The New IT Outsourcing Landscape

The global information technology outsourcing (ITO) market has increased each year since 1989, when global ITO was only a $9 to $12 billion market. In 2007, the global ITO market was estimated to be between a $200 to $250 billion market. The business process outsourcing (BPO) market in 2008 was less than the ITO market, but growing at a faster rate. On conservative estimates, looking across a range of reports and studies, global IT outsourcing revenues probably exceeded $US 270 billion in 2010. With business process outsourcing revenues exceeding $US 165 billion in the same year, and offshore outsourcing representing more than $US 65 billion of these combined revenue figures (Willcocks, Cullen and Craig, 2011), it is very clear that, with its 20-year plus history, outsourcing of IT and business services is moving into becoming an almost routine part of management, representing in many major corporations and government agencies the greater percentage of their IT expenditure. Moreover, all projections we have looked at or made suggest continued growth over the next five years (2011–15). Our own synthesis of the reports from Gartner, Everest, NASSCOM and IDC suggests that ITO global growth will be in the range of 5–8 per cent per annum, with business process outsourcing rising by 8–12 per cent per annum, and, subsumed within these, offshore outsourcing growing at an even faster annual rate.

During the past 20 years, a rich but diverse body of theoretical and empirical work has accumulated on information technology outsourcing (ITO). Researchers have studied ITO from over 20 theoretical perspectives — including theories from economics (e.g., Transaction Cost Economics, Agency Theory), strategy (e.g., Resource-Based View, Resource Dependency Theory), sociology (e.g., Relational Exchange Theory, Social Capital Theory, Innovation Diffusion) and natural sciences (e.g., Punctuated Equilibrium Theory) (Barney, 1991; Eisenhardt, 1989; Ekeh, 1974; Gould and Eldredge, 1977; Nahapiet and Ghosal, 1998; Pfeffer and Salancik, 1978; Rogers, 1983; Williamson, 1991). By appropriating so many theories, researchers have tested a large number of relationships between independent and dependent variables. Because of this diversity, findings from the overall body of empirical ITO literature have been difficult to summarize, analyse, and evaluate succinctly.

Transaction Cost Economics (TCE) has been the most frequently appropriated theoretical frameworks to study Information Technology Outsourcing (ITO) (Dibbern et al., 2004; Klein, 2002). TCE is a theory specifically addressing make-or-buy decisions and has therefore been viewed as a strong theoretical base for analysing ITO decisions. TCE has enjoyed an abundance of empirical and theoretical academic attention in other organizational contexts, which may have also influenced its appeal to ITO researchers (Anderson, 1994; Bowen and Jones, 1986; Griesinger, 1990; Hennart, 1991a, 1991b; Hesterly et al., 1990; Hill, 1990; Joskow, 1985, 1991; Lieberman, 1991; Malone, 1987; Malone et al., 1987; Pisano, 1990; Robins, 1987; Walker and Poppo, 1991). In addition, this is a theory we have used and applied in our own empirical work (Lacity and Willcocks, 1995, 2009; Poppo and Lacity, 2002). Given its common adoption for studying ITO, and following on our observations in Chapter 1, it is both relevant and timely to review further the empirical applications of TCE to the ITO context.

This chapter provides insights into how companies that are relatively mature in their sourcing capabilities are using outsourcing to achieve innovation. Our research finds that this can be achieved through collaborative practices that have distinctive attributes, and a process we call collaborative innovation.

As we saw in Chapter 1, over the past decades outsourcing has gained significant importance as an arrangement for managing various organizational activities. Similarly, business process outsourcing and offshore outsourcing are gaining momentum worldwide. Even so, research shows that outsourcing has a mixed track record: in most cases organizations get fewer benefits than they expected and more worryingly, a number of companies encounter severe problems as a consequence of outsourcing (Lacity and Willcocks, 2001, 2009). Furthermore, in observed practice organizations often get trapped in outsourcing projects that are clearly doomed to fail. In these cases decision makers allocate more and more resources to troubled ventures instead of admitting to the fundamental problems and facing the fact that the projects should be re-directed or abandoned if even more painful future losses are to be prevented.

Global sourcing is characterised by the migration of knowledge-intensive as well as routine IT-enabled tasks from large industrialized countries to lower wage, highly productive, labour-intensive locations (Carmel and Tjia, 2005; Willcocks and Lacity, 2006). This phenomenon raises a variety of issues affecting client-supplier interactions which have attracted interest in the research community, although that interest dominantly focuses on the client’s perspective and on relationships with large, multinational Indian firms. Recently, however, China has been identified as the next major competitor for a share of the offshored services market and is actively implementing strategies to develop this sector, including the development of technology parks targeting offshore software and services providers (Qu and Brocklehurst, 2003).

Recently, academic outsourcing research has focused on offshore outsourcing of IT work. Offshore outsourcing almost always promises to reduce client costs, but also promises faster delivery speed, the ability to focus in-house IT staff on higher-value work, access to superior supplier resources and capabilities, and process improvement. Research has found that offshore outsourcing can delivery on many of its promises (Lacity and Rottman, 2008), but researchers have also found that offshore outsourcing poses additional challenges when compared to domestic outsourcing. For example, offshore outsourcing is more challenging because of time zone differences (Carmel, 2006), increased efforts in knowledge coordination (Kotlarsky et al., 2008; Kanawattanachai and Yoo, 2007) and boundary spanning (Levina and Vaast, 2008; Mahnke et al., 2008), the need for more controls (Choudhury and Sabherwal, 2003; Lacity and Rottman, 2008), cultural differences (Carmel and Agarwal, 2001; Carmel and Tjia, 2005; Krishna et al., 2004), defining requirements more rigorously (Gopal et al., 2002), and difficulties in managing dispersed teams (O’Leary and Cummings, 2007; Oshri et al., 2007). Some of these issues are so difficult to manage that practitioners are turning to nearshore alternatives (Carmel and Abbott, 2007). Another emerging trend is rural outsourcing.

What are the roles of Middle Managers (MMs) in outsourcing, and how key are they to success? For many years the justification for introducing technology within companies has been to replace layers of MMs, to allow visibility and increase efficiency. The result? MMs have often become the main target for cost-cutting across companies, and, indeed, for outsourcing certain processes. In the 1980s and 1990s, high profile management advisers such as Tom Peters and Michael Hammer considered the removal of MMs as a major corporate objective (Hammer and Champy, 1993; Peters and Waterman, 2004).

With cloud computing becoming an increasingly important element of the IT function of most organizations, this chapter presents a state-of-the art review of the key features of cloud computing and its likely near-term and longer-term development trends. It draws on research undertaken from late 2010 through 2011, including a survey of over 1035 business and IT executives and thirty five plus interviews with key international players in the cloud computing ecosystem including cloud providers, system integrators and users of cloud services (see Appendix A for details of the research and methodology).