IT Outsourcing Risks: Empirical Evidence from Bulgarian Service Providers

Transcription

1 December, IT Outsourcg Risks: Empirical Evidence from Bulgarian Service Providers Matilda Alexandrova, PhD Department of Management University of National and World Economy Sofia, Bulgaria Abstract In recent years IT outsourcg is a widespread practice the global busess today. Busess organizations decide to transfer such kd of services to other firms (vendors) search of costrelated and other competitive advantages. Identification and handlg of risks appears to be crucial for IT outsourcg success. The objective of this paper is to identify the ma risks related to IT outsourcg partnerships from the perspective of the service providers Bulgaria on the basis of empirical study. The analysis is based on theoretical grounds provided by the specialized literature and utilizes selected results from a survey of the outsourcg relations between Bulgarian vendor organizations and their clients (outsourcers). The subject of the study was the analysis of the key determants fluencg the formation and development of strategic outsourcg partnerships. Some of these determants act as threats for outsourcg success and their potential effects need to be considered with the risk mitigation strategies of IT outsourcg service providers. Keywords IT outsourcg; risk; service provider; questionnaire survey; Bulgaria. I. INTRODUCTION IT services outsourcg has emerged as a key drivg force the globalized world economy. IT outsourcg has expanded widely the last decade but still the number of empirical studies its doma is not substantial. Some authors note that the nature of the outsourcg relations has evolved [1] and became more than just an teraction between client and vendor [2]. Organizational networks and partnerships demonstrate a potential to be amongst the key drivg forces of the future busess. However, the contradictory success of outsourcg practices durg the last few decades calls for a more comprehensive study of the value added by vendors through the provision of the transferred services. It is commonly recognized that the system of key competences of the service provider appears to be complementary respect of the competences of the service client. This could be explaed by the fact that the vendor makes efforts to develop own technological frastructure and capacity by which to substantially crease the efficiency of outsourced services realization. A strategic partnership this area assumes sharg of the value added between the service provider and the client generated through the attament of comparative advantages. This is realized by a complex of both formal and formal relations between units of the organizational structures of partner organizations. Usually the focus of analysis IT outsourcg is put on the costs and benefits of the partnership as well as the factors fluencg its success. Relatively lower attention is paid to the issues of outsourcg risks that are herent to such busess practices. Indeed, IT outsourcg partnerships bear various types of risks, cases for which are reported by some authors [3, 4, 5]. Such relations became creasgly complex after beg based on a set of composite assumptions. This way, the IT outsourcg partnership success will mostly depend on identifyg and handlg the risks by implementg effective risk mitigation strategies. This paper presents the results of a study of IT outsourcg partnerships Bulgaria which, among other goals, tries to identify the key risks that are herent to such partnerships and fluence their level of success. The analysis reflects the pot of view of the IT outsourcg service providers. The paper reviews shortly the ma literature on IT outsourcg partnerships risks, presents the survey methodology, and the basic results from an empirical study of the opion of managers and experts Bulgarian busess organizations havg IT outsourcg practices. At the end, it outles the degree of importance of IT outsourcg partnership risks the surveyed organizations derivg conclusions about the approaches for effectively handlg such risks. II. LITERATURE REVIEW Outsourcg has progressed a strategic way where collaboration and partnership between the client and vendor are targeted to the achievement of mutual goals which is especially valid for IT outsourcg. From this pot of view, only a longterm relationship based on trust and cooperation can provide gas from sustaable competitive advantages. Many authors assert that the excellence of outsourcg partnership is crucial for the longterm success, however, many cases the partnerg organizations lack the capability to achieve such an excellence [6]. Here we adopt the conception for IT Outsourcg as an act of delegatg or transferrg some or all of the ITrelated busess processes, ternal activities, and specific services to external providers (vendors) who develop, manage, and admister these activities upon agreed performance standards and deliverables accordg to a contractual agreement [7]. In today s networked economy the role of partnerships dramatically creased the busess partnership shifts to a critical organizational resource. It can be defed as a The author acknowledges the fancial support of the Mistry of Education, Youth, and Science, Republic of Bulgaria, and Human Resources Development Operational Programme of the EU (Grant No. D02 540/20.06., Project BG051PO001/ ). 29

2 December, relationship between two entities that entails the sharg of benefits and burdens over some agreed upon time horizon [8]. Other views emphasize on the shapg of the busess relationship upon mutual trust, openness, shared risk, and shared rewards that yields a competitive advantage, resultg busess performance greater than would be achieved by the firms dividually [9]. The key characteristics of the strategic partnership also clude shared risks and rewards, longterm commitment, and coordated jot activities where riskreward sharg appears as an important characteristic of IT outsourcg partnership [10]. Among the most frequently mentioned risks associated to the vendorclient relationship are the overdependency between partners and the mismatch of goals [11]. Another important risk is the conceivable violation of tellectual property rights the course of partnership realization, as well as sharg of knowhow and ternal corporate formation. Such risks can origate from cultural compatibility which reveals through low degree of shared values and goals durg all stages of the partnership development process [2, 12]. Risk analysis of IT outsourcg practices has been implemented from different perspectives. One such perspective outles eleven risks identified by exploration of participants (clients and vendors) the IT outsourcg market [13]. Mostly, emphasis was put on the client pot of view where a range of hidden costs of IT outsourcg has been uncovered [14]. Various management perceptions about IT outsourcg risks as well as risks mitigation strategies were explored usg qualitative research and case studies [15, 16, 17]. The perspective of the service provider is much less frequently considered the specialized literature. For example, a study vestigates the role of a vendor a longterm partnership leadg to a conclusion that the handlg of IT outsourcg risks is herent to the overall management process [18]. Based on the case study method, Das Aundhe & Mathew [19] identified three types of risks emergg to the service provider macroeconomic, relationshipspecific, and projectspecific. Several factors fluencg the degree of risk have been specified, namely relationship maturity, nature of contract, nature of service or project, and nature of client. Some authors dicate a range of critical risks related to the outsourcg of formation system function, among which the potential loss of: control, flexibility, qualified personnel, and competitive advantage formation management [20]. It is commonly considered that the expanded transfer of IT functions dicates an creased role of service providers nowadays who are assumed to bare more risk than the outsourcers [21]. Special attention is put on application development [22] where a range of risk determants are identified, e.g. project type, project size, uncertaty of the requirements, trag of providers personnel, experience of the client MIS, experience of the client outsourcg, size of client, tensity of competition at both client and vendor, contract type, etc. Modelg based on a fuzzy framework is also used for risk assessment respect of both partner organizations where key risk dicators are outled [23]. From the pot of view of busess auditg Brandas [24] provides a categorization of major risks on both client and vendor dimensions and derives ma objectives of an IT outsourcg audits targetg the evaluation of efficiency and effectiveness. Outsourcg projects defitely have trsic risks which are likely to crease due to the project complexity and busess networkg patterns. Considerg the vendor perspective, Hazel [25] identifies overoptimistic expectations on schedule and budget durg the outsourcg project planng stage which, however, leads to creased risk at the realization phase a highly competitive environment. Even though a range of studies have treated various issues of IT outsourcg risks it can be stated that empirical evidence is occasionally provided support of one view or another. III. RESEARCH METHOD AND DATA A. Survey Data Source The present study is based on the results obtaed by depth terviews conducted the period This tegrated approach of case study and survey research conveyed empirical formation from key experts and managers that are aware of IT outsourcg practices. The subject of the study was the analysis of the key success factors fluencg the formation and development of strategic outsourcg partnerships between Bulgarian vendor organizations and their clients (foreign companies). The issues of risks were considered some detail regardg a set of specific sources of risks however, the macroeconomic environment risks (such as taxes, subsidies, exchange rate fluctuation, governmental policies, etc.) were beyond the scope of this research. The units of the survey were defed as organizations that have two or more IT outsourcg projects realized (or, currently workg for 2+ ternational client organizations). Because of the specific character of these organizations the sample was selected by the purposive samplg method usg formation from the websites of: Bulgarian Investments Agency, CEEOA, ITO catalogue of IT outsourcg companies the CEE region, etc. The respondents respective organizations have key managerial or expert positions at various levels and are directly responsible for the accomplishment of outsourcg partnerships. Initially, 85 representatives from companies volved IT outsourcg have been contacted by telephone. However, only 57 of them have agreed to participate the scheduled depth terviews and provided a valid observation. The length of the terviews varied between 40 and 90 mutes, sce these terviews were semistructured and a discussion with the respondent developed some cases. This was spired situations when especially terestg issues have been considered throughout the terview. The survey provided valuable sights about the nature of the IT outsourcg relationship motivations, evaluations, problems, reasons and causal effects, etc. For the purpose of data collection a specialized strument for empirical study of outsourcg partnerships was developed at the earliest stage of research [26]. The emphasis was put 30

3 December, maly on the characteristics of the partnership itself rather than on the characteristics of these organizations. A predesigned questionnaire was used to record targeted data by 20 questions, although additional relevant formation was asked durg the depth terview. These questions allowed the operationalization of the response variable and the determants of outsourcg partnership as defed the model. The concept dicators extracted by the respective sets of items (derived from the survey) have been verified and prepared for further data processg and analysis of results. The operationalization of the concept dicators the survey was performed through a multivariate (multiitem) method where for each dicator few (1 to 4) questions were volved. For the standardization of primary data a unified 7 rank Likert scale for the answers was adopted which allowed summarization of the answers on the items to extract one empirical measure (variable) for each concept dicator. Rank 7 was chosen to code the opion expressed at the maximum level of the scale (e.g. maximum degree of agreement with a statement) and rank 1 respectively to code the mimum level of the scale. B. Sample Overview For each sampled organization a set of characteristics was obtaed order to describe its profile legal status (type of firm), size (number of employees), type of the ma activity, foreign participation its capital, etc. Accordg to their legal status, shareholdg and limited responsibility companies prevail (about 43% for each of them) and about one tenth are the sgleowner limited responsibility companies. The size of organizations captured by the number of the employees also varies considerably about one third (34%) are big enterprises (over 250 persons accordg to Bulgarian Law on SMEs); only 10% are microenterprises (up to 10 employees); the rest of respondents are from the category Small and Medium Sized enterprises. In the same time, about two thirds of the respondents declare that they regularly hire parttime personnel. A typical feature of many Bulgarian IT companies is the presence of foreign shareholders: about 29% of the firms volved survey are mixed capital enterprises and about 16% are companies entirely owned by a foreign vestor. This undoubtedly provides these organizations with options for transfer of contemporary managerial and technological knowhow busesses with hightech applications. About 40% of the organizations classify their ma activity as beg the software dustry (software development and/or implementationatclient) and about 25% have operations database management services, back offices or call centers IT support, etc. With IT frastructure outsourcg the service provider is volved the operation and matenance of the service customer s IT systems, e.g. it takes responsibility for the customer s computer and/or communications systems. Shared hostg is related to the provision of data management services by a specialized provider which can be partially or fully standardized (e.g. platform operations). TABLE I. SHARE OF OPERATIONS RELATED TO COMPONENTS OF IT OUTSOURCING AT THE RESPONDENT ORGANIZATIONS Outsourced components Share of operations related to outsourcg Over 40% Over 60% Over 80% to 60% to 80% to 100% Total IT frastructure Shared hostg Application service provision Application hostg Total Another typical form of IT outsourcg is application service provision [27] where some applications predomantly standardized software are outsourced to an external provider as part of a special agreement. The provider deals with the development, operation and matenance of the software and is responsible for its utilization (e.g. CRM software). A special case of IT outsourcg is application hostg where already customized software is implemented by the provider to suit the needs of a specific customer (the so called onetoone approach). Table I presents the distribution of the categorization of respondents to the general IT outsourcg categories accordg to the share of outsourcg services their total annual operations. IV. RESEARCH RESULTS AND DISCUSSION As outled the literature review, each IT outsourcg partnership is accompanied by a complex of risks that origate from a variety of sources. It is difficult just one survey to cover all types of potential risks. On the basis of case studies analyses and depth terviews the ma sources of potential risks have been identified and cluded for evaluation the survey strument. The question however imposed a restriction on the respondents to identify the 3 most important risks amongst a set of options presented to them. The set emphasized on risks herent to the partnership from the pot of view of the service provider. Table II contas the frequencies of responses summarized by a multiple response technique on the basis of 84 total responses from the 57 representatives of service providers. The most frequently dicated risk is the lack of sufficient formal warranties for the fulfillment of the contracted outsourcg tasks with the partnership (almost two thirds of the respondents). This could be explaed by a lack of sufficient experience of Bulgarian service providers with ternational outsourcg service level agreements, which is however not likely to be valid for the foreign controlled companies. The latter typically have higher level of experience the monitorg of the execution of IT outsourcg agreements they can fetune the contract clauses and renegotiate the current contracts order to amplify the formal warranties. 31

4 December, TABLE II. SOURCES OF RISKS WITH IT OUTSOURCING PARTNERSHIPS (IDENTIFIED BY SERVICE PROVIDERS) Source of risk Insufficient knowledge about the specifics of the outsourced service Insufficient speed of implementation of new technologies by the service provider Ineffective knowledge transfer and coordation between partners Percent of responses Percent of cases Ineffective communications between partners Insufficient formal warranties for the fulfillment of contracted outsourcg tasks Low level of mutual trust Ineffective procedures for solvg emergg problems or conflicts Curcumstances that facilitate easy replacement of the provider by the client Increased ternational competition the area of hightech services outsourcg Total Another risk clearly identified by half of the respondents is related to the feasible circumstances that facilitate the replacement of the service provider by the client. This evidently puts the vendor quite an unfavorable position compared to the outsourcer. Such a situation is narrowly related to the market conditions characterized by a severe ternational competition the area of hightechnology services outsourcg (identified by about one third of the respondents). Obviously the factors of globalization play a significant role the outsourcg busess which concerns completely the Bulgarian participants this form of ternational busess cooperation. Two other risks are frequently dicated by the respondents effective procedures for solvg any emergg problems or conflicts (39%) and effective communications between partners durg the partnership execution (36%). These risks are related to the persistent pressure for achievement of the results on time and without any deviation from the contracted quality. In this respect, any communication gaps between outsourcers and vendors can duce such risks they typically origate from a lack of communication plan as well as unclear statements about the objectives, processes, and timeles. The risk from any effectiveness of the knowledge transfer and coordation between partners is also identified, albeit by somehow lower frequency (32%). This common risk origates from the lack of adequate and relevant bilateral formation about the availability and access to uptodate highly productive technology by any of the partners. Also, we can assume that this risk is related to mismatches the organizational cultures of the partners the offshore context of the partnership. The level of IT outsourcg partnership risk is commonly considered as reflectg the impact of one particular factor, namely, the level of knowledge and skills of the human resources of the IT service provider. Additionally, the level of technological capacity of the provider was identified as a complementary critical factor. These factors were cluded the questionnaire strument for targeted evaluation by the respondents as key factors of the partnership success. They were considered to have a critical role for providg two features of the delivery: (i) high performance results and (ii) high outcome results. TABLE III. ROLE OF KEY COMPETENCES OF THE PERSONNEL OF IT SERVICE PROVIDERS (% OF RESPONDENTS EVALUATING THE LEVEL) Level Knowledge and skills level solutions for standardization solutions agast system failure Very low Moderately low Slightly low 7.1 Neutral Slightly high Moderately high Very high 75.0 Level solutions for security of the formation exchange Capacity for archivg and restorg of corporate formation Policy towards a contuous technological renewal and upgrade Very low Moderately low Slightly low 14.3 Neutral 21.4 Slightly high Moderately high Very high For this purpose, a set of 6 terconnected items have been defed on the basis of the prelimary study of the key competences and capacity of the vendor. Table III contas the distribution of answers to each of the 6 items evaluatg the role of these key competences. These results should be considered cautiously light of the fact that the responses have been obtaed from the representatives of vendor organizations this way, they have been put apposition to selfevaluate the roles of their own organization competencies. The respondents provide a firstdegree evaluation about the role of the human capital and related organizational knowledge and expertise (75% dicatg a very high role). Obviously, from their pot of view this component is the most important for the mitigation of overall risk and thus creasg the prospects for success of IT outsourcg partnership. Another key competence is evaluated at almost at the same level (89% for moderately high and very high ), namely, the availability of technological solutions for providg high security of the formation exchange by the vendor. In light of this, it is not surprisg that Bulgarian vendor organizations often declare a focus on the development of competitive 32

5 December, advantages their technological capacity and related competencies. The evaluation regardg the last item implementation of policy towards perpetual technological renewals provides support to this commonly recognized statement (71% for moderately high and very high role). Last but not least, the emphasis on technological advancement, effective personnel trag and retention appears to be among the core tools risk mitigation strategy of Bulgarian It outsourcg service providers. V. CONCLUSION This paper presents a selection of results obtaed by probation of a methodology through which among other goals an evaluation of the sources of risks related to IT outsourcg partnerships was conducted. Along with the contemplation of the status of these partnerships, the application of this methodology aims supportg the identification of the most important risks accompanyg the development of a sustaable IT outsourcg partnership. It was observed durg the study that risks mitigation approaches are associated with the shift from a formal contractual relationship to a more relational governance that creates value for both partners. It should be noted that part of the survey has been conducted durg the first years of the global crisis which naturally affected many of the responses and evaluations. From this pot of view, a future perspective of research the field should emphasize more on the effects (favorable or adverse) of the crisis on the development of IT busesses CEE region and emergence of respective risks. The future research should consider the turbulent environment of IT outsourcg CEE countries and its potential impact on the achievement of global competitiveness of IT busesses. This study attempts to contribute to the existg research IT outsourcg to CEE region by explorg some issues of risk sources that are expected to substantially fluence the development of IT outsourcg partnerships with a strategic dimension. It should provide a basis for comparison of local practices with the world experience this area as well. Havg md these itial achievements for Bulgarian IT services providers, an overall model could be developed for a reliable evaluation of the impacts of various risks on the success of the outsourcg partnerships. This model should map the crements the relationship maturity associated to the implementation of various risks mitigation strategies. REFERENCES [1] V. Grover, M.J. Cheon, and J.T.C. Teng, The effect of service quality and partnership on the outsourcg of formation systems functions, Journal of Management Information Systems, vol.12 (4), pp.89116, [2] F.W. McFarlan and R.L. 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