Effect of IT outsourcing on business IT alignment in manufacturing companies

Transcription

1 Master thesis Marcus M. Veen (student nr ) June 2015 Faculty of Science Information Studies track Business Information Systems Prof. Dr. Tom van Engers Effect of IT outsourcing on business IT alignment in manufacturing companies Supervisors: Dr. Guus Delen and Drs. Ronald Kleijn

2 Business IT alignment is everyone rowing in the same direction Indian snakeboat Search for the connection and remove what divides Effect of IT outsourcing on business IT alignment in manufacturing companies Page 2 of 69

3 Abstract Companies in the western world who outsource their IT to lower wage countries are becoming the norm, and this can have an effect on the performance of the IT department and business results. This thesis researches this effect in manufacturing companies, the origin of modern industry. Eight international manufacturing companies are analysed by measuring and comparing IT outsourcing characteristics and the business IT alignment maturity, the persistent number one concern of chief information officers. In this context business IT alignment is defined as everyone rowing in the same direction, which is a complex challenge in our changing world. This requires a common direction and mutual goal which is not self evident in a networked organization spread across the globe with different cultures and languages. IT outsourcing is a dynamic process and can be viewed as a lifecycle with various phases, and occasionally companies back-source their IT after failure. Based on the eight cases and supported by literature this research indicated that the average business IT alignment of manufacturing companies decreases as a result of IT outsourcing during the transition of personnel, hardware and software. Once the service provider has taken over the IT related activities and a new equilibrium has been accomplished in the new networked organization, the business IT alignment starts to increase again, but slowly. Further the research indicated that it is very challenging to regain the original business IT alignment maturity level after IT outsourcing, and most manufacturing companies will not succeed, which has a negative effect on business performance. To conceptualize this effect a longitudinal model is introduced explaining the business IT alignment alteration in the course of the sourcing lifecycle. Recuperation of this effect requires an organization with a professional client-customer relationship, and the research indicated that informal communication structures supported by benevolent relationships are crucial. The interpersonal relationships showed to be the dominant factor to align this new networked IT organization with the business and improve company performance. As human beings are the common denominator of all organizations, the negative effect of IT outsourcing on business IT alignment indicated a similar effect for other main industries based on literature. Keywords Business IT alignment, IT outsourcing, change management, manufacturing companies Effect of IT outsourcing on business IT alignment in manufacturing companies Page 3 of 69

4 Table of contents 1 Introduction Theoretical background IT outsourcing Sourcing lifecycle Cultural differences IT outsourcing maturity Outsourcing failure Business IT alignment Business IT alignment definitions Business IT alignment maturity Interventions to improve business IT alignment Possible influencing factors Chief information officer Informal organization structures Business IT alignment in collaborative networked organizations Universal principles Changing environment ERP in manufacturing companies Governance model Case study Methodology Problem discussion Approach Research question Research design Case selection Conceptual framework Derksen research model Research measurements Research results Research opportunities Analysis and results High level company description Business IT alignment maturity results Business IT alignment Tata Steel Europe Business IT alignment all cases Business IT alignment in other industries IT outsourcing results IT outsourcing Tata Steel Europe IT outsourcing all cases Influencing factors Longitudinal perspective Verification of results Effect of IT outsourcing on business IT alignment in manufacturing companies Page 4 of 69

5 6 Discussion Sourcing alignment lifecycle model Limitations Future work Conclusions References Appendix 1: Interview Barry Derksen Appendix 2A: Questionnaire to measure business IT alignment Appendix 2B: Questionnaire to measure IT outsourcing Appendix 2C: Questionnaire to verify possible influencing contingency factors Appendix 3A: Business IT alignment detailed results Tata Steel Appendix 3B: Remarkable quotes during interviews Tata Steel Appendix 4: Business IT alignment detailed results all cases Appendix 5: IT outsourcing detailed results all cases Appendix 6: Possible contingency factors results Appendix 7: Verification questions cases Appendix 7A: interview notes company Canoe Appendix 7B: interview notes company Kayak Appendix 7C: interview notes company Skiff Appendix 7D: interview notes company Galley Appendix 7E: interview notes company Sampan Appendix 7F: interview notes company Gondola Appendix 7G: interview notes company Longboat Appendix 7H: interview notes company Snakeboat Effect of IT outsourcing on business IT alignment in manufacturing companies Page 5 of 69

6 1 Introduction Working as a business analyst in the IT department of Tata Steel Europe, an international manufacturing company, my role is to balance the business process requirements and possible IT solutions. This balancing encompasses the interface between the business and IT departments. In literature this is known as business IT alignment (BIA), a complex process and extensively researched subject within information science. Tata Steel Europe already outsourced "captive" their application development and support partially to an affiliated company, and is preparing to increase the outsourcing volume significantly. Tata s main aim is a more flexible organization, need for technological innovation due to ageing of personnel and cost reduction. The IT department consists of approximately 650 internal employees responsible for all company IT including infra, hardware, software and services. The business operations are performed in 25 larger and smaller plants mainly in the United Kingdom and the Netherlands with more than employees in total. In this context my interest in the effect of IT outsourcing (ITO) on the BIA is both professionally as well as an academic student. According to Chan et al (2007) those organizations that successfully align their business strategy with their IT strategy will outperform those that do not. BIA has also been shown to be a crucial predictor of superior business process performance, IT success, and competitive advantage (Schlosser, 2010). However, practice has demonstrated that successful ITO is not self evident (Delen, 2009) as companies regularly back-source after failure. During the thesis design phase a literature review was performed to investigate the mechanism how ITO affects BIA. It appeared that the combination of these two subjects is a relevant however not extensively researched topic. As BIA is such a thoroughly studied and complex topic it is surprising how little this is related to ITO considering outsourcing is becoming the norm. One of the first studies in this area was performed by Pollalis (2003) in the banking industry who concluded that ITO could affect business performance positive if IT is well aligned to the business requirements. This suggests that organizations which have a low level of BIA maturity, this will remain the same as a result of ITO. However, properly aligned organizations actually do benefit positively from ITO. Schlosser (2010) studied how companies internal alignment and governance processes impact the service quality received from an external ITO provider. Using data from a 154 firms he concluded that good BIA leads to a better and more accurate provider service control process improving service level agreements. Considering IT governance, Schlosser (2010) concluded that the level of the client s importance to the IT provider positively affects the implementation of governance processes in terms of control mechanisms. This study was performed in the German banking industry. A more recent case study of Silvius (2013) compared four companies to observe the relationship between BIA and ITO. The results showed that two of the cases achieved a higher level of ITO relationship in comparison than the other two cases. The overall conclusion of Silvius (2013) is that there are indications that ITO influences BIA and that this effect is generally positive. However, the ITO model used by Gottschalk and Solli-Sæther (2006) appeared too simple to present the ITO relationship properly. A more extensive study is performed by Derksen (2013) who researched in a PhD dissertation the impact of ITO on BIA. Derksen analysed cases in Dutch organizations and tested the following hypothesis: IT outsourcing has a negative impact on business & IT alignment. The hypothesis was rejected, and the main conclusion was that ITO does not negatively impact BIA maturity. Further was concluded that ITO can have a small positive influence on BIA maturity, based upon the correlation between degree of ITO and BIA. This is however different in several situations from the contingency perspective (for example industry and size of organization). Overall, the impact is small, although statistically significant. Based upon the research results, ITO is not in favour but also not negative for BIA maturity. To refine the dissertation of Derksen his research model is used to investigate the effect of ITO on BIA specifically for manufacturing companies, as differentiation on type of industry was suggested as further research. For this purpose eight international manufacturing companies are investigated using a quantitative method supported with a qualitative verification to measure the effect of ITO on BIA. This revealed a more dynamic perspective how BIA is influenced over time. Effect of IT outsourcing on business IT alignment in manufacturing companies Page 6 of 69

7 2 Theoretical background In this chapter a literature review of both IT outsourcing and business IT alignment is elaborated as theoretical background. In addition, the possible influencing factors which could possibly influence the effect of IT outsourcing on business IT alignment are explored. 2.1 IT outsourcing The main drivers for companies to outsource their IT are generally cost savings (Lacity et al, 2009), strategic and lack of knowledge (Schimmel, 2010). Application development, IT infrastructure and helpdesk are the most commonly outsourced services (Miozzo and Grimshaw, 2005). According to Gwebu et al (2010) it is not self evident that the expected economic value from IT outsourcing (ITO) are delivered at firm level, as the impact on efficiency of operating activities and value chain are mixed. Therefore Gwebu et al (2010) highlight the importance of considering various types of ITO and selecting the appropriate evaluation performance metrics to measure the efficiency improvements. Also IT costs are often not transparent, Gartner (2003) concluded in a benchmark that IT costs are on average 30% more than expected due to hidden costs outside the IT department which will be excluded from the sourcing contract as a result. According to a recent Gartner study (2014A) organizations that outsource their IT are increasingly focusing on productivity and quality, and not just on labour cost reductions. This is the result of the second or third sourcing cycle, where lessons learned are taken into account. As outsourcing maturity is growing and the complexity of IT is increasing, multiple service partners are often included, referred to as multi sourcing. This also requires a stronger focus on risk and security management especially in a cloud context being less in direct control of assets and activities. In figure 1 the percentage is represented of ITO spend of the total IT spend per industry globally. For manufacturing this is 25%, and it is expected that these figures will only grow in Europe, United States and Asia in the next years. Figure 1: IT Outsource percentage of IT spend (Gartner, 2014A) Sourcing lifecycle The Dutch IT outsourcing expert Delen (2009) has defined ITO as "the transfer of service, where if applicable, the accompanying employees and resources who are transferred to specialised service provider and consequently the rendering back of those processes by that provider as services for the duration of the contract at an agreed-upon level of quality and a financial compensation structure". Effect of IT outsourcing on business IT alignment in manufacturing companies Page 7 of 69

8 Delen had a leading role in the Dutch platform for outsourcing (PON 1 ) which introduced a sourcing lifecycle (PON, 2006) describing the five phases as reflected in figure 2 below. Figure 2: The PON sourcing lifecycle (PON, 2006) A short description of these five phases is included in table 1 below based on Delen (2009). # Phase Description 1 Decision taking Company considers potential IT outsourcing with as most common factor the reduction of costs and improvement of quality. 2 Provider selection The customer makes a selection of IT service providers based on facts and commercial insights, commonly using the information service procurement library (ISPL). 3 Transition Three sub phases can be distinguished: -Unbundling: separation of personnel, hardware and software -Transferring: transfer of services to service provider (including accompanying resources) -Transforming: transformation of services and adjustment of resources in service providers environment and capabilities. 4 Services Ongoing process where both parties manage services from their individual perspectives, also defined as demand and service management. 5 Contract termination The sourcing contract is terminated after a pre determined period has expired, or prematurely in case of discontent. Table 1: Five phases of PON sourcing lifecycle (Delen, 2009) To support the success of the sourcing lifecycle Delen (2005 and 2012) has defined nine controllable success determinants which are listed below: 1. Working according to the transition plan; outsourcer as well as service provider, 2. Managing the business case for outsourcing, 3. The service supplier should manage his own business case, 4. Staff transfer of outsourcer, 5. Assets transfer of outsourcer; hardware, software and accompanying knowledge, 6. Demand management; ability to manage the service provider, 7. Retention of expertise; to support back-sourcing or changing from service provider, 8. Communication inside the outsourcer s organization with all stakeholders, 9. Communication inside the vendor s organization with all stakeholders. 1 Effect of IT outsourcing on business IT alignment in manufacturing companies Page 8 of 69

9 After the sourcing lifecycle is completed, the outsourcing company has the following three options: Extend the contract and continue with the service provider, Transfer the sourcing contract to a new service provider, Back source the IT services from the service provider Cultural differences Collaboration and communication between the outsourcer and service supplier will be affected by cultural differences during the outsourcing lifecycle. According to Gartner (2014) India will remain the largest supplier despite emerging capacity in other regions such as Eastern Europe. Hofstede (2002) has introduced five dimensions to measure the cultural differences being: Power distance index, Individualism versus collectivism, Masculinity versus femininity, Uncertainty avoidance index, Long term orientation versus short term normative orientation. Considering these dimensions and anticipating on them through the sourcing lifecycle, they could attribute to sustain the relationship and improve mutual understanding. These dynamics have been studied by Jebli (2014) who concluded that cultural differences are a major challenge in an offshore context. Intercultural differences in offshore virtual teams are not only expressed through electronic communication but also through the way of perception and execution of daily work tasks. Jebli (2014) emphasizes the importance of observational learning which can support a better understanding of other cultures in the team and a sense of control regulation for commitment and agreement. He also highlighted the importance of work satisfaction and recognition by creating autonomous rules to adjust control regulation IT outsourcing maturity To measure ITO considering both parties involved in the contract, Gottschalk and Solli-Sæther (2006) have introduced a maturity model describing three stages as reflected in figure 3 below. Figure 3: Maturity model for ITO Gottschalk and Solli-Sæther (2006) In the ITO maturity model of Gottschalk and Solli-Sæther (2006) the three stages of growth are sequential and occur as a hierarchical and not easily reversed progression involving a broad range of activities and structures. Effect of IT outsourcing on business IT alignment in manufacturing companies Page 9 of 69

10 Also eleven benchmark variables are suggested which are applicable per individual stage; these are listed below in table 2. # Variable 1. Cost 2. Resource 3. Partnership 1 Economic benefit Cost minimization and operational efficiency Business productivity, technology innovation Business benefits, mutual goals 2 Primary transactions Infrastructure Applications Joint investments 3 Contractual completeness Specified obligations Key competence, critical projects, access to Profit sharing, personnel exchanges resources 4 Vendor behaviour control Service level agreements Project performance Strategy implementation service quality 5 Demarcation of labour Procurement Innovation projects Continuous innovation 6 Core competence Client defines technology Vendor is regarded as a Co-developing business management 7 Vendor resource exploitation requirements strategic resource processes Excellent operations Technology initiatives Complementary, capabilities, skills, competences & methods 8 Alliance exploitation Account manager; IT Operations & business Business manager manager manager 9 Relationship exploitation Inter firm information Joint planning Relational norms sharing 10 Social exchange Low Medium High exploitation 11 Stakeholder management Economic interests has priority Recognizing a number of stakeholder groups Balancing interests Table 2: ITO bench mark variables Gottschalk and Solli-Sæther (2006) According to Gottschalk and Solli-Sæther (2006) the critical ITO success factor to manage an outsourcing relationship is "to exploit the opportunities and avoid the threats for which a mutual understanding of their relationship stage is a prerequisite". If both parties agree to move to the next step they can join their resources to identify and realise the benefits Outsourcing failure Barthémely (2003) has introduced seven deadly sins underlying most failed outsourcing efforts based on a survey of nearly one hundred cases in Europe and the United States. These seven sins are sequentially ordered, dividing the outsourcing into three stages. These are the original idea, beginning of relationship and changing vendor. Barthémely (2003) has provided also the lessons learned for each individual deadly sin which are reflected in table 3 below. # Deadly sin Lesson learned Time table 1 Outsourcing activities that should not be outsourced Only activities that do not belong to the core business can be safely outsourced. The core vs. non-core approach can be implemented both at the firm and activity level. 2 Selecting the wrong vendor 3 Writing a poor contract Outsourcing clients should look for vendors that are able to provide state-of-the-art solutions and are trustworthy The contract is the main tool to establish a balance of power in outsourcing relationships. Good contracts have four characteristics. They must be precise, complete, balanced, and flexible Original idea to outsource Effect of IT outsourcing on business IT alignment in manufacturing companies Page 10 of 69

11 4 Overlooking personnel issues 5 Losing control over the outsourced activity 6 Overlooking the hidden costs of outsourcing 7 Failing to plan an exit strategy Loss of key employees and lack of commitment can seriously threaten the viability of outsourcing efforts. However, good communication and ethical behaviour towards employees can help avoid such problems In order to keep control over outsourced activities, clients must retain a small group of qualified managers. An active management of the vendor is also crucial. The hidden costs (i.e., search, contracting, and managing costs) can threaten the viability of outsourcing efforts. Hidden costs are likely to be lower when commodities are outsourced. The end of the outsourcing contract must be planned from the outset. Building reversibility clauses into the contract is crucial. Beginning of the relationship Vendor switch or reintegration of the outsourced activity Table 3: Seven deadly sins of outsourcing and lessons learned, Barthémely (2003) Barthémely (2003) emphasises that some sins are "deadlier" than others. The mistakes "outsourcing activities that should not be outsourced", "writing a poor contract," and "failing to plan an exit strategy" have appeared to be the most frequent. The main message of Barthémely is that some outsourcing efforts are already doomed to fail even before the actual relationship with the vendor started. And to be successful companies need to accumulate the required outsourcing expertise to avoid these seven deadly sins. In additionally the hidden costs of outsourcing are often not indentified and Barthémely (2001) introduced following four categories: Vendor search and contracting, Transitioning to the vendor, Managing the outsourcing effort, Transitioning after outsourcing. As cost savings are one of the main reasons for IT outsourcing (Lacity et al, 2009) these hidden costs should not be underestimated (Barthémely, 2001) and efforts should be made to reduce and include these to calculate a more realistic business case. Summary IT outsourcing Most common IT outsourcing projects are initiated to realise cost saving targets (Lacity et al, 2009) starting with application development, IT infrastructure and helpdesk (Miozzo and Grimshaw, 2005). In some industries the total outsourced IT spend is already exceeding 30% (Gartner, 2014A) and these figures are expected to grow in future. IT outsourcing introduces a lifecycle Delen (2009) with five different phases and a number of success determinants. Once the cycle is complete typically the contract is extended or transferred to a new service provider, or alternatively back sourced. The level of ITO can be measured, for example using the model of Solli-Sæther (2006) and is influenced by cultural differences as the sourcing partners are often off shore parties driven by lower wages. There are many described cases were sourcing failed and Barthémely (2003) has described seven deadly sins explaining the underlying most failed outsourcing efforts, and mentioned the hidden costs. Effect of IT outsourcing on business IT alignment in manufacturing companies Page 11 of 69

12 2.2 Business IT alignment Henderson and Venkatraman (1993) have introduced the strategic alignment model (SAM) with the main message that IT strategy should be aligned with business strategy to become a successful company. This model (see figure 4 below) defines four fundamental domains of strategic choice to leverage information technology for transforming organizations being: Business strategic choice, Information technology strategy, Organizational structure and processes, Information technology infra structure and processes. Figure 4: Strategic Alignment Model, Henderson and Venkatraman (1993) The strategic alignment model has been the basis for many successful pieces of research aiming to realise a maximum value from IT investment (Maes et al, 2000). This mechanism is commonly defined in information science as business IT alignment (BIA) Business IT alignment definitions Two decades after the strategic alignment model (Henderson and Venkatraman, 1993) was introduced BIA is still a very much a live topic within information management, supported with many studies. In table 4 below a number of BIA definitions are listed in chronological order as reference. Business IT alignment definition Author The mapping between IS strategy and business strategy so that IT is deployed Baets (1992) for supporting competitive advantage The allocation of IT budgets such that business functions are supported in an Henderson and optimal way. Venkatraman (1993) The degree of congruence of an organization's IT strategy and IT infrastructure Broadbent and Weill (1993) with the organization's strategic business objectives and infrastructure. The degree to which the IT mission, objectives, and plans support and are Reich and Benbasat (1996) supported by the business mission, objectives and plans. The situation that occurs when IS functions are amalgamated with the most Chan et al (1997) fundamental strategies and core competencies of the organization A continuous process, involving management and design sub processes, of Maes et al (2000) consciously and coherently interrelating all components of the business/it relationship to contribute to the organization's performance over the time. The process of achieving competitive advantage through developing and Duffy (2001) sustaining a symbiotic real relation between business and IT. Effect of IT outsourcing on business IT alignment in manufacturing companies Page 12 of 69

13 A state where IT is applied in an appropriate and timely way, in harmony with Luftman (2003) business strategies, goals and the needs. Managing the resources such as people, technology, and outside resources to Moody (2003) provide a set of IT services and capabilities that are in line with the needs and priorities of the businesses. Ensuring that every single action performed by IT individuals is focused on Senn (2004) building and delivering shareholder/ stakeholder value by supporting business operations and/or achieving business goals. Alignment is the business and IT working together to reach a common goal. Campbell (2005) Strategic alignment is everyone rowing in the same direction. Abraham (2006) The process to make the services offered by IT support the requirements of the Santana Tapia (2009) business - whether such services are offered individually by one participant in the collaborative networked organizations (CNO) or collaboratively by the entire network - so that value is created for the participating organizations of the CNO. Table 4: BIA definitions There is also criticism on BIA, for example Ciborra (1997) questioned the commercial motives of Henderson and Venkatraman and referred to the scientific paradigm of the hard sciences. Also Chan et al (2007) were critical and argued that corporate strategy is often unknown, unclear or difficult to adapt, and therefore alignment with IT strategy is hard. However, according to a recent international study of Derksen and Luftman (2014) the perennial number 1 concern of information managers in Europe but also world wide is still business IT alignment Business IT alignment maturity Being such an important topic various models have been introduced to measure the BIA maturity to make it tangible and comparable. The model of Luftman (2000) is broadly accepted and used widely for the purpose to measure the BIA maturity, and in this context it is quoted in hundreds of scientific information science articles. The BIA measurement model of Luftman uses six different business IT alignment maturity criteria. These are communications, value measurement, governance, partnership, scope & architecture and skills & competences. Each individual criterion can be measured using a number of characteristics, and is assessed on five maturity levels as reflected in figure 5 below. Figure 5: Six BIA maturity criteria and five maturity levels, Luftman (2000) Effect of IT outsourcing on business IT alignment in manufacturing companies Page 13 of 69

14 The five maturity levels of business IT alignment as proposed by Luftman are: 1. Initial/ad hoc process, 2. Committed process, 3. Established focused process, 4. Improved/managed process, 5. Optimized process. In figure 5 the differences of these maturity levels are explained per individual criterion. According to Luftman (2000) most organizations are at level two of this maturity scale, and this alignment maturity assessment provides a vehicle to evaluate where an organization is and where it needs to go to attain and sustain BIA. In a succeeding research using the same maturity scale seven years later Luftman and Kempaiah (2007) conclude that most organizations are at a remarkably consistent level of three suggesting improvement, however BIA is still a persistent issue according to Derksen and Luftman (2014) Interventions to improve business IT alignment Poels (2006) wrote a PhD dissertation to investigate which interventions lead to a better alignment between business and information technology studying several cases in leading financial service providers. Poels (2006) defines BIA as "the best possible use of IT resources to meet enterprise objectives". He selected 12 interventions which improve the BIA and arranged these into three different categories which are briefly described below. Interventions that lead to a better dialogue as there are many formal and informal relationships the business and IT service provider. Dialogue should connect the strategy of the firm to relationships between IT projects, and a chief information officer (CIO) could translate business goals to into IT opportunities especially in a multidisciplinary environment. Also increasing the improvement of power on the business demand side appeared successful. Interventions that improve business economics, for example by making IT costs of employees and other resources transparent. In addition, organising IT portfolio management and IT investment procedures based on a business case improve the BIA. Interventions that strengthen the IT core competencies, for example position in IT architecture properly is important. Additionally by awarding multidisciplinary team performance, stimulate and initialising experiments and establish IT wards will support the maturity of BIA. Also re-organising IT core competencies and outsourcing the remaining could contribute. Comparing these interventions with the criteria of Luftman (2000) the methodologies overlap, however in the opinion of Poels (2006) these interventions are the most critical influencing BIA. In general Poels found out that the size of the organization did not influence BIA, and eagerness to learn and act on outcome did have a positive affect on the extend of BIA. Summary business IT alignment BIA was introduced by Henderson and Venkatraman (1993), and is still a persistent issue (Derksen and Luftman, 2014). To measure BIA maturity measurement the model of Luftman (2000) is a commonly used and accepted model using six criteria being communication, competency/value measurement, governance, skills, scope/architecture, and partnership measured on 5 levels. Poels (2006) introduces three interventions which can improve BIA focussing on the dialogue, business economics and strengthening the IT core competencies, and concluded that the size of the organization did not influence BIA. Effect of IT outsourcing on business IT alignment in manufacturing companies Page 14 of 69

15 2.3 Possible influencing factors This chapter explores the possible influencing factors considering the effect of IT outsourcing on business IT alignment. Some factors can be more important than others, but this is not further distinguished or analysed Chief information officer Focussing on the partnership criteria, Luftman and Kempaiah (2007) emphasise that this can be strengthened between the business and IT by introducing a chief information officer (CIO) on the level of chief executive officer (CEO) who both share a clearly defined vision. Also governance is important especially in large manufacturing companies as IT operates commonly as a cost centre (Luftman and Kempaiah, 2007). Prioritising of IT projects is reactive to business needs and a CIO could improve this mechanism. The importance of the CIO role in relationship to BIA is also supported by the research of Weil and Woodham (2002), Chan (2002) and Balocco (2013), especially in the area of governance Informal organization structures According to a study of Chan (2002) better BIA improves the performance of information system functions. However, Chan is critical considering the formal organization structures. She found in her research among eight cases supported by literature that the informal organization structures do play a far more important role than expected in improving the performance of information systems. This informal effect appears more during compared to the formal structure which is more transient (Chan, 2002). Therefore attempts to improve overall BIA and information systems performance, management effort should be spent on improving the robustness of the informal organization, defined as "the relationship based structures that transcend the formal division of labour and coordination of tasks", instead of aligning formal structures Business IT alignment in collaborative networked organizations Santana Tapia (2009) has investigated various BIA maturity models to support his research considering BIA in collaborative networked organizations (CNO). Outsourcing introduces by definition a collaboration of at least two organizations and this is considered to be a networked organization. Therefore this research is relevant in the context of this thesis and is explored in more detail. Santana Tapia (2009) defines a CNO as any mix-and-match network of profit-and-loss responsible organizational units, or of independent organizations, connected by IT, that work together to jointly accomplish tasks, reach common goals and serve customers over a period of time. From his research Santana Tapia (2009) concluded that there are four main domains which can be used to measure the BIA maturity in a CNO to benchmark and support continuous improvement of BIA process. Each domain being partnering structure, IS architecture, process architecture and coordination has five levels of maturity with specific characteristics, this is represented in figure 6 below. Figure 6: Four domains and levels of BIA maturity, Santana Tapia (2009) Effect of IT outsourcing on business IT alignment in manufacturing companies Page 15 of 69

16 Comparing the measurement model of Santana Tapia (2009) with the model of Luftman (2000) there are overlapping areas and similarities, however with divergent terminology usage and detail. On high level the partnering structure domain compares to the partnership and communication criteria, IS architecture domain compares to the competency/value measurements and scope/architecture criteria, and coordination domain compares to the governance and skills criteria. Looking at the noticeable differences the domain of process architecture is introduced supplementary by Santana Tapia (2009) compared to Luftman (2000). Considering the model of Santana Tapia (2009) is aiming at a networked organization, the process architecture domain is the distinguishing factor to measuring the interorganizational process as well. As this domain is more business oriented representing business process descriptions and performance measuring business process modelling (BPM) could support this aspect positively Universal principles Making IT work has little to do with technology itself according to Feld and Stoddard (2004). They state that there are three interdependent, interrelated, and universally applicable principles for executing IT effectively being: Long-term IT renewal plan linked to corporate strategy overarching a multiyear period, Simplified, unifying corporate technology platform; which is typical for an ERP system, Highly functional, performance oriented IT organization working according to corporate standards. Feld and Stoddard (2004) state that once these three principles are aligned and locked together, IT organizations and supporting systems tend to deliver expected results rapidly within six months Changing environment Organizations change constantly to remain viable and competitive. This mechanism is described by Abcouwer and Parson (2011) as the adaptive cycle of resilience. In this model (see figure 7 below) all changes start with a crisis, e.g. the sales of the flagship product are collapsing, after which the organization starts looking for new combinations to keep in business. Once a new market or product has been targeted a new entrepreneurial phase starts ending in a new equilibrium if the changed organizational targets have been met again. Figure 7: Adaptive cycle of resilience, Abcouwer and Parson (2011) This cycle is influenced by a constantly changing environment with unpredictable factors having a drastic effect on the business and IT requirements thereby affecting the BIA. These changes could be amplified in case of IT outsourcing considering this network as a viable system model (Beer, 1984) making it more complex. Therefore the exploiting or exploring state of an organization could potentially affect the relationship between BIA and ITO as a result of this mechanism. Effect of IT outsourcing on business IT alignment in manufacturing companies Page 16 of 69

17 2.3.6 ERP in manufacturing companies Enterprise resource planning (ERP) systems are commercial software packages integrating the information flowing through a company (Maas, 2014). This software supports all main business processes such as manufacturing, inventory management, sales, shipping, human resource and finance making it essential for medium and large size companies. Estimates have been made indicating that approximately 75% of medium to large manufacturing companies have implemented ERP (Morris and Venkatesh, 2010) and even 80% among Fortune 500 firms. Implementation of ERP systems introduces fundamental changes to the nature of tasks, workflows, and the jobs themselves due to the embedded predefined functional structure and organizational choices affecting BIA (Millet, 2013). Considering the ERP system as an important technological artefact in the organization, it should be viewed as a key driver of job design and organizational change strategies as well (Morris and Venkatesh, 2010). However, when the users of ERP do not use it to its full extent the expected benefits are unlikely to be obtained and subsequent increases in performance will not occur (Murphy and Chang, 2012). According to Gartner (2014B) a CIO survey highlighted that ERP is the core application, with SAP as market leader, and enterprise business applications in general are responsible for almost half of the IT investments to improve business. The Gartner survey also revealed that a gap is developing between the business users of enterprise applications such as ERP and the IT professionals charged with supporting these applications. This leads to strategic misalignment slowing down IT deployment to solve specific problems or respond to new market opportunities. According to Soffer (2005) one of the main problems in ERP projects is to align an off the shelf software package with the business processes as the system is designed to serve a large variety of enterprises by default. Despite the common wisdom suggesting that enterprises should standardise their business processes and align with best practice, this it is not always the case (Koch, 2001). Koch states that ideally business process reengineering and ERP are complementary, this is however a continuous challenge considering the integrated nature connecting all requirements and possible solutions. As with all IT systems ERP applications can be outsourced and is considered to be a commodity according to Gartner (2014A). Olson (2007) evaluated the outsourcing of ERP and emphasises that costs can rise precipitously after the outsourcing firm has become committed to the relationship introducing a number of important issues. Therefore multiple criteria analysis should be incorporated to minimise quantified factors into rational decision models which is described by Kahraman (2010) Governance model IT governance is a critical success factor to align and optimise the various business processes (Luftman and Kempaiah, 2007). Therefore information management should be organised effectively, and the integrative generic framework for information management of Maes (2000) suggests how this can be structured, see figure 8 below. Figure 8: Generic framework IS, Maes (2000) From this perspective it appears that governance is required at various levels to connect and align the nine planes in the organization, ideally at individual, team and departmental level. Effect of IT outsourcing on business IT alignment in manufacturing companies Page 17 of 69

18 A similar alignment mechanism has been further researched by Fonstad (2006) who has introduced an IT engagement model for this purpose with following two fundamental goals: Alignment between IT and the rest of the business and, Coordination across multiple organizational levels. According to Fonstad (2006) a key success factor to IT governance is the linking mechanisms bringing together key stakeholders such as informal communication to ensure that IT projects achieve both local and company-wide objectives. To enable ideas flowing back and forth between company-wide IT governance and project management, linking mechanisms are the heart of a company s IT engagement model. This ensures that high-level governance decisions are understood and implemented by project teams (Fonstad, 2006), enabling projects to achieve the company s objectives and lessons learned from each project. Notable the linking appeared affective in both informal as well as informal meetings suggesting this can not always be orchestrated (Fonstad, 2006) Case study A recent case study of Silvius (2013) compared four companies to observe the relationship between BIA and ITO. To measure BIA the strategic alignment maturity model of Luftman (2000) was used, and to measure ITO the maturity model for ITO of Gottschalk and Solli-Sæther (2006). The assessments followed the process as suggested by Ekstedt et al (2005) performing the semi structured interviews with the lower levels in the organization as well. The results showed that two of the cases achieved a higher level of ITO relationship in comparison than the other two cases. In all four cases the scores on governance maturity and scope & architecture maturity were remarkably high and the scores on skills maturity remarkably low. This finding is contradicting to Luftman and Kempaiah (2007) who suggest that all the six variables should be developed in a more or less equally manner. This could indicate that ITO has actually a positive effect on the BIA maturity of governance and scope & architecture maturity. The lower score on skills is also surprising as Thorogood et al (2004) have identified that improved skills are one of the aspects of alignment on which ITO actually could help. The overall conclusion of Silvius (2013) is that there are indications that ITO influences BIA and that this effect is generally positive. Silvius suggests a number of factors which could influence the relationship between ITO and BIA and would require further research, as included in table 5 below. # Influencing factors 1 Difference in assessment level of the ITO relationship 2 Proactive attitude and behaviour of the service provider 3 Involvement of IT end-users in the ITO relationship 4 Innovation requires partnership 5 Service providers that employ former employees of the outsourcers 6 The monetary value of the ITO contract 7 Corporate restructures deteriorate ITO relationships Table 5: Possible factors influencing relationship ITO and BIA, Silvius (2013) Summary influencing factors A chief information officer is a strong enabler to improve the BIA criteria (Luftman and Kempaiah, 2007). To improve BIA the informal organizational structure was indicated to be of relevant importance and needs to be stimulated consciously for this reason (Chan, 2002). Also business process architecture should be considered to measure BIA according to Santana Tapia (2009), especially in collaborative networked organizations using business process modelling. Considering the changing environment where organizations commonly act (Abcouwer and Parson, 2011), the lifecycle stages of exploiting and exploring can influence the BIA. Despite ERP systems are common in manufacturing companies they are still complex to support considering their integrated nature. Therefore effective governance is required to align and link all involved stakeholders both formal and informal. Also the IT outsourcing relationships was indicated to be strong influencing factor on BIA according to Silvius (2013). A number of these potential influencing factors are suitable to be used in the questionnaires of the multiple case researches. Effect of IT outsourcing on business IT alignment in manufacturing companies Page 18 of 69

19 3 Methodology 3.1 Problem discussion Manufacturing companies outsource their IT for approximately 25% on a global scale, and it is expected this percentage will grow in future (Gartner, 2014A). Kahraman et al (2010) state that "the performance of the service provider directly affects the main firm s performance", especially when an ERP system is involved. Therefore selection of the most appropriate service provider is an extremely important decision affecting the business IT alignment (BIA) potentially negative. Derksen (2013) suggested further research considering the BIA alignment maturity among different industries that outsource their IT. In the context that an internal IT department of an (international) manufacturing company is outsourced, my interest focuses on the effect on BIA. The effect of IT outsourcing could potentially jeopardize the manufacturing company s results, and understanding this mechanism is therefore scientifically relevant. To research this problem following hypothesis is proposed: IT outsourcing has a negative effect on business IT alignment in manufacturing companies. 3.2 Approach The research approach is based on a multi-strategy design combining quantitative as well as qualitative data collection methods, and according to Robson (2011) there is greater variety of the potential benefits when these two paradigms are brought together. Also Bryman (2006) mentions that a multistrategy (or mixed-methods) design will produce a more comprehensive and complete picture of the research topic. To justify the combination of both quantitative and qualitative data collection methods, Bryman (2006) states following five potential benefits: Triangulation as corroboration between the data will enhance the validity of the findings, Complementarities to seek elaboration, enhancement and clarification producing a more comprehensive and complete picture, Development to use the results from one method to develop the other, Initiation seeks the discovery of contradiction and paradox to recast questions or results from one method to the other, Expansion to extend the range of enquiry and breadth using different methods. The research uses a quantitative method to measure the business IT alignment maturity level and IT outsourcing characteristics at a number of manufacturing companies. For this purpose a structured questionnaire is used. The collected quantitative results are subsequently analysed and compared to industry statistics. The interim results are verified using a semi structured interview with the interviewees. By coding the interview notes the qualitative verification is finalised. By combining the results of both data collection methods, the findings are discussed and final conclusions are drawn. 3.3 Research question To test the proposed hypothesis following research question is formulated: To what extent effects IT outsourcing the business IT alignment in manufacturing companies? To answer this research question the following sub questions should be answered: 1. Which factors influence business IT alignment of manufacturing companies? 2. Multiple case studies: what business IT alignment and IT outsourcing maturities are measured for manufacturing companies applying the research model of Derksen (2013)? 3. What are the similarities and deviations of the case studies compared to the results of Derksen (2013) and Luftman (2000) specifically for manufacturing companies? 4. What is the elucidation of these similarities and deviations? Effect of IT outsourcing on business IT alignment in manufacturing companies Page 19 of 69

20 3.4 Research design To answer the sub questions as described above following research methods are distinguished. Extensive literature research explaining business IT alignment, IT outsourcing and possible influencing factors to answer sub question 1. Applying the Derksen (2013) research model using quantitative questionnaires at a number of case studies at manufacturing companies to answer sub question 2. The quantitative results are qualitative validated using semi structured interviews for all cases. Determine similarities and deviations with a quantitative statistical analysis based on the case data of sub question 2 and the results of Derksen and Luftman to answer sub question 3, supported with the qualitative verification results. Based on the quantitative and qualitative data analysis supported by the literature research the similarities and deviations will be examined and explained to answer sub question 4, and generalised. These steps are reflected in figure 9 below. Figure 9: Research design for research questions 3.5 Case selection The cases are selected through a network of the Dutch association of SAP users (VNSG 2 ) who all use the same ERP system and exchange experiences and share knowledge. Being a member of the enterprise asset management (EAM) focus group, all manufacturing companies were selected from the members list and asked for their collaboration. The VNSG EAM focus group has approximately 250 members from a variety of different companies. Especially the manufacturing companies are commonly active internationally with branches outside the Netherlands as well. Based on Mintzberg (2007) these manufacturing companies can be classified as a machine bureaucracy as they depend primarily on the standardization of operating work processes for coordination. This approach will make the sample set compatible as all manufacturing companies have a similar type of ERP system and the interviewees have a common frame of reference. 2 Effect of IT outsourcing on business IT alignment in manufacturing companies Page 20 of 69

21 4 Conceptual framework In this chapter the research model of Derksen (2013) is described in more detail as it will be used as conceptual framework of this thesis. The case studies of the manufacturing companies will measure both the IT outsourcing (ITO) characteristics and the business IT alignment (BIA) maturities to compare. Therefore first a generic description is given of the Derksen research model. In addition the research measurements are explained of the ITO and BIA maturity, and his results to explain the details and context. By applying the Derksen research model to manufacturing companies the effect of ITO on BIA can potentially be refined in more detail within this specific domain. 4.1 Derksen research model The research model of Derksen (2013) describes how ITO influences BIA and is reflected in figure 10 below including contingency factors affecting possibly this mechanism. Figure 10: Contingency factors ITO influencing BIA Derksen (2013) Derksen (2013) uses following definitions: ITO is a process whereby an organization decides to contract out or to sell the firm s IT assets, people and/or activities to a third party supplier, who in exchange provides and possibly manages these assets, people and/or activities for a fee over an agreed period of time. BIA is realising and optimizing in an on-going process; the relational mechanism between business & IT by working on the IT effectiveness of the organization in order to realise enterprise business objectives. The PhD dissertation of Derksen (2013) tested the following hypothesis: IT outsourcing has a negative impact on business IT alignment. Additionally following industry questions are answered: Does BIA differ depending on the degree of ITO? On which aspects / areas of interest does the BIA differ? Does ITO influence the level of BIA maturity? What are the determining characteristics for BIA in ITO situations? The hypothesis was rejected, and the main conclusion was that IT outsourcing does not negatively impact BIA maturity. Further was concluded that ITO can have a small positive influence on BIA maturity, based upon the correlation between "degree of ITO" and "BIA maturity". This is different in several situations from the contingency perspective (for example industry and size of organization). Overall the impact is small although statistically significant. Based upon the research results, ITO is not in favour but also not negative for BIA maturity. Effect of IT outsourcing on business IT alignment in manufacturing companies Page 21 of 69