Information Technology Outsourcing: A Strategic Management Framework

1
Information Technology Outsourcing A Strategic
Management Framework
State of the Art Literature Review October
2005 Jo Ann Saitta, Ph.D. candidate Department
of Information Systems New Jersey Institute of
Technology Advisor Jerry Fjermestad,
Ph.D. School of Management New Jersey Institute
of Technology
2
Agenda

• Introduction
• Current research
• Motivation
• History Definitions
• Theoretical Foundations
• Current Outsourcing and Industry Models
• ITO Framework
• Value
• Components
• New Themes
• Conclusion
• Future Research

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Information Technology Outsourcing Research

• 24 months to date
• Academic and professional review of literature
  and empirical studies
• No one source of ITO success factors
• ITO strategic management framework integrates the
  success factors and synergies from IT outsourcing
  and strategic management literature

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Motivation

• To determine which factors are the most important
  for IT outsourcing
• To determine if these factors are segmented by
  on-shore vs. off-shore
• To determine if these factors are segmented by
  industry
• To integrate the existing models and frameworks

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Benefits

• Guide to successfully manage IT outsourcing
• Provides understanding of key IS management/staff
  skills
• Provides an academic basis for learning and
  future empirical studies.

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IT Outsourcing Definitions
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SOTA IT Outsourcing Definition

• For the purposes of the SOTA, I define
  Information Technology Outsourcing (ITO) as the
  decision by an organization to contract an
  external provider in the delivery and/or support
  of IT and/or IS services and functions.
• An assumption is that services are contracted for
  agreed upon pricing and specified period of time.
  
• The definition applies to some or all IT/IS
  services and functions.
• The definition purposefully does not
  differentiate between type of services (e.g.
  application development versus infrastructure
  hosting), nor does it distinguish between
  offshore and on shore outsourcing.
• The rationale being that the success factors
  outlined in the basic model are not limited based
  upon IT/IS function or location of the
  outsourcing vendor.

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History

• In 1989, Eastman Kodak signed landmark
  mega-outsourcing deal for 250 million over 10
  years with IBM Corporation, Digital Equipment
  Corporation, and Businessland Inc. (Field, 1999).
  The beginning of a new era in large scale IT
  outsourcing.
• A year after Kodak signed the outsourcing deals,
  CIO reported IT capital costs dropped 95, PC
  costs lowered between 5-10, and mainframe
  processing costs were reduced by 10-15 (Field,
  1999).
• Traditional motivations were to reduce cost.
  Specifically with offshore outsourcing for
  significantly lower wages.
• Current research (Kern and Willcocks 2000, Ross
  and Westerman 2004, Kishore 2003, Kaiser 2004,
  Lander 2004, IBM 2004, Smith and McKeen 2004),
  suggests motivation is more strategic in nature
  with the goal of improving the business
  competitive advantage.

Kodak, A New Era
Cost Savings
Lower Wages
Strategic Motives
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The last decade

• Organizations placed more focus on their core
  competency business (Field, 1999).
• IT was now measured by metrics and service level
  agreements, and not just budgets or capital spend
  (Field, 1999).
• The changing role of the CIO from operational
  figure to strategic planner (Field, 1999).
• IT outsourcing not only for cost savings but as a
  tool for utilizing state of the art service
  providers (Field, 1999).
• A large growth in business process outsourcing
  with the success of ITO (Field, 1999)
• Global Insourcing Bank of America (Hopkins,
  2005), Avon Products (King, 2003), Global
  Exchange Services Inc. (King, 2003) and Allstate
  Insurance (King, 2003).

Core Competency
Service Level Metrics
CIO, strategic planner
Service Providers
BPO
Global Insourcing
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The Future

• Gartner reports that the worldwide outsourcing
  market is expected to grow from 293.4 billion in
  2003 to 429.2 billion in 2008 (De Souza, 2004).
• The Indian IT services market is predicted to run
  a compound annual growth rate of 17.4 percent
  through 2008, reaching 3.7 billion (Datar,
  2004).

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The Need for a Framework
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Strategic Frameworks

• In the past, organizations have used frameworks
  and models as guidelines for assessing their
  current state and determining future actions
  (Gorry and Scott-Morton 1971, Nolan 1973, Luftman
  1999, Venkatraman and Henderson 1993).
• The proposed ITO framework can be used by
  organizations to benchmark their current maturity
  with ITO management and determine improvements
  they wish to make to achieve success.
• The ITO strategic management framework is based
  on prior existing theoretical frameworks and
  models

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Previous Theoretical Models
IMM 2004
Infrastructure Maturity Model
Smith McKeen 2004
Sourincg Strategy Model
Kishore et.al. 2003
Offshore Relationship Model
Khan, Currie Guah 2003
Offshore Outsourcing Model
Carmel Agarwal 2002
Offshore Outsourcing Maturity
Luftman 1999, 2000
Business/IT Alignment
CMM 1997
Software Development Maturity
Venkatraman Henderson 1993
Strategic Alignment
Nolan 1973
Computer spend
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Previous Theoretical Models

• Nolans Stage Model (1973) maturity based on
  computer investments
• Strategic Alignment Venkatraman and Henderson
  (1993)
• IT Business Alignment Luftman (1999, 2000)
• The Offshore Outsourcing framework of Khan,
  Currie, and Guah (2003)
• The Offshore Outsourcing Maturity Model of
  Carmel and Agarwal (2002)
• Offshore Sourcing Strategy, Smith and McKeen
  (2004)
• Outsourcing Relationships (FORT), Kishore et. al.
  (2003)
• The Capability Maturity Model from the Carnegie
  Melon Software Institute, (Herbsleb, Zubrow ,
  Goldenson, Hayes, and Paulk, 1997),
• The Infrastructure Maturity Model, Bitman (2004)

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The building blocks of the ITO
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A Strategic Framework for IT Outsourcing
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Methodology for creation the ITO framework

• The methodology used to create the integrated
  framework consisted of a literature evaluation of
  IT outsourcing and strategic management articles
  in an effort to identify synergies and success
  factors.
• The articles surveyed were from both academic and
  industry publications.
• The collection of success factors were developed
  into an integrated strategic framework that is
  useful to IT managers in decision making and
  ongoing strategic planning for IT outsourcing.
  Managers can utilize this practical checklist
  based upon current literature.

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Integrated IT Outsourcing Management Framework
Cost Quality
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Alignment to business strategy

• The mapping of outsourcing decisions to business
  strategy. Ensuring that IT aligns with
  strategies.

• Medjahed, et al., 2003
• El Sawy, et al., 1999
• Henderson Venkatraman (1993)
• Ba, et al., 2001
• Zwass 2003
• Beck, 2002
• Carmel, 2002
• Lee, 2001
• Ross and Westerman, 2004
• Boden, 2004
• Huang, Ceroni and Nof, 2000
• Sheridan, 1996
• Luftman (1999, 2000)
• Kohli and Devaraj 2004
• Hefner 2003
• Luftman and McLean 2004

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Contracts

• A formal document of the goals, requirements and
  commitments for the relationship.
• Measurements and standards
• Understanding core competencies, goals, for all
  partners and shared risk/benefit.

• Beck, 2002
• Kahn, et al. 2003
• Delmonte and McCarthy, 2003
• Lee, 2003
• Benoit, Houde, Patry, and Rivard, 2003
• Byson and Sullivan 2003
• Beulen and Ribbers 2003

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Infrastructure

• The technical environment which includes network,
  hardware and software
• Interoperability and integration of multiple
  components
• Technology standards and scalability are key
  elements to an effective infrastructure

• Zwass, 2003
• Kahn et al., 2003
• Sakaguchi 2003
• Medjahed et. al., 2003
• Weill and Vitale, 2002

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Culture

• Cultural readiness by both the organization and
  proposed vendors
• Issues of trade policies, tax, licenses, etc.
• Proper communication among the partners
• Evaluate political climates

• Zwass 2003
• Carmel 2002
• Kahn 2003
• Delmonte 2003
• Sakaguchi 2003
• El Sawy 1999
• Davison 2004

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Strategic Partnership

• Form and maintain partnerships internal/ external
  to the organization
• Customer Relationship Management and Vendor
  Management
• Formation of collaborative teams. Fosters
  flexibility, communications, timeliness, and
  mutually beneficial relationships.

• Lee 2001
• Zwass 2003
• Lee 2003
• Rogers 2001
• Phan, 2002
• Shaw, 2000
• Kern and Willcocks, 2000
• Sharma, et. al 2002
• Kavan, et. al 2002
• Ross and Westerman, 2004
• Kaiser and Hawk 2004
• Lee and Kim 2003

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Management Support

• Management support of decisions on outsourcing,
  communication to the organization with truthful
  and valuable information
• Addresses resistance
• Vision for technology possibilities and continual
  innovation for positive organizational
  transformations

• Lee, 2001
• Carmel, 2002
• Ba, et al., 2001
• Clemons and Row, 1991
• Keen, 1981

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Governance

• Both tactical and strategic to determine which IT
  functions should be outsourced and to whom
• Monitoring of expectations.
• Includes risk analysis.
• Includes security, privacy, and costs analyses.

• Flannery and Heckathorn, 2003
• Ba, et al., 2001
• Delmonte and McCarthy, 2003
• Sakaguchi and Raghavan, 2003
• Weill 2004

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Economics Cost Quality

• The balance of cost savings and access to IT
  competencies when outsourcing IT/IS competancies.
• Ensure that IT outsourcing decisions support
  business strategy and enhance business
  competitive advantage.

• Lacity, et al, 1995
• Willcocks, et al, 1995
• Watjatrakul, 2005
• Aubert, et al, 2004
• Manila, 2004
• Cox and Clift, 2003

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Contributions

• A comprehensive strategic management ITO
  framework.
• Each component can exist, perhaps in varying
  degrees, based upon the situation.
• Identification of key IS management and staff
  skills to manage ITO partners.
• An academic reference.

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Limitations

• Does not address how the components might be
  affected by differences between offshore and near
  shore outsourcings.
• Measures of success vary across the literature.

• The framework does not address the type of IS/IT
  outsourcing (e.g. application versus
  infrastructure.)
• Due to restrictions in access of current industry
  research there is some empirical data that could
  not be examined for the benefit of this paper.

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Conclusion

• The research of IT outsourcing and strategic
  management literature provided a collection of
  success factors that had not existed in one
  document before.
• Although the reader might be left with questions
  about what are the discretionary components,
  current practitioners can utilize the model as a
  checklist of considerations, ensuring that they
  have included all that is needed.

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Future Research Meta-data

• Validate or discount components in the framework
  by comparing them to reported success factors in
  secondary data.
• Fjermestad and Hiltz (1999-2000) in their
  assessment of empirical research on Group Support
  Systems (GSS).
• Romano and Fjermestad (2001-2002) on the topic of
  electronic commerce customer relationship
  management (eCRM).
• A sample search of such data from Business Source
  Premier between the years 1989 and 2005 on the
  terms information technology outsourcing
  yielded close to 20,000 hits. It is proposed
  that the number of articles on the topic of IT
  outsourcing will be in the 200 range.
• This research has begun Example Company
  Component Table

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Company Component Table
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Early Indicators

• Analysis of the limited data collected
  (approximately 40 data points) yields initial
  support for all of the components of the IT
  outsourcing framework, especially since the year
  2003.
• Cost, governance, quality, and contracts
  are the most reported drivers and factors during
  2004-2005.

• During the latter part of the 1990s, it appears
  that only cost (and sometimes quality) were
  key considerations for IT outsourcing.
• Not until after the year 2000 did companies begin
  reporting success factors such as management
  support and strategic partnership.

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The Research Questions

• Which components of the ITO framework are
  indicators of success, as validated by a
  meta-analysis of secondary trade/industry data?
  (Limitation success can be defined differently
  for each org.)
• Do the components of the ITO framework vary based
  on near shore or offshore, based upon
  meta-analysis of secondary trade/industry data?
• Do the components of the ITO framework vary based
  upon type of outsourcing, e.g. application
  development versus infrastructure?
• Is the ITO framework inclusive, or under which
  conditions are all or parts required?

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Published Works/Conferences

• ISOneWorld March 2005
• Published Chapter on ITO
• International Conference on Global Outsourcing
  September 2005
• Best Paper Award
• JIST 2005
• JITCAR 2005

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