The Practice of Outsourcing

Drawing from the firsthand experiences of senior executives and Information Technology (IT) managers in North American and British companies, this chapter summarizes the expectations they had for outsourcing and explains what went wrong — and why — when expectations were not met. Successful outsourcing experiences are then used to outline a prescription for ensuring that expected benefits are fully realized. All too often outsourcing success is declared even before the ink on the contract is dry. This study has key, perennial things to say on expectations, and on realism about outcomes from outsourcing. It is also an important precursor to our follow-up study on outcomes and success detailed in Chapter 12.

This chapter is based on a research study on the outsourcing of information technology activities in the United Kingdom. This involved a large survey and a set of detailed case studies based on large and medium-sized organizations. This chapter uses findings from the survey and cases to address the two key issues of contracting and partnering. We show the variety of approaches and perceptions that exist concerning these issues, and conclude that there is much misunderstanding, particularly in relation to partnership. We conclude by creating a framework for helping to identify and examine the interrelationship between contractual arrangements, the required degree of contractual definition, and the characteristics of the area being outsourced. These themes are perennial and continue to be addressed in our subsequent work, particularly in Chapters 4, 10, and 13, our 2001 book that focuses on “the relational advantage” (Kern and Willcocks, 2001), and our 2006 paper on the power of relationships. A collection of papers on relationships also appears in Volume 2 of Willcocks and Lacity (2009). By 1994 the outsourcing of Information Technology (IT) and associated services was a rapidly growing phenomenon in the United Kingdom (UK), the market expanding at 12% per annum to a predicted 1995 revenue of £1.08 billion (Willcocks and Fitzgerald, 1994). A large 1993 example of this continuing trend was the announcement by British Aerospace (BAe) to outsource its Information Technology to Computer Sciences Corporation (CSC) in a ten-year deal worth £900 million, and involving the transfer of over 1,000 IT staff (Evans, 1993).

This chapter has two primary purposes. The first is to think through the concept of cooperation and its relevance for strategic alliances. The second is to analyze the potential role of information technology in such alliances. Specifically in the latter we focus on examples of “total” IT outsourcing — often cited as forms of “strategic alliance” — to examine the structure of cooperation, the relationships formed, how structure and relationships evolve, and the degree to which they might be sustainable. Here, as in all our chapters, “total” IT outsourcing is taken to be where 80% or more of an organization’s IT budget is spent on third party management of IT assets, people and/or activities to required/agreed results (Lacity and Willcocks, 1998). In the mid-1990s, when an earlier version of this chapter was published, the topic of cooperation in strategic alliances, especially in the specific area of IT outsourcing, was relatively undeveloped in the academic management studies literature. “Undeveloped” refers to a lack of agreement on definitions of fundamental concepts; wide differences in use of terms such as “partnership”, “strategic partnership” and “strategic alliance” and a lack of academically researched case material to work through such problems, as opposed to an uncritical adoption of cases and vocabulary described in trade journals, the press, and business magazines.

The Yankee Group estimated the 1994 global IT outsourcing market as exceeding $US49.5 billion with an annual 15% growth rate. As at 1995 the US market was the biggest; estimated to exceed $US18.2 billion (Patane and Jurison, 1994). Offshore outsourcing formed a very small part of this growing outsourcing phenomenon. Its main appeal up to this date had been in the systems/software development area, and resided in four critical factors: low salaries in foreign countries, access to a larger group of trained professionals, reduced cycle time for systems development, and improved access to global markets (Ravichandran and Ahmed, 1993. For subsequent developments see also Chapters 14 and 15). As such, offshore outsourcing by this date would seem to have been mainly a response to the need to contain costs (though, according to the research by Sobol and Apte (1995), the median cost saving in 1995 needed to be 30% to make offshore outsourcing attractive). A further factor would seem to be dissatisfaction with the quality and speed of software/systems development in the developed economies.

The origins and history of a single case study of large-scale IT outsourcing in the 1994–99 period is investigated in the United Kingdom Defence sector. Such deals are high risk and we describe types of risk and how the client organization sought to mitigate these. These risks and mitigation approaches are then analyzed against a distinctive risk framework formulated for IT outsourcing. Risks emerging in terms of type and scope of outsourcing; vendor selection criteria and process, the role of the contract, retained capabilities and management processes, and partnering and relationship dimensions are then assessed against other research findings. Two additional distinctive risks are identified from the case history arising from the public sector context and supplier long-term market strategy. A contribution of the chapter is the revised risk framework for analyzing IT outsourcing that is then presented. Finally, we highlight the implications of these findings for future research and practice.

In this chapter the process and content of decision making on sourcing information technology (IT) in two case histories from the United States public sector are examined in detail. We find that outsourcing IT problems, as opposed to tasks, rarely works in either private or public sectors. The findings suggest that both sectors must develop similar IT competencies before considering sourcing decisions. These include fostering relationships with senior management, benchmarking performance, creating shared IT objectives, understanding requirements, diagnosing IT problems, evaluating in-house versus market capabilities, and, in the case of outsourcing, developing competencies in contract negotiation and post-contract management. The major difference between public and private sector sourcing was found to be that public sector agencies faced more environmental constraints, including dictated budgets and requirements, and restrictions on civil servant salaries (see Chapter 6 for a discussion of distinctive public sector contexts).

In this chapter we bring together a number of threads running through previous chapters, and focus on distinguishing between four types of IT sourcing decision: total outsourcing; multiple supplier sourcing; joint venture/ project sourcing; and insourcing. To illustrate each type, detailed case histories are used where we analyze the reasons why specific IT sourcing decisions were adopted, and provide comment on the outcomes. Here we consider total outsourcing at the London Stock Exchange; multiple supplier sourcing at ICI pic; joint venture/project sourcing at CRESTCo Ltd; and insourcing at Royal Bank of Scotland.

As the external services market has evolved, academics have systematically studied a number of important aspects of these IT outsourcing decisions. These studies can be categorized as descriptive case studies and surveys of the current outsourcing practices; surveys of practitioners’ perceptions of risks and benefits of outsourcing, studies of determinants of outsourcing, and identification of best practices which distinguish success from failure (Loh and Venkatraman, 1992; Ang, 1993; Willcocks and Fitzgerald, 1994; Clark etal., 1995; Klepper, 1995; Grover etal, 1996, Gurbaxani, 1996; Nam et al., 1996). A detailed review of outsourcing research can be found in Dibbern et al. (2004), while Willcocks and Lacity (2009) provide a three volume set of research papers on these topics. In general, research indicates that selective sourcing has always been the norm, in fact, but, as Chapter 8 pointed out, that outsourcing options have become more complex. There are many perceived benefits and risks of outsourcing, but many studies are based on respondents’ perceptions rather than actual outcomes. Our earlier research on determinants of outsourcing generally showed that companies most likely to outsource on a large scale were in poor financial situations, had poor IT functions, or had IT functions with little status within their organizations (Lacity and Hirschheim, 1993, 1995). To this day there is still considerable debate on whether certain sourcing decisions and practices result in success or disappointment (Lacity and Willcocks, 2009).

Adoption by some of the largest international corporations has seen outsourcing become a key component of the information technology management agenda. Critical to this agenda is the formulation of comprehensive contracts. For this, legal experts and/or advisors can be consulted, but enforcement depends very much on client and vendor account managers. In this chapter a theoretical analysis of the contract contrasted with empirical data from client and vendor post-contract management practice revealed that the contract has a number of purposes beyond its sole legal nature, outlining a number of control dimensions both parties aim to enforce. Here we present findings from 13 organizations on the role of the outsourcing contract in ensuring control over the client’s outsourcing destiny (for this subject see also Chapters 3 and 11).

This chapter proposes and demonstrates the usefulness of a new conceptualization of information technology outsourcing (ITO) success. Based on results from three ITO surveys conducted during 1994–2000, a review of the literature, and data from 49 in-depth ITO cases, it is argued that although some organizations may, at times, seek outcomes from outsourcing similar to other organizations, fundamentally what each firm seeks from outsourcing is different. Accordingly, it is argued, studies that recognize the idiosyncratic and changing nature of outcomes sought are likely to offer greater insight into what comprises successful outsourcing. Developing this idea, the chapter proposes an ITO outcomes framework consisting of a list of 25 goals that organizations frequently pursue when outsourcing IT. The list reflects most goals pursued by most organizations, but only some of these goals are expected to be applicable to any given organization at any given time.

In this chapter we report our research into Business Process Outsourcing (BPO). Using case studies, we assess initial progress and challenges to 2005, then update developments to 2008. As is reflected in these cases, by 2001 the outsourcing of so-called IT-enabled back office support processes was beginning to be seen as a viable strategy by many large corporations, fuelling forecast revenue growth of 10%-15% per annum in a market already estimated then as worth nearly a quarter of that of IT outsourcing (Lacity and Willcocks, 2001). Figures for BPO are, for many reasons, notoriously difficult to arrive at accurately, but in a review of several studies Willcocks and Lacity (2006) suggested that in 2006 the market could have been as big as $US80 billion and would grow at a forecast 10–12% over the next five years.¹

While Chapters 2 and 12 focused on outcomes across the 1990–2007 period, they drew mainly on evidence from IT and business process outsourcing arrangements. What about outcomes from the relatively newer, and faster growing, phenomenon of offshore outsourcing? In this chapter we report the findings from a Fortune 500 biotechnology company that engaged six Indian offshore suppliers on 21 IT projects during 2003 through 2005. Interestingly, we found mixed results on the success of offshore projects. At the organizational level of analysis, we found evidence that the biotechnology company’s offshore strategy to simply replace domestic contractors with cheaper, offshore suppliers was a poor fit with its own social and cultural contexts. This chapter provides further food for thought on off shoring and builds on the 1990s work we carried out represented in Chapter 5, catching up with 21^st century developments, and providing insight into practices that work, and future research needs.

As evident in Chapters 5 and 14, decision makers often rationalize offshore outsourcing by comparing hourly rates for domestic and offshore workers. This approach is dangerous because it assumes domestic and offshore workers are equivalent “factors of production/” Once engaged in offshore outsourcing, senior executives are often disappointed. Many complain that offshore suppliers do not understand their business, deliver late, and produce poor quality work. In reality, the problems are not caused primarily by the supplier — they are primarily caused by the client’s naïve focus on only costs and failure to invest properly in the relationship.

In this final chapter of a book about sourcing options we examine an approach that is often mooted, and quite often practised, but remains very under-researched. Sometimes shared services is considered as an advanced, more efficient way of retaining IT and other back-office functions in-house. On other occasions, we have seen it used as a half-way house toward potential commercialization, or to outsourcing — following the oft-quoted advice of getting your own house in order before outsourcing, and not outsourcing problems and the “low lying fruit” (i.e., easily reduced costs) (Lacity and Willcocks, 2001, 2009). Creating shared services requires a coordinated integration of four change programs: business process redesign, organizational redesign, technology enablement, and sourcing redesign. If managed properly — shared services reduce costs, improve services, and can even generate revenues. However, surveys show that many executives fail to achieve the promised results. In this last chapter, we present the lessons Reuters learned during a five-year journey to create global shared services within their finance organization. Lessons address the right transformation approach, how to identify processes for shared services by analyzing the costs, attributes and readiness of process activities, and getting business unit clients and internal staff to cooperate and embrace the shared services initiative.