy of an outsourcing agree-ment reflects the outsourcing objectives of the princi-pal architects of that agreement, along with the setof beliefs that led them to conclude that outsourcingwould be an effective and appropriate way to pro-ceed. These beliefs would be expected to encompasstheir perceptions of

❖ the future role of IT within their organisations❖ the capabilities and behaviour of outsourcing sup-

pliers❖ the risks inherent in an outsourcing approach

The motivations for IT outsourcing are widely dis-cussed in the literature and summarised in Shepherd(1995 pp. 7–11). For the majority of organisations,these are some combination of:

❖ financial restructuring❖ reducing or stabilising costs❖ overcoming cultural and organisational problems❖ concentrating on core competencies❖ accessing world class expertise

European Management Journal Vol 17 No 1 February 1999 65

Some organisations may see their needs for IT ascomparatively static and essentially of a commoditynature. Others may see them as fast changing andstrategic to their competitive position. This willinfluence whether the first or second half of the listis likely to predominate.

The achievement of these objectives depends, in turn,upon some combination of beliefs concerning thecapabilities and behaviour of outsourcing suppliers.For example, advocates of an outsourcing approachmay believe that an outsourcing supplier will

❖ undertake work at lower cost❖ have more flexibility in financing the service❖ be more flexible in accommodating varying levels

of demand❖ be more competent, both technically and mana-

gerially, and more trustworthy❖ be better able to communicate in business teams

and understand business needs❖ be able to transcend internal cultural and organis-

ational barriers❖ eliminate the need for specialised staff who do not

fit the organisational culture❖ relieve in-house management of non-core tasks

Lacity and Hirschheim (1993) describe a number ofoutsourcing decisions which were driven by variouscombinations of these beliefs.

For each of these beliefs, however, there is a corre-sponding risk. For example:

❖ the supplier may find ways of charging morethan expected

❖ financing needs may change❖ demand levels may not vary in the way antici-

pated❖ the supplier’s technical and management skills

may prove less impressive than expected❖ the supplier may prove unable to relate to the cus-

tomer’s business and its needs❖ the supplier may be unable to deal with the cus-

tomer’s culture and internal politics❖ there may be a continuing need for specialist staff

to monitor and direct the supplier❖ managing the supplier(s) may prove to be a

greater burden than managing an in-house func-tion

Outsourcing clients will vary in the strength of theiradherence to each of these beliefs and their percep-tion of the corresponding risks. Equally, the rel-evance of these to their specific outsourcing objec-tives will vary. These factors in combinationdetermine the underlying philosophy of the agree-ments that they seek to conclude. This is referred to


elsewhere in this paper as the outsourcing philo-sophy of the organisation concerned.

The outsourcing approach will reflect this philo-sophy, and determines the basic shape of the out-sourcing agreements that are concluded. In parti-cular, is there a ‘selective’ or a ‘total’ approach tooutsourcing (Lacity et al., 1995, p. 89), are the con-tracts of a short- or long-term nature, and are theywith a single or multiple suppliers? The approachwill equally determine the basic commercial structureof the agreement: in particular how the services to beprovided are defined, and how they are to be paidfor.

The outsourcing relationship reflects the roles to beplayed by each of the parties once the agreement isin place, and the way in which they will relate to oneanother. Essentially it is the implementation of theunderlying philosophy within the outsourcingapproach. It is underpinned by the outsourcingagreement, but may also include formal or informalmanagement mechanisms which are not of a strictlycontractual nature. It may be aimed at fulfilling veryspecific and closely defined requirements, or at estab-lishing a basis upon which a range of future needsmight be satisfied. The shape of the relationship islikely to be influenced strongly by the risk manage-ment element of the underlying philosophy. In parti-cular, in which areas will the client seek to workclosely with the supplier, in which areas will heclosely monitor the suppliers’ performance, and inwhich areas will he leave the supplier to his owndevices?

For example, some clients will wish to maintain aclose involvement in the technical decisions made bythe suppliers, others will be particularly concernedabout the way in which charges are calculated whileothers will wish to emphasise a close formal monitor-ing of service levels.

Change mechanisms may be explicit provisions ofan outsourcing agreement, or they may be implicitin the outsourcing approach used. Essentially, theyencompass any process, afforded by the outsourcingrelationship, through which business or technicalchange may be accommodated. They are character-ised by the type of change for which they are rel-evant, and the level of assurance that they providefor the client that the competitiveness of the deal willnot be eroded by that change. Equally the vendor willbe concerned to maintain his own profitability, butthe position is generally such that the cards are in hishand one the contract has been signed (Martinsons,1993, p. 20).

The study aimed, in particular, to answer the follow-ing four questions:

❖ Are some types of outsourcing approach and


relationship better able to accommodate changethan others?

❖ To what extent do the mechanisms used to accom-modate change depend upon the underlyingphilosophy of the outsourcing agreement?

❖ How effective have these mechanisms proved inpractice in allowing desired changes to take placewithout adversely affecting the competitiveness ofthe deal?

❖ Is there a significant difference between thechange mechanisms incorporated in older con-tracts and those concluded more recently?

Study Format

The study had two components. The first of these(Shepherd, 1995) was based upon experience as apractitioner, combined with existing research. Itexplored the motivations for IT outsourcing, theapproaches and types of agreement used, and someof the risks involved. The second component of thestudy, which is described in this paper, was basedupon detailed interviews with five large organis-ations with substantial commitments to IT outsourc-ing. All had IS budgets of at least £10M, and in mostcases significantly more. No suggestion is made thatthese constitute a statistically valid sample, but theywere chosen to include a range of different outsourc-ing approaches and philosophies — in particular:

❖ Short- and long-term contracts.❖ Recent and older agreements.❖ Single and multiple suppliers.❖ Selective and ‘total’ outsourcing.❖ ‘Partnership’ and ‘Transactional’ relationships.

For each organisation, the aim was to interview:

❖ The original architect of the outsourcing relation-ship.

❖ The person who has been responsible for manag-ing it on an ongoing basis.

❖ A user of the services provided by the outsourc-ing supplier.

In some cases this involved up to five interviews withdifferent individuals, in other cases it was possible togain these different perspectives from a single indi-vidual. Use was also made of externally publishedreports on the relationships concerned and, wherenecessary, access to the contractual documentation.

The initial interviews took place in 1995. A secondseries of interviews was then carried out approxi-mately two years later, to determine how effectivethe various change mechanisms had proved to bein practice.


The organisations chosen were as follows. They arelisted with the most recent outsourcing relationshipfirst:

❖ Organisation A is a large UK based engineeringorganisation with a turnover in excess of £3bn p.a.and an annual IS budget in excess of £100M. Ithas a multi-divisional structure, with design andmanufacturing locations throughout the UK. In1995 it had recently signed an exclusive 11-yeartotal outsourcing contract with a single supplier.

❖ Organisation B is a large multinational organis-ation with turnover in excess of £10bn. and oper-ations in many countries throughout the world. In1995 it had recently adopted a total outsourcingapproach, and entered into enabling agreementswith three major vendors to supply IT services,having made most of its in-house IT staff redun-dant.

❖ Organisation C is a regionally based utility withinthe UK. It has a turnover in excess of £1.3bn andan IT budget of around £20M. It entered into a 12-year total IT outsourcing relationship with a singlesupplier in 1992, but subsequently found it neces-sary to re-negotiate the contract in its entirety.

❖ Organisation D is a UK based manufacturingorganisation with a turnover in excess of £3bn. Ithas been outsourcing around 70 per cent of its£50M IT budget on a selective basis since 1985. Ithas been outsourcing some IT services for con-siderably longer.

❖ Organisation E is a UK based transport operator.It has a turnover in excess of £700M. and an ITbudget of around £10M. It selectively outsourcednearly 50 per cent of its IT budget in 1986, throughseveral separate 3-year contracts, which had sub-sequently been renewed on several occasions. In1995 it had recently entered into a 5-year total out-sourcing contract with a single supplier, whichencompassed the majority of existing agreements.

Organisations A and B were both large multi-div-isional corporations, serving many different geo-graphical locations. Interviews were held with peoplewho were responsible for operating the agreementsat a local level, as well as those who were drivingthe outsourcing strategy and supplier relationshipsfrom the centre.

Outsourcing Philosophies

Organisation A

The original trigger for outsourcing in OrganisationA was capital restructuring. Cash flow problems andexcessive borrowings were forcing the organisationto divest itself of non-core assets and functions.Moreover, IT services were seen as essentially a com-modity, in the context of that particular business. By


committing to a long-term exclusive IT outsourcingcontract, it was able to secure a substantial up front‘goodwill’ payment from the supplier in respect ofphysical assets and transferred staff which, in the cir-cumstances, was very welcome. This did, however,involve making a substantial commitment to the pur-chase of fixed services in the initial years of the con-tract, with the intention of negotiating a more vari-able basis of pricing at a later stage.

Another major element in the decision to outsourcewas the cost saving that could be made by consolidat-ing data centres. The policy had been to devolve ITdecision making to individual operating units, eachof which had established its own independent facili-ties. Whilst it would in theory have been possible toset up a consolidated operation in-house, this wouldhave been contrary to the philosophy of local auto-nomy. Outsourcing enabled a more coherent and costeffective approach to IT without violating this prin-ciple. Subcontracting major items of work was a fea-ture of the organisation’s core business, and this nat-urally influenced their attitude to external suppliers,their perception of the risks involved and theirapproach to the outsourcing contract.

Organisation B

Whilst there are some common themes, OrganisationB’s primary motivation for outsourcing IT was some-what different. In this case the emphasis was upon amajor change in culture and working practices tomove aggressively to newer technology and toexploit information systems more effectively in achanging business environment. Whilst they did ach-ieve a major cost reduction by consolidating datacentres and moving some mainframe applications toa PC environment, they recognise that most of thesesavings could have been achieved by reorganisingthe IS function in-house. The drivers for outsourc-ing were:

❖ To move from a fixed to a variable cost base.❖ To facilitate frequent changes in the geographical

distribution of their activities.❖ To free up internal staff to concentrate on the

exploitation, rather than the delivery, of IT.

Because of the emphasis upon culture change andnew expertise, existing staff were made redundant,rather than being transferred directly to the supplier.Moreover the majority of physical assets wereretained, as this minimised contractual difficulties inthe event of future change, and cash flow was less ofan immediate issue. About 50 per cent of staff weresubsequently re-engaged by the outsourcing vendorsin order to provide some continuity of knowledge.In retrospect Organisation B believe that this was toomany, given the level of culture change that theywere seeking.


Their approach to suppliers was to seek close work-ing relationships, but to recognise the ultimate riskof non-performance. They sought to manage this byusing a portfolio of suppliers, incentivising good per-formance and avoiding contractually binding long-term commitments.

Organisation C

Organisation C has an annual information systemsexpenditure in excess of £20M, and has the majorityof its activities in a single area of business. Initiallyit saw IT outsourcing as a means of divesting itselfof a commodity function, and containing the costs ofexisting activities. However, it was also persuaded ofthe capability of an outsourcing supplier to act as apartner in transforming its business through businessprocess re-engineering, diversifying into new areas,and in particular jointly developing software pro-ducts which could be sold to similar organisationselsewhere.

In essence the relationship was in two parts — oneessentially transactional, the other open-ended, butwith the intention of developing some form of part-nership.

On this basis a 12-year contract was signed with amajor outsourcing supplier. All their IS staff movedunder the control of the outsourcer. There was noresidual IS organisation; formal contact was throughan administrative interface in the finance function.Periodic meetings were scheduled at a senior level tofurther the strategic relationship, but the supplierwas left to deal directly with line managers on mat-ters of service delivery and business transformation.

Subsequently, a change in the business and politicalclimate led Organisation C to de-emphasise its plansfor diversification, and to re-focus on cost reductionwithin its core business. In the face of strong oppo-sition from the outsourcing supplier, Organisation Cdecided to appoint an in-house IS Director. He rap-idly came to the conclusion that the outsourcing con-tract needed to be completely re-negotiated, andrecruited a small in-house team to develop an ISstrategy, manage relationships with the supplier, andfacilitate business analysis and project managementactivities with the relevant line managers.

With nine years of the original contract still to run,Organisation C was potentially faced with a substan-tial legal liability. The contract had no specific pro-visions for varying the service commitments that hadbeen made, but very fortuitously a provision hadbeen made to review the relationship after threeyears, and ultimately this was used successfully topersuade the supplier to re-negotiate.

The new contract repositioned the outsourcing sup-plier as a technology partner, not a business partner.


The emphasis was upon efficiency, cost reductionand continuous improvement, with business processre-engineering and strategy reverting to in-housecontrol. It included provision for regular price reviewand benchmarking of operational services. Commit-ments are made for only 1–3 years in advance,depending upon the service, with an annual forwardreview of resource requirements. In addition there isa commitment to achieve, and to share, cost savingson a year on year basis.

This new contract is similar in format to that nego-tiated by Organisation A, but with added flexibilityfor regular review.

Organisation D

Organisation D sold off its central IS service unitmany years ago, but retained an IT capability at theoperating unit level. It has a policy of outsourcingabout 70 per cent of such activities, whilst main-taining about 30 per cent in-house. This is done insuch a way as to:

❖ gain the benefit of outside expertise❖ maintain a variable cost base❖ maintain firm control of technology architecture,

business applications and supplier management.

IT is seen as a strategic function.

Hardware and software ownership is generallyretained in-house. This maintains closer control overtechnology costs and architectures, but reduces theopportunity to commit the supplier to end to end ser-vice level and cost reduction targets.

In some ways this approach is similar to that adoptedby Organisation B, although they have come from aquite different starting point. In particular, Organis-ation D has maintained a much higher proportion ofin-house staff, and is more prepared to retainresponsibility for managing supplier interfaces andfor overall technical design and service levels. More-over, this style is one of continuous improvementrather than revolutionary change. In consequencesome of the more sophisticated, high profile aspectsof Organisation B’s approach have not been needed.

The organisation’s general approach to supplierrelationships is on the Japanese partnership model(Dyer and Ouchi, 1993, pp. 52–53). Close long-termworking relationships are sought with suppliers, butthe risk of poor performance is covered by avoidingexclusive or long-term contractual commitments.

Organisation E

About nine years ago, Organisation E entered into a3-year facilities management agreement for their


mainframe installation. It also established a separateagreement for applications maintenance. For themost part, these relationships were not actively man-aged, and the suppliers brought little value addedexcept for maintenance of the status quo. They hadno great incentive to improve service, except for thethreat of non-renewal at the end of the 3-year period,which Organisation E management were reluctant toexercise. There was no provision for price re-negoti-ation during the life of the contract, but this was ofcourse possible in principle at renewal time. Afterthree years both contracts were renewed withoutchange. By year six, however, it was evident that afurther renewal on this basis would not be appropri-ate. Maintenance on some applications had droppedto quite low levels, and the mainframe equipmentwas mostly fully depreciated, yet the original priceswere still being paid. In spite of this, it provedimpossible to persuade the supplier to reduce hisprices substantially until competitive tenders weresought. Eventually the contracts were renewed ataround 40 per cent of the original cost.

Before the next renewal point was reached, a reviewof head office activities led to a requirement forfurther divestment of non-core activities. It wasdecided to replace the existing facilities managementarrangements with a single outsourcing contract,which would also take on various technical supportand consultancy functions that had been retained in-house. There had not been a high rate of change inthe use of IT in this particular business, and thedesire was to fix costs rather than to make themmore variable.

The organisation saw IT as a commodity function,and the form of outsourcing agreement reflected thisview. The main perceived areas of risk were coveredby a fixed base price and provision to re-tender inthe fourth year.

Summary

Table 1 summarises the outsourcing philosophies ofeach of the organisations studied at the time when

Table 1 Outsourcing Philosophy

Organisation

A B C D E

View of IT (commodity/strategic) C S C S CPredominant driver for Outsourcing F C/B C B F(Financial, Core Competencies,Business, Flexibility)Perceived risks

Price escalation ** * ** *Service degradation ** ** * *Supplier lock-in ** ** *

* Some emphasis; **strong emphasis


the agreements were initially concluded. In severalcases, these philosophies have subsequently changed.Factors included are, whether IT was seen primarilyas a commodity or a strategic function, the predomi-nant consideration in driving the organisation to out-sourcing, and the risks associated with outsourcingwhich the organisation was particularly concerned toavoid, either through its outsourcing approach orspecific contractual provisions.

Mechanisms for Change

All the organisations studied had given somethought to the need to make provision for change,but the way in which they did so varied enormously.Their major reasons for outsourcing, their attitude tothe use of IT and, to some extent, their organisationalculture appeared to be the major factors in determin-ing their approach.

The following mechanisms have been employed byone or more of these organisations to protect theirinterests in the event of business or technical change.Some are fundamental to the outsourcing philosophyof the organisation concerned, and the types ofrelationship involved. Others are contractual pro-visions that will be more appropriate to some typesof agreement than others. They are likely to be effec-tive only in appropriate combinations.

❖ The approach to managing the outsourcingrelationship was strongly emphasised by severalof the organisations as central to their outsourcingphilosophy. All had taken decisions, at leastimplicitly, about the form of relationship that theysought with their supplier(s). They aimed to achi-eve this through a combination of formal contrac-tual provisions and informal working practicesbuilt around them. Some of these could beregarded as mechanisms to facilitate change, forexample by promoting greater mutual under-standing of each other’s business drivers and anatmosphere in which a mutually acceptable sol-ution might be negotiated.

A clear contractual

baseline is essential to the

success of any major

outsourcing agreement


❖ Pricing provisions are key to any outsourcingagreement. All of the organisations studied usedsome form of competitive tendering to select theiroutsourcing suppliers. Once the contract has beensigned, however, the competitiveness of a deal caneasily be eroded as new business and technicalrequirements are incorporated on the basis of non-competitiveness quotations, and external marketprices reflect advances in technology. This was ofparticular concern to those organisations enteringinto long-term commitments to a single supplier,and a variety of mechanisms were used to managethis risk.

❖ Service level schedules are indispensable to asensible dialogue with vendors about cost/servicetrade offs. Virtually all of the organisations stud-ied had to undertake some form of re-negotiationwith their suppliers in this context, but in severalcases this was complicated by disputes as to whatdid and did not constitute change. All would, inretrospect, have given more attention to this areain the initial contract negotiations,

❖ Strategic control of this information systems func-tion was an issue for several of the organisations.The desire to retain this in-house was in severalcases a specific factor in thedecision to avoid an out-sourcing approach basedupon a long-term contractwith a single supplier. Inother cases, both informalrelationship managementand specific contractualmechanisms were used toretain a degree of strategic control.

Table 2 summarises the predominant outsourcingapproach of the organisations studied.❖ Administrative control mechanisms were an

essential feature of many of the contractual mech-anisms used, although in some cases this was notentirely appreciated at the time of the originalnegotiations. The culture of the organisations con-cerned as reflected in their outsourcing philo-sophy, was a significant factor in the type of con-trol that they initially sought to maintain.

❖ Exit provisions are an important requirement,particularly with long-term multi-service out-sourcing contracts. Handover to a new vendor is

Table 2 Outsourcing Approach

Organisation

A B C D E

Contract term (yr) 10 5 12 3 5Single/multiple suppliers S M S M STotal/selective T T T S TStart of agreement studied 1994 1995 1992 Many 1995Approximate initial contract value (p.a.) £100M £100M £25M £35M £6M


unlikely to be achieved in a non-disruptivefashion without the co-operation of the outgoingsupplier. Without a clear agreement as to how thiswould be accomplished, any re-tendering exercise,whether at the end of the contract period orprematurely, would not be truly competitive. Theorganisations studied varied widely in the pro-visions that they made for this contingency.

In the following sections, each organisation’s deploy-ment of these mechanisms is explored, along withsome indication of their practical operation.

Management of the OutsourcingRelationship

The term ‘partnership’ is widely used in the contextof outsourcing agreements and has already been thesubject of research (Henderson, 1990; Dyer andOuchi, 1993). In practice its meaning varies widely,depending upon the contractual nature of the agree-ment that has been concluded and the arrangementsthat have been put in place for post contract manage-

ment. In the extreme it can belittle more than a naı̈ve hope onthe part of the customer thatthe supplier will behave‘reasonably’ in dealing withissues that have not beenadequately defined in the con-tract. Unfortunately (Lacity etal., 1995, p. 90) this hope is not

always realised, if only because of the absence of acommon view of what is reasonable. The organis-ations studied varied considerably in theirapproaches to this issue.

In the context of this paper, a partnership, as opposedto a transactional relationship is defined as one whichhas the following characteristics:

❖ an intention for customer and supplier to work inclose cooperation rather than at arms length;

❖ some element of shared risk and reward;❖ a firm intention to engage upon joint activities that

are not defined in detail at the outset.


It is the last element which makes this relevant inthe context of change. It is important to note that apartnership does not necessarily imply, as is some-times suggested, an absence of clear contractualagreement as to the roles and responsibilities of eachparty. Indeed, it has been argued (Lacity andHirschheim, 1993, pp. 242–255) that a clear contrac-tual baseline is essential to the success of any majoroutsourcing agreement. Equally, it does not necessar-ily imply a long-term contractual commitment to aparticular package of services. Those organisationswhich were most strongly committed to the partner-ship criteria outlined above took the view that agree-ments should be continued by mutual consent. Lock-ing either party into a formal long-term commitmentis arguably contrary to the principle of shared riskand reward, because it seeks to place the burden ofchange related risks onto the customer.

Organisation A was driven to outsourcing primarilyby cash flow and cost considerations (Strassman,1995). They viewed the provision of IT services essen-tially as a commodity. Subcontracting was a corecompetence of their organisation, and they were usedto a very closely defined formal contractual relation-ship with their suppliers. Certainly they wished tomaintain a cordial and constructive relationship, butthey stressed that ‘partnership’ cannot be seen as asubstitute for performance against the formalrequirements of the contract. In the terms of thispaper, the relationship was transactional.

Organisation B was driven to outsourcing primarilyby the need to move from a fixed to a variable costbase, and a desire to renew its base of expertise. Theysaw effective exploitation of IT as strategic to theirbusiness, and their culture was to develop close long-term relationships with their suppliers on a globalbasis, whilst handling the details locally.

There was already substantial experience of selectiveoutsourcing, and the organisation was anxious toavoid the overheads of in-house service integrationand inter-supplier dispute resolution which they hadexperienced in that environment. On the other hand,they were not prepared to accept the risk of beingtotally dependent upon a single supplier. Quite apartfrom the danger of complacency and exploitation,nobody, they believed, could be world class at everyaspect of IT.

Moreover, they favoured the Japanese motor indus-try concept of supplier partnership, in which long-term relationships are established through enablingagreements and joint working, (Dyer and Ouchi,1993, pp. 52–53) rather than through being lockedinto long-term contractual commitments to particularproducts or services. They saw the success of such asbeing critically dependent upon the achievement ofa close alignment of organisational culture and man-agement vision between all the parties involved, andtheir selection process was specifically geared


towards that end. This is in line with the definitionof partnerships used in this paper.

A great deal of emphasis was placed upon the mech-anisms employed to establish and maintain closeworking relationships at all levels with the supplier‘partners’. These aimed to ensure a high level of com-munication and involvement in strategic planningand continued understanding of one another’s issuesand problems. In particular, close personal relation-ships at the most senior levels created a climatewhere any conflicts which arose at a more junior levelcould be rapidly resolved.

Organisation C was originally drawn to outsourcingby a desire to constrain the cost of a stable and non-core commodity function. It also perceived anopportunity to develop new areas of businessthrough a relationship with an IT supplier, but theculture match between the organisations was notclose enough for this to succeed.

The business process re-engineering activity also didnot live up to expectations. Line managers in theoperating units did not have the analytical or projectmanagement skills to deal effectively with the out-sourcer’s consultants in introducing new systems.Equally the consultants, many of whom were of veryhigh quality, nevertheless found it culturally differ-ent to relate to the line managers, and to gain theiractive participation in developing ideas for businesstransformation.

A major change in business objectives from diversi-fication to close control and continuing improvementof the core business, drove the revised agreement.This restored Organisation C to the driving seat andanticipated a substantial degree of continuing busi-ness and technical change. An overall framework setthe relationship, but commitments to specific pro-ducts and services were established only on a short-term non-exclusive basis.

The original agreement was somewhat anomalous, inthat whilst there was a genuine desire to establish apartnership in business processing re-engineering,the outsourcing of IT operations was done on astrictly transactional basis. The original relationshipfailed precisely because of a lack of mutual agree-ment and understanding of the role that each partywould have to play in order for it to succeed.

Organisation D’s policy on outsourcing was drivenprimarily by a desire to limit its fixed cost base andtake advantage of external expertise. It recognised ITas a strategic activity within its business. Its businessculture had evolved from aggressive spot tenderingtowards developing long-term relationships withstrategic suppliers, while maintaining close strategiccontrol and avoiding long-term commitments to spe-cific products and services.


Organisation D was strongly committed to estab-lishing Japanese style partnerships with its suppliers,and had worked with a Japanese partner in puttingthese into effect across the whole of its business. Itsapproach to outsourcing was specifically determinedby these considerations. Joint planning with strategicsuppliers was the norm, to enable them to anticipatebusiness and technical change. Price reductions wereachieved where possible by helping to reduce thesupplier’s costs, rather than by pressuring his mar-gins. In return, the supplier was expected to open hisbooks, to be prepared to tender competitively on anassignment by assignment basis, and to participate ina programme of continuous improvement.

Key elements of the working relationship haveincluded:

❖ Joint planning with supplier partners in connec-tion with future requirements and opportunities,so that they are able to acquire appropriate skillsand resource availability to compete on the mosteffective terms.

❖ A commitment to working jointly with suppliersto reduce costs on both sides, through processimprovement.

The organisation has been refining this approach formany years, so it is not surprising that there havebeen no major changes in their philosophy over theperiod of this study. They benefit from a close long-term relationship with their outsourcing partners,and technical changes such as client server comput-ing have been accommodated without difficulty.Whilst a change of ownership has brought aboutsome changes in management philosophy, this islikely to favour more rather than less in-house con-trol.

Organisation E was driven to outsourcing primarilyby a desire to constrain the cost of a non-core over-head activity. Most of their systems were stable, anda high degree of either technical or business changewas not foreseen in the medium-term. The culture ofthe organisation was essentially one of formal sub-contracting. This led to a traditional ‘total’ outsourc-ing contract with little provision for change in thecore services, but a comparatively short (5-year) dur-ation.

Both staff and assets were transferred to the out-sourcer, with the expectation that they would bothbe merged with his wider business activities. Theresidual functions retained in-house include contractmanagement, technical strategy, and business sys-tems analysis and project management of new appli-cations. The outsourcing contract allows applicationdevelopment to be tendered competitively, althoughthe outsourcer can make a time and materials inte-gration charge. This would give them some advan-tage when tendering for such work.


Formal management processes are defined for theconduct of day to day relationships, and a senior rep-resentative of the outsourcing supplier attends adirector-level IS steering committee twice a year.

Whilst there is some use of the term partnership inthe preamble to the agreement, it does not meet thepartnership criteria outlined in this paper. In practicethe style has proved to be essentially transactional.

Summary

Table 3 summarises the outsourcing relationshipsadopted by each organisation — in particular,whether it was predominately transactional or part-nership based, and the predominant roles which theorganisation originally chose to retain in-house,rather than devolve to the supplier.

Mechanisms for Managing Relationships

There are two elements of an outsourcing approachwhich may form the basis of a mechanism for manag-ing change. The first of these is through the negoti-ation of framework agreements, which are widelyused as the basis of partnership relationships of thetype described in the previous section. The other isthrough the involvement of multiple suppliers so asto retain some element of choice and competition inthe event that a major re-negotiation is required.

Framework agreements provide a means of buildinglong-term relationships with a supplier, withoutcommitting to a fixed package of products and ser-vices. They can also provide a means of involvingsuppliers in joint planning to assist them inresponding to business and technical change (Dyerand Ouchi, 1993, pp. 61–62). Proponents of conven-tional total outsourcing argue that framework agree-ments will not achieve such favourable pricing as afirm commitment to a specific package. However, theindications are that very good deals can be done ifthe volume of prospective business is sufficientlyattractive. Organisations B and D, who adopted thiskind of approach, placed a great deal of emphasisupon the need to build close partnership-stylerelationships with prospective suppliers. Coupledwith an open book approach to pricing, thesearrangements seem to have been quite successful.

Organisation B developed framework agreementswhich defined the working relationship with (andbetween) their suppliers, but avoided long-term com-mitments to particular products, services or locations.There was an expectation of a high level of change.Open book accounting and performance improve-ment incentives, together with provision for localcompetition, were used to discourage complacencyand exploitation.


Table 3 Outsourcing Relationship

Organisation

A B C D E

Predominant focusPartnership/transactional T P T P T

Retained roles in-houseSystems architecture * ** ** *Technical architecture * ** ** *Technology deployment * * **Technology procurement ** **

*Some emphasis; **strong emphasis

Enabling agreements were negotiated centrally withthree suppliers, nominally covering computer oper-ations, telecommunications and desktop servicesrespectively. These had an initial term of five years,but, subject to satisfactory performance, were renew-able indefinitely. Services are called off locally on anannual basis; there is no specific longer term commit-ment.

The principle of local execution has not been entirelysuccessful. The degree of both technical and contrac-tual divergence has been greater than intended, andthis has led to difficulties in implementing cross-siteapplications and infrastructure changes. They havesince reverted to a higher degree of central contractmanagement. In addition there has been a movetowards making the suppliers responsible for hard-ware and software procurement so as to facilitate endto end accountability.

The other major lesson from this experience was theneed to have the right kind of people on each site tomanage the relationship with the suppliers. This wasequally true for the suppliers themselves. Clarity ofrequirements and expectations on both sides, com-bined with the ability to respect these in negotiationproved essential to a productive relationship.Deficiencies in this area are considered to have beenby far the most frequent cause of difficulty.

Organisation D also concluded long-term enablingcontracts with some suppliers. This was a compara-tively recent development, but they intended to usethis approach more in the future. Their philosophyhas been to centralise the enabling contract negoti-ation and management, along with IS strategy andtechnical design assurance. However, local appli-cation owners and service owners deal with day today issues.

The organisation has many years experience of work-ing with its major outsourcing suppliers, and this hasled to the establishment of custom and practicewhich made some of the relationship building tech-niques used by organisation B unnecessary. How-ever, they have found that framework agreements


are greatly facilitating the wider use of appropriateservice level measures and incentives.

Agreements with multiple suppliers allow theflexibility to use best of breed expertise and to main-tain some element of competition. The reduced scopeof individual contracts makes periodic re-tenderingmore practicable (Willcocks and Lacity, 1997, p. 89).Moreover, a wider range of expertise is potentiallyavailable in the event of a need for new or differenttechnology and applications. Additionally, there is analternative in the event that a supplier consistentlyfails to perform, or finds itself in a position where itno longer wishes to continue this type of business.However, service management is more complex in amultiple supplier environment. Framework agree-ments can help, but organisations adopting thisapproach have to accept the overhead of some levelof subcontractor management. The designation ofone supplier as ‘prime contractor’, possibly in thecontext of a particular service or location, rather thanacross the board, can help in this regards, but severalorganisations found that it was only a partial sol-ution.

Organisation B used framework agreements withmultiple suppliers as a way of bringing a broadspread of best in class expertise to the table as wellas retaining some degree of choice and competitionif one supplier did not come up to scratch, either ina particular geographical area or more generally. Byavoiding monolithic agreements with a single sup-plier and making specific commitments only in avery granular way they retained the ability to intro-duce new suppliers gradually, and with a minimumof disruption, if they found it necessary to do so.

In an attempt to avoid the subcontractor manage-ment overhead, they encouraged the suppliers towork closely together and form their own partner-ship working arrangements. In addition, the frame-work agreements provided that:

❖ A single supplier will take the lead at eachlocation.


❖ Suppliers agree to resolve any differences amongthemselves without involving the customer.

❖ If one supplier withdraws from the relationshipor fails to deliver, the others agree to take overhis role.

In practice this did not work entirely as intended. Toa degree the suppliers were still in competition withone another, and they frequently proved unable toresolve difficult issues on their own. The appropriate-ness of the responsibility boundaries between the dif-ferent suppliers has also come into question in thelight of changing technology. A more formalprime/subcontractor structure is being consideredfor the future.

Organisation D retained a higher level of in-houseresource, and made commitments to its outsourcingsuppliers at an even more granular level. Thesearrangements have proved highly flexible, with asubstantial element of variable cost, whilst retaininga very close and co-operative working relationshipwith strategic suppliers, and an imaginative use ofincentives. Moreover, they have avoided the risksand complexities associated with very large scalemonolithic outsourcing agreements. On the otherhand, it could be argued that they have retained sub-stantial in-house management costs, and have failedto off-load as much responsibility on to their sup-pliers. In particular it has proved difficult to establishservice level measures which are meaningful to theend user, because no visible service is exclusivelywithin the province of any one supplier. They expectto address this issue over a period of time, as theyestablish more comprehensive and strategic relationswith a smaller number of suppliers.

Pricing

A variety of mechanisms were used by the organis-ations studied in an attempt to retain competitivepricing in the face of technical business and marketchange. The obvious way to do this is by periodic re-tendering, and this was most practicable for thosethat had structured their relationships in such a waythat comparatively small areas of activity could bere-tendered individually. Where a large, complexorganisation has been transferred to a supplier as asingle package, the magnitude of the task of re-ten-dering and moving to a different vendor is likely beso great as to make this only a possibility of lastresort.

Traditional outsourcing agreements, as studied inLacity and Hirschheim (1993, pp. 3–4) were parti-cularly hostile to change. In general a fixed packageof work was contracted at a fixed price. The supplierwas effectively free to charge what he liked to busi-ness or technical changes of any kind, and also to


pocket most, if not all, of the benefits from fallingtechnology costs and operational improvements. Thecustomer had little opportunity to go elsewhere.

Contractual price lists can provide a means of pre-determining the cost of future changes, but someform of benchmarking is needed to keep them up todate. They may be either resource or deliverablebased. The former provide no incentive to efficiencyand the latter require the ability to predict the natureof future requirements. Experience of the organis-ations studied has shown that large detailed sched-ules can be very expensive to maintain, and thatsome form of cost plus approach combined withappropriate incentives may be easier to operate.Agreed manpower rates for ad hoc assignments arestill, however, an important provision.

The format of the contract used by Organisation A issimilar in concept to a conventional single suppliertotal outsourcing relationship (Lacity andHirschheim, 1993, p. 3), but with a lot of additionalfeatures designed to protect the long-term competi-tiveness of the deal in the face of change. Each serviceto be provided is the subject of a set of detailedschedules which define service levels, capacityrequirements and the basis of pricing. The intentionwas that these should be reviewed annually, and thatadditional schedules should be negotiated to covernew technologies and services as and when required.In order to counter the non-competitive environmentfor such negotiations, several forms of protectionwere incorporated.

Several years into the contract, a high level of bothbusiness and technical change was evident. IT hadbecome far more strategically important, andLAN/desktop computing had expanded at severaltimes the rate originally anticipated. Meanwhile, theexpected decline in mainframe usage had not materi-alised. An additional factor was a growing require-ment for IT to support collaborative working withexternal business partners and the need for Internetand intranet capabilities. These led to a need for pric-ing schedules to be re-negotiated in a non-competi-tive environment.

Pricing in Organisation B’s contract is on a ‘cost plus’basis, based upon open book accounting, and a fixedmargin which is set at a level that will not in itselfprovide suppliers with an adequate return. However,they have an opportunity to achieve additionalrewards, by beating predefined performance criteria.

This mechanism presents some difficulties wherethere is no stable base for year on year comparisons.There is also no direct incentive to reduce hardwareand software costs, although there is no reason inprinciple why targets could not be set in this area. Ina similar vein, it could be difficult to achieve commit-ment to meaningful end to end service level targetsgiven that the hardware and software suppliers are


not party to the relationship, either directly or as sub-contractors.

A more serious weakness is that the open bookapproach does not provide any visibility of true costsfor services that are supplied from outside a dedi-cated cost centre, either elsewhere within the sup-plier’s organisation or externally. This has made itnecessary to introduce a new pricing model for tele-communications.

The contract used by Organisation C took the formof a fixed price for a basic package of mainframeoperations and application maintenance, and a fixedmanpower rate for certain additional activities. Newdevelopments and re-engineering consultancy weresubject to quotation, and in principle could be putout to competitive tender. PC support was originallytendered on a short-term basis as a separate activity,but subsequently added to the main contract. Hard-ware and software contracts were notionally trans-ferred, but for technical reasons Organisation C con-tinued to pay the bills and re-charge the outsourcer.

The initial agreement was driven by a perception ofminimal change in the core technology and systems,but on open ended relationship in the potential areasof new business. It assumed that all IT activity wouldbe driven by the supplier. A 3-year review point wasfortunately included. This was originally intended toallow minor adjustments, but in the event was a leverfor total re-negotiation.

Whilst Organisation E expected their supplier tobring more added value than had been evident in thefacilities management relationships, both in improv-ing the current operations and suggesting opport-unities for the future, this was not, however, reflectedin any specific targeting within the contract. Insteadthe supplier was invited to take a view on what couldbe achieved, and produce a detailed statement oftheir cost profile over a 5-year period. The initial takeon costs and the back-end savings were then equal-ised over the period to arrive at a fixed annualcharge. The intention was that the contract would bere-tendered in the fourth year. There is little pro-vision for change in the basic package of servicesoffered under this contract, beyond agreed time andmaterials rates for additional work. Whilst flexibilityis a stated aim of the relationship, this primarilycomes from the ability to re-tender after five yearsrather than any specific change provisions within thecontract period.

Whilst Organisation E had evidently been aware ofthe need to cater for change in its outsourcingrelationships, the way in which this has been donereflects the stable nature of the majority of appli-cations involved and the comparatively low rate ofinnovation in this area of their business. Neverthe-less, some concern was expressed by one intervieweethat the definition of the basic service package left a


lot of scope for additional charges, and that the trans-fer of all detailed application knowledge to the sup-plier could lead to difficulties when the contract isre-tendered.

The lack of either contractual or budgetary provisionfor change has proved to be a problem in practice.This has been exacerbated by the supplier’s difficultyin achieving expected cost reductions, which has ledhim to seek additional sources of income. The lackof contractual provision for reducing charges whenmainframe applications are discontinued has been afurther source of difficulty, although there has beensome success in moving to volume based chargingfor minicomputer applications where the supplierwas able to make savings through consolidation.Many changes that would have been absorbed inexisting budgets prior to outsourcing have been thesubject of additional charges.

Incentives for suppliers to beat cost or performancetargets can facilitate some types of change negoti-ation, particularly where the cost of the underlyingtechnology is falling. These may be based uponadditional payments for good performance, reducedpayment for bad, or a combination of the two. Sharedrisk/reward is one format for this type of incentive.Provided that they are well structured, and thatappropriate budgetary provision is made, such incen-tives seem to work well.

Both organisations B and D incorporated mech-anisms for rewarding the achievement of agreed tar-gets, and sharing of cost savings on an agreed basis.These were a fundamental component of their part-nership philosophies. There is no fundamental reasonwhy such provisions should not also be incorporatedin a transactional relationship, but conventional ‘pen-alties’ are more common in that context.

The reward criteria used by Organisation B included:

❖ beating agreed cost targets (in which case savingsare shared);

❖ beating agreed service level targets;❖ improving their score in user satisfaction surveys;❖ successful introduction of new technology and

service innovation.

This approach makes target negotiation a critical pro-cess for the suppliers. This is done locally as part ofthe annual call-off process, and at times has provedcontentious. There is some provision for bench-marking as a back stop.

Benchmarking and open book accounting areclosely related. The former allows the supplier’scharges to be reviewed periodically with other organ-isations — both outsourced and in-house. The latteris intended to make the supplier’s costs visible tothe customer.

Open book accounting

seems to have proved effective

as a basis for negotiation in

the face of change


Organisation A, which entered into a long-term totaloutsourcing contract with a single supplier, incorpor-ated both open book accounting and benchmarkingprovision as a means of keeping prices competitivein the face of change.

The open book accounting clause places a limit onthe margin that the supplier is allowed to make onthe contract as a whole. This cannot be applied con-tractually to individual services, but does provide abaseline for the negotiation of new service scheduleswhen appropriate market pricing data are not avail-able.

The benchmarking clause allows individual servicesto be benchmarked by an independent organisationagainst best external pricing and performance, andthe supplier must come within the top decile. Thiscould be expected to be most effective for well estab-lished technology and services where a stable bench-marking base can be identified.

In practice, benchmarking has not proved to be effec-tive as a contractual mechanism, because of the lim-ited range of activities that commercial bench-marking services have been able to cover, and thedifficulty of agreeing an appro-priate reference group with theoutsourcer. On the other hand,open book accounting hasproved a useful basis for nego-tiating new price schedules,and of establishing that thesupplier’s proposals are notunreasonable. Excessive overallmargins have not proved to bea problem — in fact inadequate margins on the orig-inal services have been more of an issue. These haveresulted in pressures within the supplier’s organis-ation to reduce costs, and an unwillingness to investin service improvements where they are needed.

Open book accounting was fundamental to the pric-ing mechanisms used by Organisation B, which alsohad provision for comparing its suppliers’ perform-ance against a published set of benchmarks for infor-mation systems costs within the energy industry. Inpractice, some aspects of this approach have provedmore effective than others. The open book pricingmechanisms seem to have worked well. Savings havebeen achieved, and changes negotiated without aperception of over-charging. Nevertheless, four yearsinto the contracts, there is some internal pressure tore-tender.

Organisation C had no specific benchmarking oropen book provisions to keep the deal competitiveover its 12-year lifetime. Neither was there any spe-cific provision for change. An RPI – x% formula hadbeen expected to give them a share of operationalsavings made by the supplier, but it became evidentafter several years that the percentage had been set


too low. In particular, reduced hardware leasingcosts were not reflected in any reduction in the sup-plier’s charges. It was also noticed that a windfallprofit was being made on overtime payments (Lacityand Hirschheim, 1993, pp. 248–249) and there weresome arguments as to which services were coveredin the basic charges.

Organisation D conducted annual price reviews withits suppliers, based upon actual costs and agreedmargins, subject to open book accounting and indus-try benchmark data. This mechanism has provedeffective, but it must be appreciated that contractnegotiation has until recently been at a very granularlevel of assignment and with many suppliers. Inconsequence a great deal of competitive data is avail-able, and there is always the possibility of direct com-petition.

Organisation E had no specific provision for eitherbenchmarking or open book accounting during thelife of the contract, but did have very detailed costschedules submitted as part of the original tenders.They relied upon the ability to re-tender at the endof the contract period, but in retrospect would havefound access to the supplier’s cost information valu-

able when negotiating changes.

In summary, benchmarkingprovides a means of requiringthe supplier to follow marketnorms in price and service pro-vision without the cost and dis-ruption of competitive re-ten-dering. It is most readilyapplied to mature technologies

or services for which reliable market data are avail-able. Unfortunately, experience of using this as a con-tractual mechanism has not been very favourable,due to the limited range of services covered and thedifficulty of agreeing an appropriate population forcomparison. Commercial benchmarking services aredesigned primarily as a basis for self-improvement,and it is in this context rather than as a basis for con-tractual sanctions that their use seems to be mostappropriate.

Open book accounting has the potential to discour-age the supplier from making excessive margins, butoffers no incentive to efficiency. It can, however, pro-vide a mechanism for benefit sharing to encouragethe use of new technology and process improvement.Moreover it is difficult to assess true costs where ser-vices are being purchased from outside the contract’sdedicated cost centre or shared with other clients.Nevertheless, this mechanism seems to have provedthe most effective in providing a basis for negotiationin the face of change, and for preventing actual orperceived exploitation by the supplier. Where thismechanism is to be used, it is important that vendorsare required to disclose their anticipated cost struc-ture at tender time, so that the accounting method-


ology to be used is visible, and a baseline establishedfor subsequent comparisons.

Price reviews, often in conjunction with the mech-anisms outlined above, were used in some form bymost of the organisations. Organisation A did nothave a specific process for regular across the boardprice reviews, but the open book and benchmarkingprovisions along with the need to negotiate pricingschedules for new services have meant that in prac-tice such reviews have taken place, and on a basisthat had been established, at least in principle, withinthe contract. Annual price reviews are a fundamentalcomponent of the agreements established by Organ-isations B and D. Organisation C had provision foronly one review, covering all aspects of the contract,after three years. It soon became evident that morefrequent reviews were needed, and fortunately the 3-year provision made this possible. Organisation E’scontract allowed reviews only at the supplier’sdiscretion, and in at least one case this has been donewhere some level of shared benefit was possible.However, the entire contract was designed to be re-tendered in its fourth year.

Service Level Schedules

Service level schedules have proved indispensableto a sensible dialogue with the vendor aboutcost/service trade offs (Lacity and Hirschheim, 1993,pp. 250–252). Several of our organisations had dis-putes with their supplier in this area, and often thiswas because the service requirements had not beenadequately explored and defined in the original con-tract negotiations. Virtually all had to undertakesome form of re-negotiation and it was much easierwhen a pre-defined basis for such negotiations hadbeen agreed at the start. Having said this, the experi-ence of those organisations which put a lot of effortinto this activity was that it is far more complex thanit appears.

Those organisations which had contracts with mul-tiple suppliers had a particular problem in this area,as it was often difficult to define, and more parti-cularly to monitor on a continuing basis, service levelmeasures which were entirely within the domain ofa single supplier. Several were intending to introduceformal subcontract relationships that would over-come this difficulty in future. The challenge was tomanage them in a flexible way that would not negatetheir original reasons for retaining multiple sup-pliers.

Organisation A incorporated detailed service levelschedules which were, as far as possible, inde-pendent of the means of delivery. In principle thesewould be benchmarked against other service pro-viders. Generally speaking, service has been accept-able where the original service level agreements were


well defined. Where this was not the case, and parti-cularly for desktop related services, users have beenless satisfied. A major re-negotiation of service leveland pricing schedules is under way.

For Organisation B, service level requirements arepart of the annual re-negotiation with each supplier,and details have generally been handled locally. Insome cases, users have been dissatisfied with the ser-vice received compared to the previous in-houseoperation, but in some cases at least there was a con-scious decision to reduce costs at the expense of ser-vice.

Organisation C made very little attempt to includedefined service levels in its original contract, and thiswas a source of difficulty prior to re-negotiation.

Organisation D, like B, made service level definitiona fundamental part of their negotiation with eachsupplier along with contractual incentives to succeed.

Organisation E, like B, chose to control the supplierprimarily through service level agreements, withoutregard to the means of delivery. This was possiblebecause they dealt with a single prime contractor, butin practice it has also been a source of difficulty. Con-tractual specifications proved insufficiently detailed,and the supplier has been unwilling to makeimprovements without additional payment. Equally,in spite of a formal prime contractor relationship, dif-ficulties with subcontractors have frequently beenexposed. Contract management requirements haveproved much greater than anticipated, andadditional staff have had to be brought in to handlethis work.

Strategic Control

Strategic control clauses allow the customer to main-tain control of the means by which services are deliv-ered. This can help ensure that the supplier does notmake decisions that would inhibit his ability toaccommodate future business and technical change.It may, however, also restrict him in his ability tomake savings by re-engineering operations and shar-ing resources with other clients. Previous researchhas indicated (Lacity et al., 1995, pp. 92–93) that it isimportant to retain strategic control, but this must bedone by people who can take a broad view of whatis important, rather than getting bogged down byinterfering in unnecessary detail. However, theextent to which it is sought to do this is very mucha function of the outsourcing philosophy of theorganisation concerned.

The nature of the relationships established by Organ-isations B and D allows them as much strategic con-trol as they wish. However, Organisation B foundthat deploying technical architects at the local level

Undue contractual

complexity can be

counterproductive


to supervise the supplier’s activity generatedunnecessary conflict, and that a small central tech-nology team was more appropriate. Both organis-ations involve their suppliers extensively in centralstrategic planning activities.

Organisation A requires the supplier to consultbefore making major technical changes, but consentcannot be ‘unreasonably’ with-held. This has yet tobe put to the test. Organisation E is in a similar pos-ition, and so far such changes have been achievedamicably, mainly because they were initiated by thesupplier and enabled both parties to make a saving.Organisation C originally ceded all technical controlto the supplier, but has since reasserted it.

Technology update clauses are closely related tostrategic control, but also have financial implications.They are intended to ensure that the supplier keepsthe hardware and software that he uses up to date,and shares with the customer any cost savings thatresult from improved technology. A related issue isto ensure that savings resulting from the continueduse of equipment beyond its planned lifetime are alsopassed on. It is essential to be clear on what basistechnology upgrades will be provided and financed,otherwise there will be a sub-stantial post contract costexposure (Willcocks and Fitz-gerald, 1994, p. 70). Wherethese are financed by the sup-plier, experience has been thatthey can become increasinglycontentious as the contract renewal date approachesparticularly if the exit provisions do not make pro-vision for reimbursement.

This is no longer just a hardware issue. New softwarereleases are becoming ever more frequent, and theimplications of implementing them can be far reach-ing. Moreover, the software vendors are becomingincreasingly reluctant to support old versions.

Organisation A paid for most non-mainframe hard-ware on a price-list basis, and required the supplierto keep software up to date as part of the service.Organisation B retained ownership of most of thetechnology, and included implementation ofsoftware upgrades in its annual re-negotiation.Organisation D was similar.

Organisation C had no provision for hardwarereplacement, but included basic software upgrades inthe contracted service. There has been some disputeas to what this included.

Organisation D required software to be kept up todate, but manpower costs involved were generallycharged on a variable basis.

Technology update is most likely to be an issue inthe context of long-term service based contracts.


Organisation A experienced a far greater growth inits use of networked personal computers than it hadanticipated, whilst the contractual price-lists allowedthe hardware to be added, the service level schedulesdid not cover all aspects of the service needed, andthe vendor received inadequate funding for infra-structure management. This resulted in an impassethat was not easy to resolve.

At the other end of the scale, Organisations C and Ewere both unhappy when they found that their sup-plier was under no obligation either to reduce hischarges or to renew the equipment once the underly-ing leases were fully paid.

Administrative Control

Most of the contractual protection mechanisms pre-viously outlined are only enforceable if the customerand supplier together implement appropriate admin-istrative controls. In a complex environment this canbe very onerous indeed, and it was evident from thisresearch that this was inhibiting several of the organ-isations studied from taking full advantage of the

safeguards that they had nego-tiated. Undue contractual com-plexity can be counterpro-ductive. Ambiguity can makewell intentioned provisionsunworkable. Most of the organ-isations had some difficulty in

operating the service level agreements with their sup-pliers. Equally, several admitted that it was virtuallyimpossible to track system changes in sufficient detailto be able to establish whether the savings whichthey originally expected to achieve from outsourcinghave actually been maintained in the longer term, or,for that matter, to be able to re-tender the service toan alternative supplier.

Ideally, the onus would be placed upon the supplierto undertake the detailed monitoring required to sup-port the pricing, service level and benchmarkingmechanisms contained within the contract, and tomake this information available to the customer. Thecustomer can then concentrate on higher level issues,with a periodic audit in areas of concern.

Several of the organisations had cultures that werenot naturally inclined to take this point of view, andthis was reflected in their outsourcing relationships.Organisation A initially had substantial numbers ofpeople checking the invoices and other informationwhich the detailed contract schedules required. Someaspects were not monitored for lack of staff to under-take the work. Organisation C had detailed financialcontrols, but virtually no service monitoring. Organ-isation E found that they had to employ far more staffthen they originally anticipated for supplier manage-ment and service level monitoring.


Most of the organisations revised their approaches inthe light of experience. Both organisations A and Bsubstantially cut back on the amount of detailed fin-ancial monitoring in favour of a higher level, morestrategic approach, but increased the level of atten-tion that they gave to service level issues. In retro-spect, most of the organisations would have givenmore attention to the practicalities of servicemeasurement in their original contractual negoti-ations.

Exit Provisions

Exit provisions define the responsibilities of each ofthe parties when the contract is terminated. Theymay include arrangements for maintenance of theservice during handover to another operator, dealingwith personnel matters, and any financial impli-cations. Without such provisions, the customer ispotentially very exposed, particularly if he is not ongood terms with his supplier at the time of termin-ation. At the very least, some thought needs to begiven to how the service would be handed over atthe end of the contract, given that this is unlikely tobe achieved in a non-disruptive fashion without theco-operation of the outgoing supplier. This is parti-cularly critical with complex multi-service or totaloutsourcing contracts. Apart from dealing with natu-ral expiry and default of either party, a long-termcontract may contain a ‘termination for convenience’clause which provides a predetermined basis forwinding up the relationship in the event that chang-ing circumstances make it no longer appropriate. Atthe very least, the negotiation of such a clause canprovide a useful insight regarding the vendor’s atti-tude to the relationship and longer term intentions —particularly where he is quoting a low initial price inthe expectation of more profitable business later. A‘partial termination’ clause allows for the scope of thecontract to be reduced geographically, organis-ationally or in the range of services provided. This isimportant with large scale, long-term commitmentsto a pre-defined package of services, particularly onan exclusive basis. Several of the organisations stud-ied had not made adequate provisions in this area.

It was also evident that such clauses need to be keptup to date in the face of changes that take place dur-ing the life of the contract. (This is equally true ofthose covering processes such as disaster recovery.)Several of the organisations, whilst initially outsourc-ing on the basis of a free standing infrastructure, sub-sequently allowed their suppliers to move off-siteand amalgamate facilities with other clients. This sig-nificantly impacted the options available on termin-ation.

Closely related to exit provisions, is the ability toundertake a major re-negotiation in the light ofchanging circumstances. Early outsourcing agree-


ments had no provision for this, and suppliers some-times took a hard line and extracted substantial pen-alty charges when asked to re-negotiate. Whilst it isimpossible to legislate for such circumstances indetail, and the non-competitive nature of the re-negotiation gives the supplier an inherent advantage,it is possible to set down some basic ground rules.These cover at least the right to request such a re-negotiation, and the basis on which it would behandled financially. Open book accounting andbenchmarking are potentially of value. Some care isneeded to ensure that re-negotiation clauses do notprovide a loophole through which the supplier canimpose arbitrary price increases.

Organisation A negotiated exit provisions in detail,including the basis for financial settlement in theevent of premature termination. There was no pro-vision for partial termination however, so the entireoperation would have to be passed to an alterna-tive supplier.

This was less of an issue for Organisation B, as theircontractual commitments were highly granular andre-negotiated annually. Organisation C’s contractallowed for premature termination, but only if theoperation was brought back in-house — it could notbe transferred to an alternative supplier. It also hada one-off re-negotiation opportunity at the end of thethird year.

Organisation D, like B had a highly granularapproach, and negotiated individual assignments ona 3-year cycle. Their contracts allow such assign-ments to be terminated on six months’ notice,although the intention is that this would only be usedin exceptional circumstances.

Organisation E’s contract was set up on the basis thatit would be re-tendered in the fourth year of its 5-year term. Handover issues had been considered insome detail, including the maintenance of an up todate inventory of hardware and software, and thetracking of staff who would be transferred. Therewas also provision for premature termination.

Summary

Table 4 shows the change mechanisms primarilyadopted by each organisation, and the degree ofemphasis given to each within the agreement.

Discussion

This research originally set out to establish the mech-anisms that might be employed to facilitate changein an outsourced environment, their practical effec-tiveness, and their dependence upon the underlyingphilosophy of the outsourcing agreement. It then


Table 4 Change Mechanisms

Organisation

A B C D E

Management approachContract management ** ** * *Relationship building * ** * ** *

PricingPrice lists ** *Margin control * **Benchmarking ** * (*) *Re-negotiation * ** * *

Service level schedules ** * * *Strategic control * ** ** *Technology update * ** **Administrative control ** * *Exit provisions * ** * ** *

*Some emphasis; **strong emphasis

sought to conclude whether some types of outsourc-ing approach, and the resulting outsourcing relation-ships were more conducive to business and technicalchange than others.

The various mechanisms available have been out-lined, and for each of the organisations studied, it hasbeen established whether provision has been madefor the use of each mechanism, and how this wasinfluenced by the philosophy underlying each out-sourcing initiative. This information has been sum-marised in Tables 1–4, along with a basic categoris-ation of the outsourcing approaches used, and thecorresponding outsourcing relationships.

The following analysis explores how the incorpor-ation of each of these change mechanisms was influ-enced by the outsourcing philosophy of the organis-ation concerned, and examines each in the context ofthe outsourcing approaches used and the corre-sponding outsourcing relationships.

Inevitably, the approach to managing the outsourc-ing relationship is closely related to the outsourcingphilosophy. Organisations that saw IT as a com-modity that was not critical to their business tendedto adopt a contractually driven approach. The sophis-tication of this in catering for change depended upontheir perception of the nature and severity of the risksinvolved, and tended to focus on the factors that haddriven them to outsourcing in the first place. Organ-isations A, C and E were essentially in this category.Organisations B and D, on the other hand, saw IT asa critical strategic function, and one that would besusceptible to high levels of future change, butbelieved that, in some areas at least, external organis-ations had superior expertise and greater flexibilityto respond. This was reflected in enabling agree-ments with multiple suppliers which were intendedto be renewed as long as the relationship was mutu-ally profitable, but avoided long-term commitments


to specific products or services. Emphasis was givento keeping the supplier briefed on changing needs,and encouraging him to prepare to meet them. Whilstthere was an intention to build a relationship ontrust, this was not to the exclusion of contractualsafeguards. This approach to managing the relation-ship was an integral part of their outsourcing philo-sophy.

The approach to pricing was also closely related tothe outsourcing philosophy of each organisation.Organisations C and E saw IT as a commodity, anddid not see change as a critical issue in this context.The emphasis was therefore upon a fixed price for afixed package of services. Organisations B and D,who saw IT as strategic and foresaw high levels ofchange, sought to establish mechanisms which couldbe used to price any future service, whilst protectingagainst excessive profit margins and giving the sup-plier a financial incentive to become more cost effec-tive. Organisation A, whose motivations were prim-arily financial, but which did anticipate significantlevels of change, negotiated detailed schedules forexisting services, but also included benchmarkingand open book accounting to protect against the per-ceived risks of overcharging inherent in a long-termcontract with a single supplier. In practice these alsoproved invaluable in setting the parameters for nego-tiating additional schedules for the introduction ofnew technology.

The approach to service level schedules tended todepend upon the level and criticality of the risks per-ceived by each organisation in the event that theirsupplier failed to perform. The ease with which amove could be made to an alternative supplier wasalso a factor. Organisation A, which had a long-termcontract with a single supplier, negotiated detailedservice level schedules for existing services and alsomade provision for benchmarking. Organisations Band D, which had multiple suppliers, and contracted

How change mechanisms

are deployed depends a lot on

the organisation’s outsourcing

philosophy


for specific services only on a short-term basis,treated service levels as part of the regular require-ments review process. Organisation C and E, whichsaw IT services as a commodity, gave limited atten-tion to service level agreements, and have in conse-quence experienced difficulties with suppliers both inthe willingness to make improvements in the serviceprovided and the price for doing so.

The requirement for strategic control was directlyrelated to the outsourcing philosophy of each organ-isation. Those that saw IT services as a commodity,or believed that strategic decisions were best left tothe supplier, had no need for such provisions. Forothers, there was a balance to be struck between mak-ing the best use of the supplier’s expertise, and ensur-ing that strategy was developed in line with the bestinterests of the business.

Organisations B and D both saw IT strategy as a criti-cal issue, and their ability to re-negotiate require-ments with other suppliers on a regular basis allowedthem to retain as high a level of strategic control asthey wished. Organisation B found that there was abalance to be struck here, and that a high level centralstrategic group was more effective than detailedinvolvement at a local level. Organisation A orig-inally intended that strategic control would graduallybe passed to the supplier, but have in practice hadan increasing involvement in the light of changingtechnology and a growing recognition of the strategicimportance of IT. Equally Organisation C originallyceded all strategic control to the supplier butreversed that position in a subsequent re-negotiation.In general those organisations that had expected theirsupplier to be proactive in development of IT stra-tegies to support evolving business needs andopportunities were disappointed. This is in line withthe findings of Lacity et al. (1995).

Technology update is an aspect of strategic controlthat can have substantial financial implications.Organisations C and E, whichtended towards a commodityview of IT and whose outsourc-ing philosophy was essentiallyfinancially driven, tended tosee this as entirely the sup-pliers’ concern. However, sub-sequent experience showedthat this could lead to unexpec-ted charges when it proved necessary to introducenew software releases, and equally that savings madewhen hardware leases expired were not alwayspassed on. Organisations B and D covered suchissues in their annual re-negotiations, and Organis-ation A through its pricing schedules and bench-marking provisions.

The perceived requirement for administrative con-trol was strongly related to the perceptions of riskinherent in the outsourcing philosophy of each


organisation. Those whose cultures required detailedchecking of all charges and invoices submitted bytheir suppliers generally carried this forward in theirapproach to outsourcing. Where the pricing mech-anisms were complex, the work involved was some-times much greater than anticipated, and Organis-ations A and E both experienced difficulties in thiscontext. The operation of such provisions as servicelevel agreements and open book accounting alsoproved very labour intensive. This was a significantissue for those organisations whose contractual pro-tection was based upon detailed schedules, as itcould mean that these were effectively unenforceable.Organisations B and D set high level principles intheir overall framework agreements, but re-nego-tiated the details regularly — this allowed the com-plexity of the approach to be adjusted in the light ofexperience, and to concentrate on those risks andareas of concern which were prevalent at the time.

Exit provisions proved to be more dependent uponthe outsourcing approach than the philosophy.Organisation A had a long-term commitment to a sin-gle supplier for a wide range of services. There wasno provision for partial termination, and handover toanother vendor would evidently be a very complexmatter, requiring a great deal of co-operation fromthe incumbent if disruption was to be avoided. Con-tractual schedules were constructed which dealt withthis in some detail. Organisation E’s contract wasspecifically designed to be re-tendered after fouryears. Organisations B and D had a more granularapproach, and could transfer elements of servicefrom one supplier to another quite readily.

Analysis

It is evident from the above that the deployment ofthe various change mechanisms discussed is highlydependent upon the outsourcing philosophy of theorganisation concerned. It is equally evident that dif-

ferent outsourcing approachesand relationships will place dif-ferent demands upon the mech-anisms that might be used. Forexample, the approach fav-oured by organisations B andD, in which detailed require-ments for both technology andservice can be re-negotiated fre-

quently with multiple suppliers in the context ofoverall framework agreements is specifically con-ducive to business and technical change. Work isdefined at a granular level, and can be moved fromone supplier to another if capability or performanceis lacking. Every possible eventuality does not needto be anticipated contractually, as both requirementsand control measures can be refined in the light ofchanging needs and operational experience. On theother hand, effective price performance managementmechanisms are needed within the framework agree-


ments to achieve an effective outcome from thedetailed annual negotiations which are conductedunder conditions of limited competition. Moreover,relationship management mechanisms are needed tomaintain the commitment of the chosen suppliers toinvest in developing the capabilities required to meetchanging demands.

An approach such as that adopted by OrganisationA, on the other hand, which involves a long-termcommitment to a single supplier, is considerablymore dependent upon specific contractual mech-anisms for accommodating change and ensuring thelong-term competitiveness of the deal. Because thereis no element of competition once the agreement issigned, price and service levels need to be defined indetail, and mechanisms established for keeping themin line with best practice in the market, as well asfor introducing new technologies and services whenthese are required. Equally the administrative con-trols to support these mechanisms need to be estab-lished, and the ground rules for strategic decisionsclarified if future conflict is to be avoided. Finally,exit provisions need to be agreed and defined indetail because a move to another supplier is impracti-cable without the co-operation of the outgoing ven-dor. Ultimately this is the only recourse in the eventof continued non-performance, or change on eitherside which renders the parties incompatible.

Organisation C also concluded a long-term agree-ment with a single supplier, initially without thechange mechanisms outlined above. A general re-negotiation clause enabled some subsequent pro-vision to be made when the need was identified.

Organisation E relied upon a 4-year re-tenderingcycle and a fairly stable IT environment to avoid theneed for elaborate change mechanisms in their out-sourcing contract. This has led to something of adeadlock when changes have been needed, in servicelevels for example.

Whilst it is evident from the above discussion thatsome outsourcing approaches are more conducive tochange than others, either partnership or trans-actional relationships may be set up to accommodatechange, provided that the roles that each party willplay are clearly understood on both sides. In parti-cular this includes the way in which the supplier’sactivities will be monitored, be it in technical, com-mercial or service terms, and the level of involvementthat each party will have in the various decisions thatwill need to be made. Closely related to these is theinformation which each party is expected to makeavailable to the other. Some of these activities maybe required to support the operation of specific con-tractual provisions, and others may be more infor-mal, but all can lead to difficulties if there is not acommon view.

Within a purely transactional relationship, change


can be accommodated by ensuring that requirementsare clearly defined, that the basis on which they maybe changed is equally clear, and that the risks associa-ted with long-term commitments are fully under-stood and evaluated. Requirements may be stated ineither business or technical terms, provided that theimplications for responsibilities and accountabilitieson both sides are clearly recognised and agreed. Dif-ficulties can arise if a change to a business require-ment is expressed in technical terms or vice versa.

A partnership relationship as pursued by Organis-ations B and D will seek to facilitate change by shar-ing advance information on evolving business needswith the supplier, and helping him to develop hiscapabilities in line with these needs. However, theemphasis upon joint working can potentially lead torole ambiguities and misunderstandings, particularlywhere multiple suppliers are involved. Whilst theintention is that a close relationship will enable theseto be speedily resolved, this will not always be thecase if the financial implications are significant.

Conclusions

The ultimate objective of this research was to adviseon best practice in catering for business and technicalchange in an environment where a large part of anorganisation’s IT infrastructure and related serviceprovision is outsourced to an external supplier. It isevident from the foregoing discussion that it is easier,in principle at least, to cater for change with an out-sourcing approach based upon framework agree-ments with multiple suppliers, which aim to establisha long-term relationship but without long-term con-tractual commitments to a specific package of pro-ducts and services. Two of the organisations studiedpursued this approach, in the context of an outsourc-ing relationship which emphasised close workingtogether at a senior management level, sharing infor-mation for mutual benefit. This included future busi-ness trends and related IT needs on the one hand,and emerging technology trends and capabilities onthe other. The aim was to position the suppliers tomeet the future needs of the organisation on the onehand, while preserving security of supply, and main-taining some level of competition.

It must be recognised, however, that this approachwill not suit the philosophy of all organisations wish-ing to pursue outsourcing. In particular some willwish to offload the management overhead of manag-ing multiple suppliers, and the level of specialistexpertise that this implies.

Three of the organisations studied chose to contractwith a single supplier. In two of these there was acontractual commitment for over 10 years. Evenwhere there is no formal commitment it must berecognised that the transfer of a complex IT infra-


structure in its entirety from one supplier to anotheris potentially a very major undertaking, and probablya measure of last resort. The resultant dependenceupon the capabilities of a single supplier, and the lackof any element of competition to ensure continuedtop level performance and competitive pricing, raisesa number of challenges which are exacerbated by theneed to cater for future developments in technologyand changes in the business environment.

It is evident that the three organisations whichadopted this approach pursued a more trans-actionally based outsourcing relationship. This couldpartly be a reflection of the greater dependence uponcontractual provisions to protect their position, butin only one of the three is this really evident. Moreprobably it is a consequence of the outsourcing philo-sophy which, in seeking to avoid the overhead ofmanaging multiple vendors, saw no need for veryclose involvement with the chosen supplier.

A number of mechanisms have been identified whichcan assist in protecting the interests of an organis-ation which outsources its IT, in the context of busi-ness and technical change. The earlier discussion hasindicated that the applicability of these is dependentupon the outsourcing philosophy of the organis-ation concerned.

The long-term effectiveness of the measures used isnot yet entirely apparent, but there are some initialindications. Opinions differed on the effectiveness ofthe approaches used to developing relationships withsuppliers, but it was evident that these relationshipsare important to the effective working of an outsourc-ing agreement, and that they are likely to come understrain when there is any substantial change in theassumptions on which the agreement was originallybased. Good relationships are needed at a workinglevel to facilitate day to day operations, and at asenior level when any major re-negotiation isrequired. A breakdown at ether level can put theother under pressure, but the converse is not neces-sarily true, and the selection of the right people todeal with day to day relationships is evidently a criti-cal success factor.

Pricing is a particularly difficult area. What is clearis that any attempt to set pricing at a detailed levelwill rapidly become out of date, and that the cost ofchanging suppliers will put the customer at a con-siderable disadvantage in any re-negotiations. In cir-cumstances where periodic re-tendering is impracti-cable some form of cost plus incentive basis, backedup by benchmarking as a means of targeting theincentive seems to have been the most successful.

Service level agreements proved to be an essentialfeature, the most difficult area being to find anadministratively practicable way of operating them.Requiring the supplier to provide an agreed and aud-


ited mechanism to measure service levels seems tobe the best solution.

Requirements for strategic and administrative controlare very much a matter of organisational philosophy.What is clear is that requirements in either area, andtheir operational implications must be addressed upfront if later difficulties are to be avoided.

Technology update is easily overlooked by financi-ally oriented negotiators, but proved to be a signifi-cant factor even for organisations which had rese-arched their needs in considerable detail. Thismanifested itself either as an unwillingness of thesupplier to invest in new technology withoutadditional payment, or a failure to pass on savingsmade because equipment is fully depreciated. It wasevident that life cycles can prove to be either shorteror longer than anticipated, and that an equitablemeans of dealing with either eventuality must bebuilt into the contract.

Exit provisions are important for the reasons pre-viously indicated. For any long-term agreementsthese need to include some ground rules to be fol-lowed in the event of a major re-negotiation. Theprobability of such re-negotiation is very high, andwithout such provisions the customer is extremelyexposed.

Future Work

The period covered by this research saw most of therelationships studied at an early stage in their lifecycle. Experience elsewhere suggests that difficultiesare likely to increase in the later stages, and it isalready evident at the time of writing that furthersignificant changes are under way. It will be valuableto revisit these organisations in a few years’ time.

Equally the sample studied was very small, and itwould be useful to examine a wider range of organis-ations in a similar way. Finally, it would be instruc-tive to study whether organisations which have notoutsourced their IT have been more or less successfulin managing business and technical change thanthose which have.

Acknowledgements

I should like to thank David Feeny and Leslie Willcocks atOXIIM for their assistance in the preparation of this paper.

References

Dyer, J. and Ouchi, W.G. (1993) Japanese style partnershipsgiving companies a competitive edge. Sloan ManagementReview Fall.

Henderson, J.C. (1990) Plugging into strategic partnerships —


the critical IS connection. Sloan Management ReviewSpring.

Hendry, J. (1995) Culture, community and networks: the hid-den cost of outsourcing. European Management Journal13(2).

Lacity, M.C. and Hirschheim, R. (1993) Information SystemsOutsourcing Myths, Metaphors and Realities. John Wileyand Sons, Chichester.

Lacity, M.C. and Hirschheim, R. (1995) Beyond the InformationSystems Outsourcing Bandwagon. John Wiley and Sons,Chichester.

Lacity, M.C., Willcocks, L. and Feeny, D. (1995) IT outsourc-ing: maximise flexibility and control. Harvard BusinessReview May – June.

Martinsons, M.G. (1993) Outsourcing information systems. Astrategic partnership with risks. Long Range Planning26, 20.

McFarlan, E.W. and Nolan, R.L. (1995) How to manage an IToutsourcing alliance. Sloan Management Review Winter.

PA Consulting Group (1994) UK IT Sourcing Survey.PA Consulting Group (1996) International Strategic Sourcing

Survey.Shepherd, A.J. (1995) IT outsourcing, hype and reality. A prac-

titioner perspective. OXIIM Research and DiscussionPaper RDP 95/6.

Strassman, P. (1995) Outsourcing, a game for losers. Com-puterworld 29(34).


Willcocks, L. and Fitzgerald, G. (1994) A Business Guide to Out-sourcing IT. Business Intelligence Report.

Willcocks, L. and Lacity, M.C. (1997) Best Practice in Infor-mation Technology Outsourcing. Templeton College,Oxford.

ALAN SHEPHERD,Oxford Institute of Infor-mation Management,Templeton College, Ken-nington, Oxford OX15NY, UK.

Alan Shepherd is Direc-tor of Research at the UKPost Office, and aResearch Affiliate atOXIIM, Templeton Col-

lege, Oxford. His research focuses on developmentsin technology, their impact on the business environ-ment and consequent management challenges.

Outsourcing IT in a changing world

Documents

Transcript of Outsourcing IT in a changing world