The strategic value of IT insourcing: An IT-enabled business process perspective

Although research on the business impact of IT outsourcing abounds, little is known about the relative strategic value of IT outsourcing and IT insourcing. Drawing upon the knowledge-based view of the firm, this study postulates that, compared with IT outsourcing, IT insourcing is more effective for developing IT-enabled business processes (IEBP), which subsequently lead to superior firm performance. Our analysis of the data from InformationWeek and Compustat shows that IT insourcing is positively associated with IEBP, while the relationship between IT outsourcing and IEBP is not statistically significant. We also find that IEBP have a significant influence on firm performance. Finally, the effect of IT sourcing mechanisms on IEBP and the effect of IEBP on firm performance are both moderated by the type of innovation related to IEBP. The results suggest that in order to improve their performance firms should consider IT an integral part of their strategic core and should be proactively involved in the internal development of IT resources. We conclude with managerial implications and directions for future research.     

Key Issues for Global it Sourcing: Country and Individual Factors

Globalization trends, trade liberalization in developing countries, quantum improvements in worldwide telecommunications infrastructures, and cost-cutting pressures have together compelled many companies to examine global opportunities for sourcing some of their IT operations. Such global sourcing, whether it involves insourcing or outsourcing, requires IT project managers to deal with issues unique to operating in heterogeneous international environments. This article examines the influences of country-level and individual-level factors on the effective management of offshore IT sourcing relationships and offers a set of best practices that project managers should consider when entering into such global arrangements.     

IT sourcing reflections

For more than a decade, the authors have studied the best, worst, and emerging information technology sourcing practices in 543 large and small organizations world-wide. From an initial focus on cost reduction in the early 1990s, the authors found that customers now expect many business advantages from IT outsourcing, including better service, infusion of new technology, transformation of fixed IT budgets to variable IT budgets, improved business processes, and even increased revenues. In short, customers expect IT outsourcing to transform IT functions into lean, dynamic groups that respond quickly to business needs and opportunities. But how do customers actually achieve such business advantage? Customers must become adept at managing four continual processes to successfully exploit IT outsourcing:

• Assess the in-house IT portfolio to determine which activities are best outsourced
• Evaluate market options for the best sourcing models and best suppliers to achieve customer objectives, ranging from simple ASP provision to the creation of customer-supplier joint ventures
• Craft contracts to align customer and supplier expectations and incentives; and
• Continually manage supplier relationships.

Major supplier lessons are also identified, which call for superior supplier integrity in selling, negotiating, and delivering IT services. The overall lesson is that outsourcing can achieve significant results, but it requires new management capabilities.     

The impact of perceived risk on the capital market’s reaction to outsourcing announcements

Outsourcing is a widely accepted option in strategic management, which, like every business venture, bears opportunities and risks. Supplementing the popular area of research on the merits of outsourcing, this paper examines how stockholders rate corporate sourcing decisions with regard to the risk they associate with this transaction. Using event study methodology and multivariate cross-sectional OLS-regression, we analyze a sample of 182 outsourcing transactions in the global financial services industry between 1998 and 2004 in order to investigate the risk-specific drivers of excess returns to shareholders. The analysis studies the impact of risk-specific independent variables, including transaction size, length, outsourced business functionality, and experience with outsourcing. Our findings indicate that risk-mitigating strategies have significant explanatory power, indicating that the capital market’s reaction to an outsourcing announcement might at least partly be forecast. Results show a positive correlation between market reaction and business process outsourcing by financial services companies. We also find strong evidence indicating that capital markets react positively to relatively large transactions compared to the market capitalization of the outsourcing firm. For service providers our results show that traditional IT-related sourcing projects or the insourcing of administrative processes have a significant positive correlation with market reaction.     

To outsource IT or not?: recent research on economics and evaluation practice

The paper reports findings from 26 longitudinal case studies of information technology (IT) outsourcing researched in the 1993–95 period. The primary focus is on evaluation practices in the lead up to making IT sourcing decisions. The pre-existing IT evaluation system was found to be a help or a major hindrance as a basis from which to assess outsourcing vendor bids. Difficulties experienced in evaluating in-house performance are highlighted. Issues include evaluating total IT contribution, identifying full costs, benchmarking and external comparisons, the role of charging systems, and the adoption of service level agreements by the in-house operation. Organizational experiences on assessing vendor bids against in-house options are then detailed. These are presented in distilled form as ‘a rich picture’ representative case study, together with additional lessons derived from the research. Finally we highlight the emerging evaluation approach shared by organizations that made effective sourcing decisions.     

Outsourcing in the private and public sectors: an unpredictable IT strategy

IT outsourcing has grown considerably in the private sector, with IT software and service suppliers reporting increased revenues. Similarly in the public sector, the introduction of market testing and compulsory competitive tendering (CCT) will inevitably lead to the contracting-out of significant levels of IT work. This may lead to the demise of some public sector IT departments where external bids are favoured over those offered by the in-house team. This paper is divided into two sections. First, it considers some of the relevant literature on IT outsourcing in both private and public sector British and American organizations. It draws together important themes which explain the attraction of IT outsourcing to senior executives. Second, it introduces the results from a questionnaire survey of nearly 200 UK private and public sector organizations on IT outsourcing. In particular it looks at the proportion of organizations that claims to use outsourcing, how contracts are negotiated and the type of IT solutions preferred by IT managers. The central argument is that IT outsourcing poses significant challenges to both private and public sector organizations and is not simply a quick-fix panacea. Moreover, public sector IT managers would do well to analyse some of the less favourable reports from private sector outsourcing as they gear themselves up for CCT in the months ahead.     

From offshore outsourcing to insourcing and partnerships: four failed outsourcing attempts

Most large software companies are involved in offshore development, now small- and medium-sized companies are starting to undertake global sourcing too. Empirical research suggests that offshoring is not always successful; however, only a few comprehensive failure stories have been reported. The objective of our study has been to understand why small and medium-sized companies terminate their offshore outsourcing relationships and what alternative arrangements they undertake afterwards. Therefore, we designed a multiple case study of four medium-sized Scandinavian software companies that have terminated their offshore outsourcing relationships. Our results are based on data collected through semi-structured interviews, informal dialogues and analysis of company documents. We found that all companies terminated their offshore contracts because of low quality of the software being developed. This was caused by an inability to build the necessary human and social capital. The companies reported challenges with domain knowledge, a lack of commitment of external developers, cultural clashes, poor communication and high turnover, which only amplified the problems. After termination all four companies changed their sourcing strategy from offshore outsourcing to offshore insourcing and partnerships. We conclude that successful offshore software development requires a change from a cost-driven focus to an intellectual capital-driven focus. To prevent continuous investments into contracts that are destined to fail, companies should look for signs of escalating commitments and terminate relationships that cannot be corrected. Those companies that choose outsourcing shall also take into account that mismatch between the size of the offshore contract relative to the vendor may have a negative effect on a relationship.     

IT outsourcing as strategic partnering: the case of the UK Inland Revenue

The information systems (IS) literature, and the industry sectors confronted with information technology (IT) outsourcing, are beginning to perceive IT outsourcing as more than just a necessary organizational resource-acquisition venture. Instead organizations have begun to consider vendors as their partners, causing many companies to enter into more intricate deals that include both contractual and informal issues. In light of these developments, a growing concern with forming closer client–vendor relationships has evolved for both vendors and clients. This paper explores, in the context of a case study, three critical dimensions emerging from previous studies. These are: what is outsourced; the contract; and the relationship dimension. We also explore the process and management issues underlying these dimensions. The investigation is enabled through two analytical frameworks, one proven in previous research, one exploratory, but both specifically developed for IT outsourcing arrangements.     

Single-plant sourcing decisions with a multidimensional knapsack model

This paper addresses sourcing decisions and how those decisions can affect the management of a company’s assets. The study begins with a single-plant insourcing problem in which the facility chooses, from a list of parts, which parts to bring in-house. This model is extended to include an outsourcing element where, in addition to the decision of which parts to insource, parts currently in-house are considered for outsourcing. The selection is based on maximizing the value of the selected parts while remaining within the plant’s capacity. This is defined as the sourcing problem and modeled as a multidimensional knapsack problem (MKP). Characteristics of the sourcing problem are identified and compared to standard MKP test problems, then utilized to provide guidelines for generating industry-motivated data sets. Experiences with modeling and solving the sourcing problem for a sheet metal fabrication facility are reported.     

It and Business Process Outsourcing: The Knowledge Potential

Despite the widespread trends in IT and business process outsourcing, there has been too little focus on what happens to knowledge when an organization outsources. We present a framework for evaluating the knowledge potential within five different types of insourcing and outsourcing arrangements. A detailed example of an enterprise partnership relationship is described as a benchmark for how companies can leverage the knowledge potential from IT and BPO outsourcing.     

THOMAS FLEISHMAN On The Role of IS in Health Care

Abstract

MORE THAN 50 PERCENT OF firms are expected to use IT outsourcing in 2006. the sourcing issue is among the top five agenda items for IT executives, as the amount of such outsourcing grows, its impact on the economies of companies and nations increases and political controversy over the consequent jobs lost to off-shore outsourcing heightens. Thus, outsourcing is, and will likely continue to be, a hot professional and political topic and a major determinant of the future of IT.     

Impacts of internal and interorganizational information systems on the outsourcing of manufacturing

Drawing on transaction cost economics, this paper looks at the relationship of IT use to the outsourcing of manufacturing using survey data from US manufacturers. We find that greater use of interorganizational systems (IOS) is associated with greater outsourcing, but we do not find any main effects between internal IT and outsourcing. A negative interaction effect is found between measures of internal IT and IOS, suggesting that the two may be substitutes rather than complements. This distinction between internal IT and IOS, and the relationship of the two, offers scholars a more nuanced understanding of the nature and impacts of IT. It provides managers insight into how different types of IT can support different sourcing options.     

Globalisation vs. Slowbalisation: a literature review of analytical models for sourcing decisions in supply chain management

In the context of the mainstream of globalisation and a new trend of slowbalisation, we review the existing literature including both empirical and analytical papers on the sourcing and location decisions in Supply Chains. After defining the different sourcing strategies, e.g., insourcing, outsourcing, offshoring and reshoring, we present the drivers for each strategy and how they can be incorporated in the analytical models in order to help to optimize the taken decisions. We also discuss the research perspectives in the field.     

Determinants of contract completeness for information technology outsourcing

This study developed and tested a model of the determinants of completeness of IT outsourcing contracts. The model is based on the assumption that the level of contract completeness results from a trade-off between the cost of developing a complete contract and the protection it offers. In contrast with outsourcing in many other sectors, IT outsourcing can be a temporary measure, with the anticipation that activities can be reintegrated in-house. This means that managers have to take into account the time horizon when deciding on the level of completeness of the contract. Results show that firms rely on more complete contracts when outsourcing is seen as a permanent approach. Also, transaction cost theory variables play multiple roles. Uncertainty reduces the level of completeness, while idiosyncrasy reduces partly the use of permanent outsourcing. Demand predictability, representing frequency, plays a dual role, increasing completeness but reducing the likelihood that outsourcing is used as a permanent solution.     

Government policy,public value and IT outsourcing: The strategic case of ASPIRE

The paper examines government IT outsourcing polices. The paper critiques the concept of ‘the Contract State’, and suggests how more disciplined uses of outsourcing can assist the creation of public value, more broadly conceived. Within the context of international developments, we study the United Kingdom Inland Revenue (IR), Customs and Excise (HMRC) and Department of Social Security (DSS) and their IT outsourcing contracts. The evidence suggests that outsourcing and marketization initiatives have adverse public value impacts, and may need to be rethought. Major IT operations and innovations, for example e-government, National Health Service (NHS) and identity card IT policies in the UK, are managed and generate legacies that do not always make efficient and effective use of the market. Moreover, their objectives, implementation and management over time may truncate their value to the public at large. Applying a revised Public Value policy approach offers a richer perspective to guide central government decisions worldwide about future IT outsourcing.     

IT outsourcing in insurance services: risk, creative contracting and business advantage

Abstract. Risks in IT outsourcing have received little systematic academic attention, despite growing evidence of wide disappointment and difficulty as well as some successes in outsourcing IT. This paper explores the 1993–98 case history of Polaris, a software intermediary in the European insurance sector. Despite the considerable risks inherent in outsourcing business-critical technology, Polaris was found to be achieving business advantage from such a strategy. This paper details 10 major risk areas in IT outsourcing distilled from previous research. It focuses on the sourcing, contractual and management choices made at Polaris. It assesses, against prior research findings, the degree to which these choices mitigated short- and long-term risk, and whether learning points flow from the analysis for other IT outsourcing arrangements.     

The strategic choice to continue outsourcing,switch vendors,or backsource: Do switching costs matter?

IT outsourcing contracts are often discontinued in favor of other alternatives (returning to in-house development, or switching to another vendor). Switching costs are experienced when terminating a business relationship and securing an alternative. We tried to answer the question: do switching costs matter significantly in the strategic choice to continue outsourcing, switch vendors, or backsource? Switching costs were considered, such as those due to IT operations (sunk investment, lost performance, system upgrades, uncertainty, and induction–retraining–performance), personnel-replacement costs (candidate search, and IT/setup), and in-house learning (cognitive/behavioral learning). A field survey was conducted, and, for each of these cost types, the differences between group means across the three groups (outsourcing continuation, vendor switching, and backsourcing) were determined. The findings suggested that customer organizations preferred outsourcing continuation most and backsourcing least when their switching costs were high. However, the relative preference for vendor switching depended on the switching cost type.     

Outsourcing and the Future of It

MORE THAN 50 PERCENT OF firms are expected to use IT outsourcing in 2006. the sourcing issue is among the top five agenda items for IT executives, as the amount of such outsourcing grows, its impact on the economies of companies and nations increases and political controversy over the consequent jobs lost to off-shore outsourcing heightens. Thus, outsourcing is, and will likely continue to be, a hot professional and political topic and a major determinant of the future of IT.     

Making the most out of an ASP relationship

Our research indicates that to ensure mutual success, companies and ASPs will need to explore sophisticated methods of pricing ASP contracts rather than using a simple fixed-price monthly rental form. Also, companies must understand the legal implications of outsourcing to an ASP and realize the necessity of specific contractual clauses. We expect that as companies outsourcing complex products to an ASP come to understand the importance of incorporating an ASP into their strategic IT needs, contracts will provide for profit sharing and other arrangements.)     

Developing a framework for analyzing IS sourcing

This paper develops a framework for the consideration of internal markets as an alternative to information systems (IS) outsourcing. It is based on an assessment of the pros and cons of both outsourcing and of insourcing based on the internal markets approach. It is formulated in terms of the operational, tactical, and strategic impacts of the choice among the alternatives. The framework, and the propositions that are developed from it, should be useful both for researchers, who can use it for developing testable research hypotheses, and for practitioners, who may use it as a basis for developing a comprehensive set of criteria for the evaluation of these sourcing options.