What kind of capabilities can make difference in information technology outsourcing? An analysis of a local survival provider in Brazil

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1 What kind of capabilities can make difference in information technology outsourcing? An analysis of a local survival provider in Brazil Abstract Yeda Swirski de Souza (UNISINOS) yedasou@unisinos.br Claudio Reis Gonçalo (UNIVALI) claudio.goncalo@univali.br Claudio Carrara (UNISINOS) claudio@meta.com.br Eduardo Rigoni (UNISINOS) ehrigoni@gmail.com This study aims at contributing to analyze competiveness of local ITO providers in Brazil. The following questions are addressed: How and why do they survive? Which strategies did help to keep them alive? Are there specific capabilities which could justify their survival? We explore the above questions through the case study of one of the few companies who survived as a local one among a strong wave of mergers and acquisitions of local companies by international companies. The analysis was built over the lens of the studies about providers capabilities in outsourcing/offshoring. We conclude that Beyond extant theory, the case study indicates, from the managerial point of view, that culture, identity and mutual learning between client and provider can be influential to long term outsourcing relationship. From the technical point of view, the case suggests that due to a degree of partially structured IT system on the client perspective, long term outsourcing relations can be justified because of path dependence on tacit knowledge needed to integrate particular requirements solving problems with innovate solutions. Introduction This study aims at contributing to analyze competiveness of local ITO providers in Brazil. In the last years, an increase on the volume of Information Technology Outsourcing (ITO) and Business Provider Outsourcing (BPO) services has been observed in Brazil. This increase is explained not only based in the growth of global sourcing but also because of internal market growth. Following Brasscom (2010) in relation to the scenery for this decade, Brazil is expected to leap from 7th to 4th largest Information Communication Technology (ICT) market in the world, as the Brazilian industry has scale, business knowledge, technical expertise, and innovative capacity. Several international services providers companies as Oracle, SAP, TATA, Accenture, 1

2 Infosys, HP have established business units in the country as a way to be closer of this new and emergent market. Besides the new interest for Brazilian services market by international providers, a variety of small and medium sized companies are established in the country. These companies have as a background a generation of computing engineers educated during the 70 s in the last century when companies had been challenged to improve ICT technological solutions during the military regime, when Brazilian government limited the importation of technology. During this period, there was a growth of ICT industry in Brazil driven by the need of solutions for manufacture, petrochemical industry, communication infrastructure, banking automation, etc Several policies had been established to support ICT industry development as the National Policy for Information (80 s in last century); Information Law (90 s in last century) (ROSELINO, 2006). More recently, in 2003, the Foreigner Trade Industrial and Technology Policy (Política Industrial, Tecnológica e de Comércio Exterior PITCE) (Ministério da Ciência e Tecnologia, 2008) turned international trade free for ICT services (Roselino, 2006; Stefanuto, 2004). The opening for international trade was a needed movement to realign Brazilian industry and technological standard to global competition. However, by 2000 the population of ICT companies in Brazil was over than 90% compound by very small start-ups, spin-offs of some big local companies as Edisa which were successful during the 70 s but could not face international competition. Nevertheless the structure of the market has been paradoxally related to the population of small companies. Demand of services has been by 80% concentrated in 5% of the population of providers, the bigger companies which were able to service more complete and complex solutions (SOFTEX, 2007). This scenery gave room for a strong movement of merger and acquisitions. Most of the local companies in order to align to international patterns were acquired by international companies, e.g. CPM Braxis, a former spin-off of Bradesco (one of the top three bigger banks in Brazil), and one of the main Brazilian software companies, has 55 % of their stock options acquired by the French Capgemini in 2010 (EXAME, 2010). 2

3 Most of the local companies lost governance over their business. The increasing offer of human resources delivered by an established set of University and technical degrees on computing engineer have been hired by the international companies on several captive offshoring operations. However a few local providers survive from the opening of the boarders to international trade and kept governance over their businesses. Examples of such company strategies can be observed in very few companies as Meta, Stefanini, Ci&T, BRQ. How and why do they survive? Which strategies did help to keep them alive? Are there specific capabilities which could justify their survival? Our purpose at this paper is to explore the above questions through a in depth case study in one of these companies (Meta). Meta as other local companies in the country was embedded on the same legacy of technical capabilities due to the education of engineers during military regime. The formal education of the entrepreneurs was similar to others who runned several start-ups in the 80 s - 90 s in the last century. However, looking at the history of this company we find several examples of long term relationships with specific clients. When the country opened to foreigner trade, some of Meta s clients, as the biggest steel company (henceforth named at this paper as SteelBrazil) in the country and among the top 5 in the world began international operations., Nevertheless, Meta s kept its position as a provider even expose to international competitors. To explore this case, we took as an assumption that specific capabilities can justify a company survival and competitiveness (Barney, 1991, Barney, 2001; Peppard & Ward, 2004). We believe that the analysis of this extreme case offers insights and propositions about the new pace of competition on services, especially when it implies on improving practices in new markets as Brazil. In the following sections we present literature review about capabilities related to outsourcing/offshoring which gives support to our analysis; methodological procedures used in the case study; the case study, analysis and conclusions. Literature review Studies about capabilities related to outsourcing/offshoring are supported by the resources-based-view and consider that differences in performance of companies can be explained by the unique way of that resources are developed, mobilized and coordinated by the organization (Barney, 1991). Intangible aspects such as knowledge, interaction, 3

4 trust, learning ability are resources that can be mobilized in favor of the building of organizational and managerial capabilities. When organizations develop the ability of creating, integrating, recombining and release their resources, building well-known managerial and organizational processes, they create specific capabilities which are recognized as dynamic capabilities (Teece, Pisano & Shuen, 1997; Eisenhardt & Martin, 2000). The dynamic capabilities, which can be represented by product or service innovation, strategic decision making or alliancing, can match or even create market change. Dynamic capabilities are especially relevant for multinational enterprise performance to be part of the global market competition (Teece, 2009). The investigation of relational capabilities can explain why some enterprises are better at partnering than others (Dyer & Kale, 2007). ITO and BPO have become effective and competitive strategies to perform in the global market. On this context, the client s sourcing decisions and the client-provider relation have been addressed by several studies (e.g. Hagel & Brown, 2005; Lewin, Massini, & Peeters, 2009) while that the provider s perspective has not been investigated as it should showing their strategies and practices of successful outsourcing (Levina & Ross, 2003). Specifically in outsourcing/offshoring of services and knowledge-intensive processes, more than in the manufacture, it is considered that a set of non-tangible resources is determinant for quality. The intensity of the interaction between customer and supplier, cultural barriers, language, distance and its consequences for the interaction bring specific challenges to services outsurcing/offshoring (Stringfellow, Teagarden, & Nie, 2008). In this context, dynamic capabilities perspective are useful lens to understand how companies develop and preserve capabilities in offshoring operations (Doh, 2005). According to the transformational offshoring perspective, third party companies are not merely transactional vendors; they have to integrate knowledge share and effective management process (Li et al., 2008). Building on the literature about providers capabilities on outsourcing-offshoring, we assumed that specific capabilities are explicative to services providers performance. An exploratory study conducted by Saxena & Bharadwaj (2010) concluded that business process management capability and relationship management capability are critical to deliver successful outcomes. Building on the reviewed literature we assumed that these categories belong to three different dimensions: (a) client relations; (b) project management capabilities and (c) customer-specific capabilities. 4

5 Client relationship management can be defined as the extent to which a supplier organization is able to effectively manage client relationships (Lacity; Khan; Willcocks, 2009). Several elements correspond to this capability as: - Contract based-mechanisms: These mechanisms are employed by the client incentive provider to demonstrate value to the client. Are examples of such mechanisms, pilot projects, multiphased contracting with penalties, interpersonal relationship building, carrot and stick incentives, shorter-term contracts and competent contract monitoring. These mechanisms increased client control and motivated provider to demonstrate value to the client. (Levina & Ross, 2003) - Interpersonal relationships actions: The provider allocates full-time managers, consultants, in order to serve as engaged helpers (e.g. Assignment of a full-time engagement manager that interfaced daily with client s manager and still remained after outsourcing. Levina & Ross (2003) - Reputation-based mechanisms: The provider focus on reputation building in their relationships with clients. There are planned actions focuses on sharing information with their clients in order to win future contracts. Investment in certificates regarding qualification of software development processes, such as CMM. ( Levina & Ross (2003) - Contract negotiation capability. The extent to which an organization is able to effectively bid, select, and negotiate effective contracts with suppliers ( Lacity; Khan; Willcocks, 2009). The project management capabilities gather expertise in planning; development and implementation of software and are not client-specific. Therefore, they can be leveraged across clients, industry domains, and development platforms. They can be also considered as technical capabilities because they are related to the ability to abstract business problems and translate them into systems. These capabilities are acquired through deliberate and steady investments in infrastructure (systems and processes) and training focused on the improvement of the process of software development. (Wynekoop & Walz, 2000; Ethiraj, Kale, Krishnan, & Singh, 2005). Different elements are identified as signs of this capability, such as: - IS technical/ methodological capability identified by an organization s level of maturity in terms of technical or process related standards including the Capability Maturity Model (CMM), Capability Maturity Model Integrated 5

6 (CMMI), and the Information Technology Infrastructure Library (ITIL) (Lacity; Khan; Willcocks, 2009). - IS human resource management capability identified by an organization s ability to identify, acquire, develop, and deploy human resources to achieve its organizational objectives (Levina & Ross (2003)Lacity; Khan; Willcocks, 2009). - Control of in-process defects identified during the project execution phase. (Ethiraj; Kale; Krishnan, & Singh (2005) - Effort overrun that is the difference between actual person-months required to complete the project and person-months that were initially estimated. This measure reflects effort estimation and management capability. The expected sign on this coefficient is negative, i.e., higher effort overrun will lead to lower project contribution. Ethiraj; Kale; Krishnan, & Singh (2005) - Extent of schedule slippage which means the delay in project completion date. It reflects schedule estimation and management capability. Delays in project completion can adversely affect profitability since the firm can incur contractual penalties for delays and also bear increased labor costs. The expected sign on this coefficient is negative, i.e., higher schedule slippage will lead to lower project contribution (Ethiraj; Kale; Krishnan & Singh, 2005). The customer-specific capabilities depend on repeated interactions with a given client over time in multiple projects, client-specific capabilities are a function of repeated interactions with a given client. These repeated interactions may be a function of time (on a long project) or spread over several projects. They are related to tacit knowledge about the client's business, as well as to knowledge about operational routines acquired through repeated interactions with the customer. Repeat clients are a proxy for clientspecific capabilities developed by the firm (Wynekoop & Walz, 2000; Ethiraj; Kale; Krishnan & Singh, 2005). The following elements are considered as signs of customerspecific capabilities (especially in ITO and BPO): - Domain capability which means the extent to which a supplier has built a capability of the client organization s business and technical contexts, processes, practices, and requirements (Lacity; Khan; Willcocks, 2009). - IS change management capability that is the extent to which an organization effectively manages change (Lacity; Khan; Willcocks, 2009). 6

7 Method This study is based on a case study of one of the IT Brazilian providers who is one of the small group of survivals companies with full governance over their business after the increasing insertion of the country in the global economy after de 90 s in last century. The elected company for this study was Meta, which operations began in 1990 as a start-up runned by three young entrepreneurs. Oriented by the good purpose of offering value to their clients, Meta was able to last in the market while many other ventures failed. The company tried to grow through acquisitions and participation in other companies. However organic grow has been the major strategy to sustain the business. In 2012, the company had facilities in different states in Brazil (Rio Grande do Sul, Paraná, São Paulo, Bahia, Brasília, Rio de Janeiro e Minas Gerais), more than employees and more than 300 ongoing projects. The main global services operations have been in United States, Chile, Argentina, France and German. Two criteria oriented the choice of the unit of analysis within the company: (a) longevity of relation with a client; (b) offshoring of services. We understand that these two criteria are aligned with the question concerned to the company s competitiveness. The unit of analysis elected to investigate was the services delivered to the main steel company in Brazil (here named SteelBrazil) The relation between Meta and this client last for more than 17 years and have been overcoming several stages and challenges, since to deliver of people in body shopping until ITO providers in global operations. Along these 17 years there were several changes on the operational technology. In this unit of analysis, Meta is responsible for all maintenance of applications of the client on their ERP from SAP. There are about 150 systems which perform the integration between the operations and the ERP, and, also, they are based on legacy applications inherited from languages, platforms, and techniques earlier than current technology. The team in these services is about 35 personnel. Data collection was based on depth interviews with different actors connected to this client with managerial as well as technical responsibilities. The criteria attributes used for defining the group of people to be interviewed, consisted in the degree of participation and influence on decision-making, technical and managerial activities, 7

8 operation time and also their performance during this operation. Table I summarizes the profile of the interviewed participants. Int 1 One of the owners of Meta. Joint the Company in Has a degree in Economy and specialization in Management and Psychology. VP of Operations. He is the sponsor for services for SteelBrazil. Int 2 President and CEO of Meta and responsible for all business processes. 46 Int 3 Int 4 Int 5 Int 5 Int 6 years old. Has been connected to SteelBrazil form inception of the relation between the companies. He is a computer engineer and in the first year of the company worked as a software developer. Business Manager and responsible for SteelBrazil contracts. 4 Has been working at Meta for 8 years. Relationship Manager and responsible for managing the relationship with SteelBrazil in terms of sales and control over deliverables. 25 yers old. He is a former trainee of the company and has a technical degree as a software developer. Responsible for technical operations. Works at Meta for 6 years and has been growing in his career in the Company. Participates of negotiations regarding time amount, time and price of deliverables. Has the responsibility of quality control. Computer engineer and responsible for applications in BrazilSteel operation. Works at Meta for 4 years and has been growing inside the Company. Is responsible for several support systems to the developers team. software Computer engineer and responsible for applications in BrazilSteel operation. Works at Meta for 8 years and all this time in the Brazil Steel operation. Has been growing is his career in the Company. TABLE I Profile of the interviewed participants The interviews were conducted through the strategy of open questions, trying to understand what capabilities influence to ensure the continued operation of outsourcing. It is noteworthy the fact that one of the researchers is a founding partner of the company. Although having no direct management role in the operation under study, there were sought alternatives to minimize his influence on the group of respondents. 8

9 For this, the interviews were conducted by two independent researchers and accompanied by the principal investigator, who had little intervention in the dynamics of the interviews. The interview collection phase was in January The transcriptions were done in a posterior moment and the interviews citations were used equally as they were cited mentioned in the interviews. The content of the interviews were analyzed with the help of the software NVivo and considered as codes the categories drew of literature review. 4 Meta s case: are there distinguished capabilities? We studied Meta s case considering the company as a case of a survival among a population of small and medium sized CT Brazilian companies which mostly merged or were acquired by international companies. We intended to understand Meta s survival through the lens of the studies about providers capabilities. We assumed that capabilities could explain performance and consequently survival of a company. We took as the unity of analysis one of Meta s operation which is the one which last longer in the Company. Meta has been delivering IT services to the main steel company in Brazil (here named SteelBrazil) for more than 17 years, overcoming several stages and challenges. Capabilities to maintain a relationship were evidenced from the case study. These capabilities will be analyzed in the following sections. 4.1 Client relationship management (Contract based-mechanisms. Interpersonal relationships actions, Reputation-based mechanisms, Contract negotiation capability). The current and well succeeded relationship between Meta and SteelBrazil had begun in a period where Meta didn t attend the required level from Steel Brazil s perspective, expressed by indicators such as time of delivery and product quality. In this context, Meta decided that it was needed to develop the excellence standard in their processes to maintain the relationship. Best practices were researched to develop the process improvement such as CMM Capability Maturity Model. At the same moment, time of delivery and product quality were assumed as an organizational commitment, even if these promote operational prejudice. A new relationship had started. 9

10 Other important aspect was the capability of contract negotiation. The more important aspects include showing different ways of achieving the expected results and finding some new points (that weren t discussed previously).this is so important as time of delivery or quality product. Such aspects demand knowledge in depth from the SteelBrazil s projects. In an environment where people work together, the informal relationship is usual to get closer starting even from the provider or from the client enterprise. This informal relationship needs to be managed as an advantage to develop the services as it was required. From the managerial perspective, the informal relationship has more significance than the formal one to pursue and improve results. Since Meta establishes a level of trust with SteelBrazil, it was be able to access new knowledge from strategic projects that were an advantage to better perform the job. The formal relationship was as well very important to express the explicit results obtained. All aggregated value must be communicated by active way for the client. On the contrary, the client will not consider it..., expressed by a Meta s manager. 4.2 Project management capabilities (Capability Maturity Model (CMM), Capability Maturity Model Integrated (CMMI), and the Information Technology Infrastructure Library, IS human resource management capability..) The problem solving should always involve the client for two factors: to generate value from the indicators of the client business and to compromise the client with the final product. Attending these two factors, it will contribute to generate solutions that really aggregate value to the business client avoiding to create only an excellent system. According to one of the Meta s personnel,...if a system is built, applying the best production process of software, and it does not improve the involved business process, sorry for that, but the system was built for nothing. The critical factor for maintaining the relationship process was the time of delivery. According to one of the Meta s personnel, you can have more than ten deliveries for a specific client, although, each one will be evaluated by itself. 10

11 The clients evaluate the time of delivery by the extent of schedule slippage and by the project quality. The lost of the time of delivery is also harmful for the provider enterprise. The loss of product quality is equal disadvantageous for the relationship since to correct mistakes after delivering costs more than to solve problems during the development phase. The team-based environment is composed of many professional characteristics: account manager, coordinator of development, analysts, programmers and others. In general, more open communication between superior and subordinate people facilitates the progress of work since that exchange managers is more difficult than changing technical people. Managers have as principal function to identify talents and promote conditions and job positions where personnel can develop their abilities. Each profile has different level of relationship with the client expressing the leadership in the team behavior. As a value chain of services if one the person does not performs well, the team will reproduce such behavior. When a team works for a long period creates a flexible behavior expressed by harmony and synergy in the job. If people perform different leadership positions in the group in specific situations and it is necessary to change personnel, the team will be flexible without loss of productivity. The worst for a team is the lack of commitment from one person, since his job delay will be harmful for the all performance. Staff rotation has been useful to prevent such problem and the development of person capabilities must be promoted. As the managerial skills are more difficult and lasting to be developed, the management training courses are for exchange of experiences and qualifications of staff. With that, the people get a general view of the business qualifying the whole process of team management. The majority of new personnel comes from indication of new co-worker or friends that in a certain way already had any contact with the provider enterprise. As soon as they start working they receive courses about the business environment and the technical requirements of the client. To standard such the development process as the maintenance of the software is the main objective. In relation to the methodology of software development a manager explains it only serves to set upright the medium of the production development. An advanced programmer tends to be prejudiced using this methodologies. 11

12 4.3 The customer-specific capabilities These capabilities are developed through client-supplier interactions. The first step consists of knowing the business environment, but mostly the technological characteristics of the client business. These learning processes of the client environment are generally done by using organizational documents and it is performed by specialized programmers. The quality of attending the application maintenance calling is oriented by three important factors: a) ability to adapt to a dynamic environment, and in this case there is not a predefined standard for the job; b) ability to diagnose problems effectively, which is essential to deliver an effective attendance, and c) ability to retain employees in maintenance operations, which demands personnel specific characteristics for dealing with high level of routines. To retain this type of personnel is an advantage because it took time for developing client s knowledge. In order to transform the attending process of maintenance applications more structured is applied a standardized process and, also, a documentation of outsourcing attendance. Besides that, different levels of attendance versus callings are performed such as: one problem can be solved remotely and other demands to be locally. Analysis of the interviews suggests that the two major categories depicted in previous studies are applicable to describe different capabilities which have been supporting these 17 years relationship between Meta and Steel Brazil (i.e. Project management capabilities and customer-specific capabilities (WYNEKOOP & WALZ, 2000; ETHIRAJ et al., 2005) Moreover, perception of the interviewees reinforces the idea that human. resources management is a key on managerial capabilities to successful outsourcing. Beyond these aspects, this case shed some light on particular points regarding these two sets of capabilities. First, from the managerial point of view, we understand that aspects related to culture and identity between client and provider must be considered. Second, from the technical point of view, the nature of the projects deliver to the client can 12

13 imply in path dependence and elevate the risk of turn over regarding providers. We discuss above these two points. Regarding the implications of culture and identity to services outsourcing, we understand that mutual learning and alignment on culture, values and leadership between these companies has been influential to support the long term relation. Meta s culture, values and leadership style are strongly embedded into SteelBrazil beliefs. Meta was a star-up when it began to service SteelBrazil. SteelBrazil have been on the leadership not only on its specific industry but also very influential to all Brazilian business leaders. It is also one of the first Brazilian MNEs. Meta improved a style of team leading which have been very well successful on the delivery of effective services. All interviewees mentioned about the high level of team commitment. Team leaders must have technical expertise and they are supposed to work at the frontline as well as at the supervision. Moreover, every project leader has full authority over the project. This management model allows flexibility and favors quick answer regarding the clients needs. We identified on this team management model connections to the sociotechnical approach of quality management. We understand that mutual learning between Meta and SteelBrazil was influential to improve this leadership style on Meta. In terms of technical capabilities, this case suggested that technical path dependence might also explain long term relations between client and provider. In this case, the services were related to the maintenance of legacy applications. Legacy applications are heritages of different stages of former technology development intertwined with updated platforms. This kind of IT system structure is very usual on various companies in Brazil. We understand that this structural condition of the IT system creates by itself the need of avoiding changes on the side of the service provider, considering that the more a system is based on legacy applications it is more likely to need tacit knowledge from the provider to solve problems and build solutions. Final considerations The purpose of this paper was to contribute to the ongoing discussion about capabilities on global sourcing of services, especially considering the competitive environment of the emergent global industry of services providers. 13

14 We investigated the case of a Brazilian service provider which has been an outlier considering the average behavior of IT companies in this country. Most of IT Brazilian companies have been acquired by international companies. This happened after de 90 s in last century, when boarders began to reopen to international trade after the constraints during the years of the military s regime. The methodological choice of studying an outlier is due to the assumption that this case has the potential to shed some light on outsourcing practices in emergent markets, particularly in Brazil. We looked forward understanding why and how this particular company survived and has kept governance over the business. A framework based on studies about capabilities related to outsourcing was considered to undertake case analysis. The findings suggest that previous studies which focus on two sets of capabilities (technical and managerial) to analyze providers performance are partially explicative to understand why and how a Brazilian provider lasts in the market. Beyond extant theory, the case study indicates, from the managerial point of view, that culture, identity and mutual learning between client and provider can be influential to long term outsourcing relationship. From the technical point of view, the case suggests that due to a degree of partially structured IT system on the client perspective, long term outsourcing relations can be justified because of path dependence on tacit knowledge needed to integrate particular requirements solving problems with innovate solutions. References Barney, J. B. (2001). Resource-based Theories of Competitive Advantage: A ten-year retrospective on the resource-based view. Journal of Management, no. 27 (6), Barney, J. B. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management, 17 (1), BRASSCOM. (2010). Brazil IT-BPO Book Brasscon printed edition. Doh, J. P. (2005). Offshore Outsourcing: Implications for International Business and Strategic Management Theory and Practice. Journal of Management Studies, 42(3), doi: /j x 14

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