Outsourcing in a Global Economy: Traditional Information Technology Outsourcing, Offshore Outsourcing, and Business Process Outsourcing

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Outsourcing in a Global Economy: Traditional Information Technology Outsourcing, Offshore Outsourcing, and Business Process Outsourcing
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  See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/226067326 Outsourcing in a Global Economy: TraditionalInformation Technology Outsourcing, OffshoreOutsourcing, and... Chapter  · January 2009 DOI: 10.1007/978-3-540-88851-2_1 CITATIONS 8 READS 202 2 authors: Rudy HirschheimLouisiana State University 174   PUBLICATIONS   10,618   CITATIONS   SEE PROFILE Jens DibbernUniversität Bern 74   PUBLICATIONS   1,805   CITATIONS   SEE PROFILE All content following this page was uploaded by Jens Dibbern on 01 May 2014. The user has requested enhancement of the downloaded file. All in-text references underlined in blue are added to the srcinal documentand are linked to publications on ResearchGate, letting you access and read them immediately.  1 Introduction The notion of outsourcing – making arrangements with an external entity for the provision of goods or services to supplement or replace internal efforts – has been around for centuries. Kakabadse and Kakabadse (2002) track one of the earliest occurrences of outsourcing to the ancient Roman Empire, where tax collection was outsourced. In the early years of American history, the production of wagon covers was outsourced to Scotland, where they used raw material imported from India in the production process (Kelly 2002). Outsourcing remained popular in the manufacturing sector, with part of the assembling in many industries being sub-contracted to other organizations and locations where the work could be done more efficiently and cheaply (Vaze, 2005). Commenting on this unstoppable trend, Pastin and Harrison (1974) wrote that such outsourcing of manufacturing functions was creating a new form of organization which they termed the “hollow corporation” (i.e., an organiza-tion that designs and distributes, but does not produce anything). They note that such an organizational form would require considerable changes in the way organizations were managed. While they limited their research to the role of management in the hollow corporation, they comment on the substantial (and unpleasant) social and economic changes that the outsourcing of manufacturing was causing.It was not long before the idea of outsourcing was applied to the procurement of information technology (IT) services also. While the current wave of IT outsourc-ing can be traced back to EDS’ deal with Blue Cross in the early sixties, it was the landmark Kodak deal in 1989 that won acceptance for IT outsourcing as a strategic tool. Many large and small outsourcing deals were inked in the years that followed. From its beginnings as a cost-cutting tool, IT outsourcing has evolved into an inte-gral component of a firm’s overall information systems strategy (Linder, 2004). Still, reducing costs is an idea that never loses its appeal, and the opportunity to meet the IT demands of the organization with a less-expensive but well-trained labor pool has led organizations to look past their national borders, at locations both far and near, for such resources. Recent statistics vouch for the continued accept-ance and popularity of IT outsourcing as well as this trend towards outsourcing to different global locations. A Gartner study conducted in 2004 placed global IT Outsourcing in a Global Economy : Traditional Information Technology Outsourcing, Offshore Outsourcing, and Business Process Outsourcing Rudy Hirschheim and Jens Dibbern R. Hirschheim et al. (eds),  Information Systems Outsourcing,  3© Springer-Verlag Berlin Heidelberg 2009 Hirschheim_PartI indd 3 Hirschheim_PartI.indd 3 2/9/2009 1:05:57 PM 2/9/2009 1:05:57 PM  4 R. Hirschheim and J. Dibbern outsourcing at $176.8 billion in 2003, and suggested that it would grow to $253.1 billion in 2008 (Souza et al., 2004). A recent IDC Report noted that the IT service market has now reached $746 billion (Fogarty, 2008). While outsourcing has grown beyond the domain of IT embodying decisions such as where and how to source IT to a much wider set of business functions, IT outsourcing still leads the pack with 67% of all global outsourcing deals in 2004 being related to IT (Pruitt, 2004). This inexorable trend towards outsourcing and offshoring brings unique sets of chal-lenges to all parties involved. Western organizations have to walk a tightrope between the savings and efficiencies that offshoring could provide and the adverse reactions from a society increasingly disenchanted by the job displacement and loss that outsourcing brings. 2 IT Outsourcing Motivation and History Although organizations outsource IT for many reasons, the growth of IT outsourc-ing can be attributed to two primary phenomena: (1) a focus on core competencies and (2) a lack of understanding of IT value (Lacity, Hirschheim, & Willcocks, 1994). First, motivated by the belief that sustainable competitive advantage can only be achieved through a focus on core competencies, the management of organi-zations have chosen to concentrate on what an organization does better than anyone else while outsourcing the rest. As a result of this focus strategy, IT came under scrutiny. The IT function has been viewed as a non-core activity in organizations; further, senior executives believe that IT vendors possess economies of scale and technical expertise to provide IT services more efficiently than internal IT depart-ments. Second, the growth in outsourcing may also be due to a lack of clear under-standing of the value delivered by IT (Lacity & Hirschheim, 1993a, b). Though senior executives view IT as essential to the functioning of the organization, it is viewed as a cost that needs to be minimized. Believing that outsourcing will help meet the IT needs of the organization less expensively, organizations have chosen to outsource. Interestingly, some researchers (e.g., Hirschheim & Lacity, 2000) have found that outsourcing has not always yielded the benefits that organizations had hoped for. This has led to numerous normative strategy proposals to help organizations achieve success (Cullen, Seddon, Willcocks, 2005; Lacity & Hirschheim 1993a, b; Linder 2004).Initially, when organizations looked to external sources for the provision of IT services, the vendor provided a single basic function to the customer, exemplified by facilities management arrangements where the vendor assumed operational control over the customer’s technology assets, typically a data center. The agreement between Blue Cross and Electronic Data Systems (EDS) in 1963 for the handling of Blue Cross’ data processing services was different from such previous ‘facilities manage-ment’ contracts. EDS took over the responsibility for Blue Cross’s IT people extending the scope of the agreement beyond the use of third parties to supplement a company’s IT services. EDS’s client base grew to include customers such as Frito-Lay and General Motors in the seventies, and Continental Airlines, First City Bank and Enron Hirschheim_PartI indd 4 Hirschheim_PartI.indd 4 2/9/2009 1:05:57 PM 2/9/2009 1:05:57 PM  Outsourcing in a Global Economy 5 in the eighties. Other players entered the outsourcing arena as well, the most noteworthy of those being the ISSC division of IBM. ISSC’s deal with Kodak in 1989 heralded the arrival of the IT outsourcing mega-deal and legitimized the role of outsourcing for IT. Following the success of the Kodak deal, well-known companies around the world quickly followed suit – General Dynamics, Xerox, and McDonnell Douglas in the U.S.; Lufthansa and Deutsche Bank in Germany; Rolls Royce and British Aerospace in Britain; KF Group in Sweden; Canada Post in Canada; Telestra, LendLease, and the Commonwealth Bank of Australia in Australia; and ABN Amro in the Netherlands (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004).IT outsourcing has evolved from sole-sourcing and total sourcing arrangements of yester-years where one vendor provides all IT services to its client to complex arrangements involving multiple vendors and multiple clients (Clemons, Hitt, & Snir, 2000; Gallivan & Oh, 1999). According to Mears and Bednarz (2005) compa-nies are also outsourcing on a much more selective basis than ever before. The tools and resources available today make it easier for IT executives to manage their IT portfolio and achieve the economies they need without outsourcing everything. (Of course a key challenge is determining what pieces of the IT portfolio to out-source and what to keep internally.) Outsourcing also now embraces significant partnerships and alliances, referred to as co-sourcing arrangements, where client and vendor share risk and reward. These co-sourcing arrangements build on the competencies of the client and vendor to meet the client’s IT needs. Kaiser and Hawk (2004) provide recommendations to organizations considering co-sourcing arrangements with offshore vendors. They note that organizations should avoid total dependency on the vendor by maintaining their IT competencies in-house.IT outsourcing – as it was practiced through the turn of this past century – was primarily domestic outsourcing. While it had considerable impact on the way organi-zations structured and managed their IT, and to some extent, redefined the roles of IT managers, the impacts were largely limited to the client and vendor firms’ boundaries with the possible exception of the creation of some new intermediary organizations (e.g., outsourcing consulting firms). Domestic IT outsourcing barely created a stir in the public press perhaps because no one foresaw that the outsourcing of a critical knowledge-work function (i.e., IT) might have more dramatic effects if these tasks could be performed not domestically but globally. In some way this is surprising because most international firms were hiring numerous foreign IT people, and import-ing people from places like the Philippines, India, etc. on staff augmentation contracts. Indeed, according to Sheshabalaya (2004) and Friedman (2005), major changes were already taking place in IT in the late 1980s and throughout the 1990s in the US but went unnoticed, mostly because of the dot.com boom and Y2K remediation needs. 3 Offshore Outsourcing A prominent change in the outsourcing arena is the growth in offshore outsourcing (Lacity & Willcocks, 2001; Morstead & Blount, 2003; Robinson & Kalakota, 2004). Driven by the pressures of globalization and the ensuing need to address Hirschheim_PartI indd 5 Hirschheim_PartI.indd 5 2/9/2009 1:05:57 PM 2/9/2009 1:05:57 PM  6 R. Hirschheim and J. Dibbern opportunities and threats from global competition, companies are increasingly looking at less-expensive resources available in offshore locations. And these less expensive resources are readily available in countries like India, China and the Philippines.An outsourcing arrangement is considered ‘offshore outsourcing’ when the responsibility for management and delivery of information technology services is delegated to a vendor who is located in a different country from that of the client (Sabherwal, 1999). While the three well-known countries in the offshore out-sourcing arena (the so-called three I’s) are India, Israel, and Ireland (Carmel, 2003a, b), near-shore providers in Canada and Mexico are also popular among U.S. clients just as eastern Europe has become a prime near-shore option for central European countries, because of geographic and cultural proximity. Some clients find the near-shore scenario more attractive because these locations facili-tate continuous monitoring (Rao, 2004). China is also quickly gaining popularity because of its low labor costs.As in domestic outsourcing, a primary driver of offshore outsourcing is the continued pressure organizations face to cut costs associated with IT while main-taining and improving processes (McFarlan, 1995; Nicholson & Sahay, 2001;  Rajkumar & Dawley, 1998). The time differences between the client and the off-shore vendor locations create extended work days which can contribute to increased IT productivity. With efficient distribution of work between the client and vendor locations, projects can theoretically be finished faster (Apte, 1990; Carmel & Agarwal, 2001; Carmel & Agarwal, 2002; Morstead & Blount, 2003; Rajkumar & Dawley, 1998; Ramanujan & Lou, 1997).Organizations also turn to offshore outsourcing because of the lack of IT resources to perform required tasks. Faced with the lack of trained professionals, organizations look to foreign shores to gain access to knowledgeable IT personnel and valuable IT assets (Apte et al., 1997; Morstead & Blount, 2003; Rottman &  Lacity, 2004; Sahay, Nicholson, & Krishna, 2003; Terdiman, 2002). Offshore vendors typically have well-trained IT personnel with the requisite technical knowledge and skills. These vendors have also recognized the need to train their staff not only in the latest technologies, but also in management and communica-tion skills and have established numerous world-class facilities to do so (Khan, Currie, Weerakkody, & Desai, 2003). Such technical expertise and qualifications of the staff make these vendor firms very attractive to clients, since clients look to outsource activities that involve high level of technical skills (Aubert, Patry, & Rivard, 2004).In addition, offshore vendors have obtained certifications to prove their ability to execute and deliver quality work. These certifications assure the client organiza-tions that the vendor is following quality practices in the management of the project and are important in gaining the client’s trust and developing the client-vendor relationship (Heeks & Nicholson, 2004). Vendors aim to align their practices with standards in different areas including software development processes (e.g., CMM), workforce management (e.g., PeopleCMM), and security (e.g., ISO 17779) Hirschheim_PartI indd 6 Hirschheim_PartI.indd 6 2/9/2009 1:05:57 PM 2/9/2009 1:05:57 PM
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