UNIVERSITITEKNOLOGI MARA. ICT Outsourcing in Public Sector: Relationship Intensity Among Vendor and Client

Transcription

1 UNIVERSITITEKNOLOGI MARA ICT Outsourcing in Public Sector: Relationship Intensity Among Vendor and Client AIDURA BT BAHAK UDIN Thesis submitted infijlfilhnentof the requirements for Bachelor of Science (Hons) Business Computing Faculty of Information Technology And Quantitative Science May 2007

2 DECLARATION I certify that this thesis and the research to which it refers are the product of my own work and that any ideas or quotation from the work of other people, published or otherwise are fiilly acknowledged in accordance with the standard referring practices of the discipline MAY 7,2007 AIDURA BT B AHAK UDIN u

3 APPROVAL ICT OUTSOURCING IN PUBLIC SECTOR: RELATIONSHIP INTENSITY AMONG VENDOR AND CLIENT BY ABDURA BT BAHAK UDIN This thesis project was prepared under the direction of supervision of the thesis coordinator, Puan Rogayah bt Abd Majid, Department of System Science and it has been approved by the supervisor. Associate Professor Yap May Lin. It was submitted to the Faculty of Information Technology and Quantitative Science and was accepted as partiallyfiilfilhnentof the requirement for Bachelor Degree of Science (Hons) Business Computing. Approvedbfc^: Jfer Ihian RogayahTbt Abd Majid Associate Professor Yap May Lin Thesis Coorflinator Thesis Supervisor Date: May 7,2007 Date: May 14,

4 ACKNOWLEDGEMENT Alhamdulillah, first and foremost I would like to express my gratitude to Allah for granting me with his mercifulness for my health, strength, opportunity and confidence in completing this research. Secondly, appreciations and thanks to my supervisor. Associate Professor Yap May Lin, my supervisor for guiding me through the completion of this research project. Thank you for brilliantly guiding and encouraging me Special thanks to Puan Rogayah Abdul Majid and Associate Professor Halilah Harun for their commitment and supports. I am deeply grateful to my beloved parents and my brother for helping me lots. Not to forget to all my friends that always encouraging and helping me through this completion of the research, especially to Lenora bt Jailan and Intan Diyana bt Azhar who offered her time and expert advice in person. Last but not least, thanks as ever for those who I am not mentioned in this acknowledgement, who gave contribution directly or indirectly, thank you for your support and contribution to this project. IV

5 ABSTRACT Malaysia has its own recipe of building a long term success in ICT industry. Since the Multimedia Super Corridor (MSC) was conceptualized in 1996, Multimedia Development Corporation (MDeC) has been tasked to develop the unique corridor into a regional operation and as a home for global ICT companies. The overall of this research is all about the ICT outsourcing in public sector. The aims of this research are to identify the SLA problems the organizations, the factors that influence the relationship intensity among vendor and client and the effect of use of CRM in ICT outsourcing. In order to achieve the aims of this research, a research model was used to develop the research instrument for this study. The primary data for this research was collected by means of a questionnaire survey conducted among Malaysian public sector organizations. There are about 50 federal government agencies based in Putrajaya. Out of that, 28 federal government agencies and 12 state federal government agencies (within Klang Valley) were selected to participate in the survey. A total of 285 questionnaires were distributed among the selected organizations and within one and half months, questionnaires were returned. Although the research was conducted successfiilly, several limitations were encountered. The limitations are time constraint, limited academic reference on ICT outsourcing based in Malaysia and lack of cooperation during field study. The findings fi-om this research indicated the relationship among vendor and client and how significant the factors influence it. Problems that inherent in SLA also will be identified.

6 TABLE OF CONTENTS CONTENT DECLARATION APPROVAL ACKNOWLEDGEMENT ABSTRACT TABLE OF CONTENT UST OF TABLE UST OF FIGURE PAGE ii iii iv v vi x xi CHAPTER ONE: INTRODUCTION 1.0 Research Background Problem Statement Objectives Scope of Research Significance of the Study Research Approach and Methodology Limitation of the Research Overview of the Research 9 CHAPTER TWO: UTERATURE REVIEW 2.0 Introduction Definition of Outsourcing Overview of Outsourcing Types of Outsourcing Outsourcing in Malaysia ICT Outsourcing in Malaysia Shared Service and Outsourcing (SSO) in Malaysia Relationship Perspective Among Vendor and Client Managing the Relationship 18 2A2 Trust 18 VI

7 2.4.3 Information Sharing and Relationship Intensity Communication Quality and Relationship Intensity Collaborative Participation and Relationship Intensity Contractual Agreement and Negotiation Issue Negotiation Service Level Agreement (SLA) Definition of SLA Purpose of SLA SLA Components Types of SLA Problems Area of SLA Benefits of SLA : Binding the Relationship Disadvantages of SLA Termination and Penalties Customer Relationship Management (CRM) Definition of CRM Types of CRM Purpose of CRM 41 2J.4 Reasons for CRM CRM and Outsourcing Industry CRM and Relationship Intensity Significance of the Research Expected Findings Summary 48 CHAPTER THREE: RESEARCH METHODOLOGY 3.0 Introduction Research Objectives Research Methodology and Approach Primary Data Questionnaire Questionnaire Scaling Technique Questionnaire Description 55 VU

8 Secondary Data Research Model Sampling Design Sampling Technique Sample Size Selection of Respondents Research Design Chart Data Analysis Summary CHAPTER FOUR: DATA ANALYSIS AND FINDINGS 4.0 Introductiion Reliability Analysis Section E - Relationship Intensity among Vendor and CIient Section F - Contractual Agreement Demographic Information CRM Usage Level of ICT Usage Contractual Agreement Relationship Intensity Among Vendor and Client Mann-Whitney Test Summary of Results 94 CHAPTER FIVE: CONCLUSION AND RECOMMENDATIONS 5.0 Introduction Conclusions Limitations Recommendation Further Study 101 vui

9 JIEEERENCES 103 APPENDICES Appendix A Questionnaire Appendix B Sample of SLA Appendix C Literature Review Matrix Appendix D SPSS Output Appendix E Respondents List IX

10 LIST OF TABLE TITLE PAGE Table 4.1: Reliability statistic for the relationship intensity among 68 vendor and client (information sharing) Table 4.2: Reliability statistic for the relationship intensity among 69 vendor and client (communication quality) Table 4.3: Reliability statistic for the relationship intensity among 69 vendor and client (collaborative participation) Table 4.4: Reliability statistic for ttie relationship intensity among 70 vendor and client (CRM) Table 4.5: Reliability statistic for contractual agreement 71 (SLA problems) Table 4.6: Reliability statistic for contractual agreement 71 (Termination Issue) Table 4.7: Summary of Reliability Statistic 72 Table 4.8: Respondents Profile (Section A) 73 Table 4.9: Organization Background (Section B) 74 Table 4.10: Level of CRM Usage 76 Table 4.11: Level of ICT Usage 78 Table 4.12: SLA Problems 81

11 Table 4.13: Factors that influence the relationship intensity 84 Among vendor and client Table 4.14: Result for Kendall's Tau Correlation 85 Table 4.14: Result for Pearson Correlation 85 Table 4.16: Case Processing Summary Result 89 Table 4.17: Descriptive Result of normality test 90 Table 4.18: Test statistic for CRM and information sharing 90 Table 4.19: Test statistic for CRM and communication quality 91 Table 4.20: Test statistic for CRM and contractual agreement 92 Table 4.21: Test statistic for CRM and collaborative participation 93 XI

12 LIST OF FIGURE TITLE PAGE Figure 2.1: Reasons for termination of contracts in IT- based service 17 Arrangements (Vintage Partners, 2004) Figure 2.2: Life cycle of an outsourcing arrangement 22 (Lacity and Hirschheims,1993) Figure 3.1: Research Methodology and Approach 51 Figure 3.2: Respondent Profile 53 Figure 3.3: Example of Questionnaire 54 Figure 3.4: Factors on Relationship Intensity Among Vendor and 58 Client Model Figure 3.5 : The model by Yun-Weon Seo, Hyun- Soo and Jae-Nam 61 Lee(2004) Figure 3.6 : Research Design Chart 63 xu

13 CHAPTER ONE INTRODUCTION 1.0 Research Background In recent years, outsourcing information communication and technology (ICT) has received much attention and has become a widespread worldwide phenomenon both in the private and public sectors (Currie, 1996). In recent years, outsourcing information communication and technology (ICT) have been used to relocate employment for many years now. During the latter half of the 1990's, the rapid development of an export-orientated information technology (IT) sector in many developing countries, was generally seen as a welcome solution to the IT skills shortage experienced in the developing nations. ICT outsourcing refers to the third-party management of IS assets, people and/or activities required to meet pre-specified performance levels (Lacity and Hirschheim, 1995). The outsourced work includes the operating of data centers, network and communication management, systems development and maintenance, and training. Issue of outsourcing has risen to the top of the policy agenda and has become the focus of significant media attention, often characterized by somewhat hysterical tone. Outsourcing has emerged as an effective tool to revamp strategies and beneficial to business in a financially viable and proactive manner (Pinnacle Systems Inc. 2003). ICT outsourcing is an affective strategy for gaining and maintaining competitive advantage when it is executed as part of an overall program to build a high-performance IT organization (Lankford and Parsa, 1999), According to Ming (2006), from School of Information Technology, Monash University Malaysia, he said that many Small Medium Enterprises (SME) companies in Malaysia realize that ICT is critical to the productivity and performance of their

14 companies. As a result, there are many of these Small Medium Enterprises (SMEs) which have invested in ICT systems feil to implement and maintain these systems successfully. Sourcing for appropriate ICT systems and implementing these systems successfiiuy are two of the most important stages of the entire ICT systems life cycle. In outsourcing, relationship among vendor and client are very important and the attention of both the outsourcer and the client is necessarily focused on the clients' customers and making sure they are happy (Webb and Laborde, 2005). Choosing to outsource or to continue outsource to a particular vendor is obviously an important and expensive decision. In outsourcing, Service Level Agreement (SLA) is an important part. In short, specified SLA in the outsourcing contract may foster commitment and trust which are lead to the success of outsourcing relationship (Goo and Nam, 2007). Service Level Agreement (SLA) is an agreement between the providers needed to support the business is determined and monitoring can be initiated to identify whether the required service levels are being achieved. The development of an SLA is a complex and lengthy process. Service level cannot be managed isolation. It is necessary to be part of a complete service management process. (Maurer et ai, 2000; Trienekens et al, 2004) Through out this research, the problems of SLA will be identified. There are several problems that inherent in SLA (Antonio et al., 2004; Hiles, 1994; Trienekens et al., 2004; Ward et al., 2002; Sahai et al., 2002; Perry and Bauer, 2004). The problem will be discussed in Chapter 2. Since SLA is a part of contractual agreement, outsourcing customers researched by Lacity and Hirschheim (1993) all agreed tfiat the contract was the number one key issue to a successful outsourcing relationship. According to CRMInfoline.com. (2006) in order to sustain the good relationship among vendor and client, vendor may choose a Customer Relationship Management (CRM) solution that caters in the right manner to all the requirements for ensuring a good relationship between vendor and client (CRMInfoline.com., 2006) Customer Relationship Management (CRM) is a methodology that extensively employs information technology, particularly database and Internet

15 technologies, to enhance the effectiveness of relationship marketing practices (Chen and Ching, 2004). Customer Relationship Management (CRM) in ICT outsourcing also will be studied. The importance of CRM also being determines. This is needed to ensure the relationship intensity between vendor and client. With CRM, both vendor and client will be able to achieve the proposed agreement. 1.1 Problem statement For the first time outsourcer, outsourcing is not an easy task and success of outsourcing depends greatly on client and vendor relationship. As the scope of business process outsourcing explodes, relationships are the key to creating value in expanding universe (Linder and Cantrell, 2002) When vendor and client set expectation early on and establish the right business structure, they position themselves for outsourcing success. The relationship between client and vendor is critical to the success. Creating, establishing, and managing it is not easy. Some challenges may arise between vendor and client. Existing studies on IT/ ICT outsourcing have mainly examined partnership factors that influence this outsourcing effectiveness. This stream of IT/ ICT outsourcing research has largely ignored how to foster and manage necessary attributes of partner relationship that promote relationship quality and intensity. A successful relationship requires that mechanism be in place to monitor and measure the success of the agreement (Hiles, 1994). This includes defining focused goals and priorities on an ongoing basis; assessing that service performance meets defined requirements and expectations. Relationship perspective has been advanced by Klepper (1995), who classified the firm's IT capability into reusable technology, competent IT skills and intimate relationship between vendors and clients. The research should be conducted to understand the outsourcing success by developing affective relationship between vendor and client (Klepper 1995, McFarlan and Norlan 1995, Grover, et al 1996, Lee and Kim 1999, Kern and

16 Willcocks 2002). Klepper (1995) addressed that the importance of development of long term relationships with good partnership building when he explored the mechanism enabling the development of long term relationship between vendors and clients. A 2002 report by Cutting Edge Information Inc, a Durham, NC- Based research and consulting firm, found that 40 percent of companies in a wide range of industries were dissatisfied with their outsourcing relationships. There are some of the lacks of understanding about why a company outsources certain process, a lack of understanding about vendors that are available, and a lack of communication with the outsourcing vendor. Other times, the outsourcer's responsibilities were not specific enough or its performance was too difficult to measure (Malhotra, 2002). Contractual agreement is very important in outsourcing. Service Level Agreement (SLA) is an official document in master contract for an outsourcing agreement which includes details description of service required, level of performance needed and where applicable, credit received by mid bonus given to the provider depending on their performance level (Kathleen, 2001) Service level agreement is very important in ICT outsourcing. The purpose of service level agreement is providing the service with the information necessary to understand and use the contracted services. It is imperative that the service level agreement (SLA) contains the necessary information to use and manage the service delivery. (Larson, 1998). In order to prepare effective service level agreement (SLA), firstly it is need to determine adequate service level specification needed by our business process then it can be observed to find the appropriate providers, who are capable to achieve that level, (Susanto, 2003). Outsourcing as any other business agreement requires a well prepared, carefully analyzed and documented details for each individual points to eliminate risk to the buyer and the end, to achieve win - win relationship between both parties (Kathleen, 2001) There are some problems that may arise during and after the implementation of service level agreement (SLA). These problems may effect the agreement. When more peoplefix)mboth parties trying to imderstand the service level agreement (SLA) overtime, they may interpret it variously which may result a big confusion and

17 crossed understanding (Susanto, 2003). No matter how carefiil preparing it, tfiere is always something unpredicted which may affect the ICT outsourcing reliability or misunderstanding throughout the implementation. According to Linder and Cantrell (2003), organizations have a better chance of succeeding with when they craft a relationship that specifically meets then- needs. Using service level agreement will examine how specific elements of formal contracts helps organizations to shape their relational attributes such as trust and commitment that leads to the success of ICT outsourcing. Instead of that, finding the right suppliers, proper negotiating agreements and manning the relationship like an asset are some factors that must be kept in mind. In order to ensure the successfiil of outsourcing, relationship among vendor and client is very important. According to CRMinfoline.com (2006), Customer Relationship Management (CRM) can assist in outsourcing in that it enables an enterprise to provide the best customer service while working hand in hand with clients and also strives to regain an in-depth focus on business objectives. CRM plays an important role in managing the relationship emong vendor and client. It has been widely regarded as company activity related to developing and retaining customer through increased satisfaction and loyalty. (Kotler, 2004) defme CRM as the overall process of building and maintaining profitable customer relationships by delivering superior customer value and satisfaction. Throughout this research, the use of CRM will be determined either the vendor site implements this CRM or not. CRM helps ICT outsourcing in that it enables to provide the best customer service while working hand in hand among vendor and client, According to CRMInfoline.com (2005), adopting the best CRM practices can go a long way in alleviating potential outsourcing problem and strong and lasting relationship that serve to benefit both vendor and client. But not all the vendors are implementing this CRM. To implement this, there are some budget issues that may arise such as high in cost. Forrester research found that the larger company spends million dollars per year but sometimes it fail to meet the objectives.

18 1.2 Objectives The main objective of this research is to study the ICT outsourcing in public sector which covers the problems that inherent in SLA, identifying of the factors that influence the relationship intensity among vendor and client. The factors that use to be tested are information sharing, communication quality, collaborative participation, CRM and contractual ^cement, and the third objective is the determination of effect of Customer Relationship Management (CRM) that influences the relationship intensity among vendor. The objectives of this research are as follows: 1. To identify the problems that are inherent in Service Level Agreement (SLA). 2. To identify the factws that influence the relationship intensify among vendor and client. 3. To determine the effect of Customer Relationship Management (CRM) to those significant factors that influences the relationship intensity among vendor. 1.3 Scope of Research This research will be conducted in the area of ICT outsourcing (which includes hardware, servers, networks, systems and software) in Malaysia public sector. As public sector in Malaysia is too wide, this research will focus primarily on federal government ministries which are based in Putrajaya and the state government agencies which are based in Klang Valley. Both location of study is chosen due to the geographical factor which will make the data collection easier and faster. It is estimated about forty three government organizations will be chosen to be the scope of this research. The targeted respondent within each organization are mostly

19 management level and employees in ICT/IS department who have experienced conducting ICT outsourcing contract previously. 1.4 Significance of the study This research will study the current scenario of ICT outsourcing in Malaysia public sector and focusing on relationship intensity among vendor and client and will focused on the factors such as information sharing, communication quality, collaborative participation. Customer Relationship Management (CRM) and contractual agreement. Currently, ICT outsourcing is not only conducted in private sector to gain a competitive advantage amongst them. There were also a lot of projects including hardware and software being outsourced by the public sector. Therefore, through this research, Malaysia public sector organizations will have better understanding of its current ICT environment such as how to influence the duration of ICT outsourcing relationship between vendors and clients; thus can be used as a guidance in order to make a better decision on the ICT outsourcing and improve the way of conducting their operation. It is also necessary to develop an understanding of the basic attributes and characteristics of ICT outsourcing relationship that lead to either shorter or longer relationship duration or either for single vendor or multiple vendors. This research also gives the significance to the ministries of some public organization in Malaysia and to the associations. This would be value that not only for public sector for managing their outsourcing arrangements; it will also be value for the researchers who are interested in understanding the phenomenon of outsourcing relationship duration. Besides that, Malaysia public sector organizations will also gain benefits fi-om this research in terms of knowledge on how to write the appropriate contract in SLA. Additionally, there is lack of research that focus on relationship intensity. The stream of IT outsourcing research has largely ignored how to foster and manage necessary attribute of partner relationship. So this research will be conducted and focus more onrelationshipamong vendor and client.

20 1.5 Research Approach and Methodology This research will cover on outsourcing of ICT from the perspective of Malaysia public sector, focusing on public sector organizations which are from federal government ministry based in Putrajaya and state government agencies based in Klang Valley who are willing to cooperate. Method used for data collection of this study is the distribution of questionnaire which a set of questionnaire will be developed for this study. The questionnaires will be distributed to the public sectors in Putrajaya and Klang Valley. Instead of primary data, secondary data was used to help in identifying and defining the related problems more clearly. Secondary data was gathered from variety of ways such as journal, text, book, report, magazine, and article from internet The statistical analyses were carried out using SPSS version 14 for Windows. Data were analyzed based on the results of the questionnaires that were collected. Some of the data were presented by percentages and frequency distribution tables for selected variables. The objectives of this research will be tested by using Exploratory Factor Analysis and Mann-Whitney Test. 1.6 Limitation of the Research During conducting this research, there are several limitations that are going to affect The following are some limitation of this research: a) Availability of Resources ICT outsourcing is still new in Malaysia, so that, it is quite difficult in searching articles and journals about this topic and commonly in Malaysia. TTie academic research paper in this area is very limited. Most of the researchers found are focusing more on international level and not focusing in ICT outsourcing but more on another type of outsourcing such as Business Process Outsourcing (BPO).

21 b) Time Constraint There was very short to complete this research within one semester. It was just only about 4 months to complete this research. The most crucial time is on distributing the questionnaires and time to collect them up. c) Lack of Cooperation from the Organizations Staff Not many organizations in public sector are willing to give cooperation. Tlie staffs are not willing to answer the questioimaire and thus making it difficult to obtain much information regarding to this research. The maximum of questiotmaire booklets that have been provided were 10 for every organizations but only maximum of 5 booklets were received back. d) Availability of Data Due to the lack of cooperation of the organizations, the result might not be as accurate as if larger samples were picked. More accurate result could be obtained if larger samples were picked. 1.7 Overview of the Research This research is about the ICT outsourcing in public sector that cover the problems that inherent in Service Level Agreement (SLA), the relationship perspective among vendor and client and the determination of relationship intensity of Customer Relationship Management (CRM) between vendor and client. The research methods consist of questionnaire distributions for the client side and interviews session for the vendor side. Some academic journals were referred in order to strengthen this research.

22 Chapter 1 Chapter 1 gives an overview of the study, the research objectives and the scope of the study. This chapter will introduce the research scope and define the problems statement, significance of study and the limitation in the research. Chapter 2 In Chapter 2, some recent studies on ICT outsourcing, Service Level Agreement (SLA) and Customer Relationship Mwagement (CRM). Academic journals are very important for references throughout tfiis chapter. Chapter 3 Research methodology will be explained in Chapter 3. This chapter also will covers research objective, research methodology and approach, descripticm about questionnaire, questioimaire scaling technique, sampling technique and research model. Chapter 4 Chapter 4, analysis and findings from the data gathered will be discussed. All the findings will be determined and to be concluded. Chapter 5 Chapter 5 includes conclusion, summary of findings and recommendations, this is the last chapter throughout the research and it will be conclude overall about the research and recommendation and conclusion will be given. 10

23 CHAPTER 2 LITERATURE REVIEW 2.0 Introduction This chapter is composed into three sections. First section is regarding to the outsourcing and focus more on ICT outsourcing including termmology which covers the meaning of outsourcing, types of ICT outsourcing, ICT outsourcing categories, ICT outsourcing in Malaysia, relationship perspective among vendor and client and contractual and negotiation issue. For the second section, all the information about the Service Level Agreement (SLA) will be determined. Regarding to SLA, definition of SLA will be determined including the definition of SLA, purpose of a SLA, component of SLA types of SLA, challenges of SLA, benefit of SLA that bind the relationship between vendor and client, disadvantages of SLA and finally the SLA metrics. The last section for this chapter is all about Customer Relationship Management (CRM). Regarding to this section it will cover the use of CRM, benefits of using it and the involvement of CRM in ICT outsourcing. 2.1 Definition of Outsourcing Outsourcing (fix)m "out" "source", i.e. external source) is a management approach that allows delegating to an external agent operational responsibility for processes or services previously delivered by an enterprise. It can be defined as the purchase of a good or a service that was previously provided internally" (Swink, 1999; Smith et al 1996; Lankford and Parsa, 1999; Elmuti and Kathawala, 2000). 11

24 Outsourcing is considered traditional if a process not considered critical for the organization is outsourced. This is the case for activities that do not require specific competencies by the supplier, like canteen services or cleaning services. Strategic outsourcing is when companies outsource everything except those special activities in which they could achieve a imique competitive edge (Willcocks and Choi, 1995). 2.2 Overview of Outsourcing There are various of outsourcing that available. ICT outsourcing is one of the types. In ICT outsourcing they can be divided into some other types. The categories are based on the level of outsourcing contract which is classified in terms of services Types of ICT outsourcing ICT outsourcing can be carried out in many combinations depending on the component of services scope tiiat is outsourced and responsibilities attached to the outsourced contract. Different authors describe ICT outsourcing arrangement differently. There are four types of ICT outsourcing categories (Currie, 2000) Total Outsourcing - the most comprehensive type, it describes a decision to transfer IT assets, leases, staff and managementresponsibilityfor delivery of ICT products and services. Insourcing (in-house sourcing) - the decision made after evaluating the IS services market. It is the decision to retain the management and provision of more than 80% of the IS budget internally. Selective Sourcing - the decision to source selected IS functions from external provider(s) while still providing between 20% and 80% of the IS 12