IT OUTSOURCING: Success in the operational phase

Transcription

1 IT OUTSOURCING: Success in the operational phase

2 IT OUTSOURCING: Success in the operational phase Master Thesis by Roland Booijen (259497) Erasmus University Rotterdam Erasmus School of Economics: Informatics & Economics April 29th, 2004 Co-supervised by Dr. A. Hoogeveen, Erasmus University Rotterdam Co-supervised by Drs. R. Mooijman, Verdonck, Klooster & Associates This thesis was assigned with a 9 on the 9 th of June 2005 by behave of the graduation committee.

3 Preface During these last few months I've learnt many things. Not only about conducting scientific research and IT outsourcing, but also how organizations actually work in reality. This thesis is the result of just over six months of research, in which I got supported by my two coaches Diana Hoogeveen (Erasmus University) and Robert Mooijman (Verdonck, Klooster & Associates). I would like to thank you both for your enormous help during this project. Additionally, I would like to thank the organization Verdonck, Klooster & Associates for the internship I received. The way I was treated and helped by all people within VKA was great, I cannot imagine a better place to have written my thesis. Special thanks goes out to Peter Scheffel for co-coaching me both personally and professionally. Guus Delen, for his tremendous outsourcing knowledge and help during this project. Berthold Konijn and Robert Buitendijk for accompanying me during an interview. Ferry Johann for attending the sourcing brainstorm and Bram Spitzer for co-writing the article based on this thesis. Finally, Tim Symons for test-reading the thesis and introducing me at VKA. Who I certainly may not forget to thank are the people I have interviewed during this research. Unfortunately, I cannot name you personally due the anonymous set-up of this thesis, but I couldn't have done this without you. Thanks for your time, information and sourcing insight. On a more personal level, in which support is also essential, I would like to thank all of my friends. They are the ones that make those great evenings, weekends and vacations of relaxation and fun. My parents Paul & Marian and my sister Anja for the support they've given my during my whole life. I would like to thank them for giving me the opportunity to attend University. But the one I owe most gratitude during these last six months and the period before is Jeanette. Thank you for your support! Roland Booijen, April 2005 iii

4 Contents 1 Introduction Context Topicality of the Subject Definition of the Research Problem Scope of the Research Objectives of Sponsors Deliverables of the Research Methodology of the Research Interim Table of Contents Visualization of the research 14 2 (IT) Outsourcing Theories and Definitions Introduction Outsourcing Definitions Definitions History of What differentiates IT from other Outsourcings? Outsourcing Lifecycle Motives and Disadvantages Selective Sourcing What is being Outsourced Summary 32 3 Management Control Introduction What is Management Control Transaction Cost Theory Application to IT outsourcing and MC Management Control in Practice Summary 43 4 Business & IT Alignment Introduction What is Business & IT Alignment Strategic Alignment Model Summary 50 5 Research Model Introduction Perceiving Success Propositions Summary 57 Roland Booijen, April 2005 iv

5 6 Research Design Introduction Case Study Research Research Subjects Research Process Summary 65 7 Analysis Introduction Analysis of a Case Study Research Propositions Other Observations of the Research 74 8 Conclusions Research Questions Research Outcomes Future Research 78 Appendices: A References 79 B Questionnaire 84 C Maturity-scan Control 86 D Maturity-scan Business & IT Alignment 92 Roland Booijen, April 2005 v

6 1 Introduction This chapter serves as an introduction for the thesis "IT outsourcing: Success in the operational phase". This research will provide insight for managers and other involved persons of large and middle large organizations concerning their outsourcing with the accompanying service-provider. The ultimate goal of research is to enable organizations to measure the maturity of several elements of their current outsourcing and provide a solution for those parts that perform insufficiently. The objective of this study is to examine the factors that influence an outsourcing in theory (which will form this thesis) and to implement this knowledge into practice (which will form an outsourcingscan). This research has been performed under the authority of the Erasmus University and Verdonck, Klooster & Associates (VKA). VKA is an independent consultancy agency specialized in Information and Communications Technology (ICT). Their mission is to make the public and private sector more successful by innovating their ICT, business processes and organization. Firstly, the context and topicality of the subject will be closely examined, in order to give a general impression of the IT outsourcing subject. This will be followed by the research definition, the research objectives, the research deliverables as well as the research scope. Finally, we will discuss the methodology of research. 1.1 Context Outsourcing During the last two decades, a lot of research has been done on the subject of outsourcing, especially concerning Information Technology (IT) outsourcing. Detailed definitions entailed to outsourcing will be discussed in the second chapter of the thesis, but the meaning of outsourcing will first be explained in a nutshell. Outsourcing is the concept of contracting out one or more activities to other companies, which used to be performed by the company itself. However, it was not a new world-shattering invention twenty years ago. For centuries, people have dealt with outsourcing, though just not called by that name. The make or buy decision, the choice between carrying out an activity within the organization itself and buying that same activity externally, has always existed. Information Technology has become very important in today's business environment. There is hardly any organization that could continue its business processes without the help of IT. Nowadays, IT has become just as indispensable as electricity or telephony. But you might wonder: why all that sudden attention from the business community in IT outsourcing during the last years? Why are more and more companies increasing their outsourcing activities? According to Willcocks and Lacity (2000) IT outsourcing is not just a fad. It has already survived the typical five-year period of a fad. Roland Booijen, April

7 There are many reasons for outsourcing, such as: the popularity (bandwagon effect), cost pressures from competition and a lack of trust in the internal IT department. However, industry watchers attribute the initial growth of the IT outsourcing market to two main phenomena (Lacity, Wilcocks and Feeny, 1996). The first one is the focus on core competence. For years, companies have used diversification in order to mediate their business risks. Now they massively leave this strategy to refocus on their few core competences. Because many companies view their IT functions as non core competence, they outsource these IT activities to service-providers whose core competence is IT. The second phenomenon is the uncertainty of IT s value. Sometimes, the benefits from IT are hard to see or located at other departments. For example: the costs of the implementation of a CRM (Customer Relationship Management) application are put on the account of the IT department, but the benefits of this application become visible at the Sales department which increases its turnover. Aside from these two causes, Van der Zee (1997) also states two other prominent developments to clarify IT outsourcing's growing importance. As time passes by, IT is becoming more complex, more diverse and also more critical. In addition, traditional IT-organizations are less capable of controlling this complexity and diversity by themselves. Outsourcing Evolution The growth of the last few years can be attributed to an evolution that took place in the outsourcing market. This change can be summarized by three interrelated developments (Kane & Ravi, 2003). The technological advances, the economical recession, continual globalization of business and the increasing complexity of the business work, collaborate as a catalyst for the adoption of outsourcing. There has been a shift in the drivers behind the demand for outsourcing. In the past, organizations often applied outsourcing to achieve tactical goals like cost reduction and business efficiency (by concentrating on core business). Nowadays, there is a stronger focus on the strategic side of outsourcing. It can also be used to transform organizations, acquire new capabilities and bring fundamental strategic and structural change (Linder, 2004) The former developments have led to a third one. The expansion and transformation of the outsourcing market have made it possible and interesting for other companies to enter the outsourcing services industry. Companies originating from software, hardware and IT services entered the outsourcing market. This diversification made outsourcing more attractive. Janet Walker, director of resource strategy at American Express, is not too surprised to see cost savings play a secondary role at companies that are outsourcing or considering to do so. For us, it is certainly a factor it would be absurd not to be but to focus on that sends the wrong message to employees and even customers and shareholders, she points out. (The Outsourcing Institute, 2002) Roland Booijen, April

8 Business Process Outsourcing A new trend in outsourcing is business process outsourcing (BPO). Although this is not entirely new, companies have already outsourced secondary processes for years. Since the eighties, they have outsourced non-vital secondary processes such as the company catering and cleaning activities. The recent trend in BPO is the outsourcing of primary activities. This outsourcing differs from IT outsourcing on the following points. With IT outsourcing, all IT activities related to one or multiple processes are being outsourced. As the name already gives away, BPO outsources the whole process, which can include IT. The reason why many managers choose to not outsource the whole process, is that they fear of losing control. According to Linder (2004), "Why do so many executives feel their stomachs knot at the thought of turning over a vital business function to an outsider? Because they fear of losing control. But a solid, collaborative business process outsourcing relationship can actually give you more control and boost performance in the bargain." Offshore Outsourcing When a company chooses to outsource processes or activities to a service-provider located in a different country, it's called offshore outsourcing or offshoring. Because some countries have lower wages, they can offer products or services at lower costs. This concept has been well known in other industries for centuries, but is relatively new in the IT services area. The globalization and improvement of telecommunications have made it possible to outsource IT services (Carretek, 2004). The transmission costs have fallen, bandwidth has exploded and universal networking standards have emerged, all ironing out the obstacles that existed in transmitting the massive amounts of information between the company and the offshore serviceprovider. India, the Philippines and eastern Europe (IDC, 2004) are frontrunners in offshore IT activities, as can be seen in Figure 1.1. Ireland plays an important role in the telecommunication market. Therefore many large companies, like Dell and Microsoft, outsourced their call centers to Ireland. Roland Booijen, April

9 Figure 1.1: Market share of offshore service providers (IDC, 2004) The education in these countries is relatively high-qualified, their inhabitants have a good knowledge of the English language and there is a match of culture between the service-providers and the outsourcing companies. All these factors are important for a service-provider, in order to understand the business of the outsourcer in an offshore outsourcing. It is not surprising that the frontrunners of the market fulfill all these criteria. Not only has offshoring an effect on cost, it can also contain strategic motives. "If approached strategically, outsourcing can enable organizations to remain competitive, not only by reducing costs, but by freeing up staff to focus on more strategic, innovative projects, or by remaining at the top of their industry by outsourcing new developments that otherwise could not have been handled by the internal staff," notes Gordon Brooks, president and CEO of E5 Systems, an application outsourcing company with software manufacturing centers in India, China and the United States (Hansen, 2004) Offshore outsourcing is a very hot topic within the current economy. Even within the modern political environment, it was one of John Kerry's issues during the United States elections of This is not very surprising, because offshoring is growing fast and has a huge impact on the employment in the country that chooses to outsource. According to the IT research and analysis firm Gartner, by the year 2004, over 40% of IT-related businesses will either be investigating the possibility of offshore outsourcing or have already shipped some IT-related work overseas (SearchCIO, 2004). Outsourcing in the Netherlands The outsourcing market is a booming business. Single deals going over billions of dollars are no exception anymore, like for instance (though already terminated) J.P Morgan Chase s 5 billion dollar contract with IBM. Everyday, more and more companies are outsourcing an increasing number of their activities. The United States (US) are the outsourcing market leader, they spent an estimated 2,827 billion dollar on outsourcing in 2003, compared to 1,047 billion dollar in Europe. Although Europe started outsourcing later, it is now catching up and growing much faster, with an annual growth of 40%, compared to 10% in the US (Corbett 2002). Roland Booijen, April

10 There has also been research to the state of outsourcing in the Netherlands (Vermeulen IDC, 2003 & Delen, 2004). Vermeulen researched the BPO expenditures and Delen did the same for IT outsourcing. The results of these researches are shown in table 1.2. As we can see, outsourcing, and in particular IT outsourcing, is growing fast Annual Growth BPO % IT outsourcing % Total outsourcing % Table 1.2: Turnover in the Netherlands in billion Euros They also compared the share of the Netherlands to the rest of the world. The IT outsourcing of the Netherlands turnover covers approximately 1% of the worldwide market, although they earn 2.5% of the world's gross product. Clearly, there is some catching up to do. Figure 1.3 contains an estimation of the years to come. Dutch companies spend about 20 percent of their total IT-budget to outsourcing. A year ago this was only 16 percent. The plans for the near future show that this growing trend continues: two thirds of the companies indicate that they will outsource even more in the near future (Giarte, 2003) IT outsourcing in the Netherlands Billion Euro 18,00 16,00 14,00 12,00 10,00 8,00 6,00 4,00 2,00 0, Year Figure 1.3: turnover over time in the Netherlands (Delen, 2005) Dissatisfaction in Outsourcing Although every organization is contented with the initial contract (why else would they sign the contract), this can change over time. Of 182 buyers of outsourcing services surveyed by DiamondCluster International Inc., 26% said to be dissatisfied with their outsourcing efforts. Moreover, 21% said they had prematurely terminated an outsourcing arrangement in the past 12 months, according to the Chicago-based consulting firm's 2004 survey (Collet, 2004). Because many organizations do not like to talk about their failures, the problem might be even worse. Roland Booijen, April

11 For the specific Dutch situation, Giarte researched the satisfaction rates of 160 Dutch companies (Giarte, 2003). Except for the general satisfaction of certain components of an outsourcing relationship, they also compared The Netherlands with the United Kingdom and Belgium & Luxembourg. As can be seen in Figure 1.4 1, there is much room for improvement. This dissatisfaction of outsourcing Figure 1.4: General satisfaction in the Netherlands organizations that arises during the running contract is the cause for this research. The objective is decreasing this percentage of dissatisfaction, so more deals will run as expected. It is regarded that better relationships lead to greater net benefits from IT outsourcing (Lacity & Willcocks, 2001). 1.2 Topicality of the Subject Ever since the moment Eastman Kodak Co. signed its world-famous 10-year 250 million dollar outsourcing deal with IBM Co. IT in 1990 (Field, 1999), outsourcing has been a hot topic in boardrooms. Many CIO's (Chief Information Officers) from other organizations jumped on the bandwagon. In the subsequent decennia, many things have changed in the outsourcing world. In the academic world, outsourcing is a well-discussed subject. Studies have been conducted by several organizations. Theoretical research has been done by international authors like Leslie Willcocks (University of Oxford & University of Melbourne), Mary C. Lacity (University of Missouri) and Rudy Hirscheim (University of Houston), but also by Dutch national authors like Guus Delen (VKA), Han van der Zee (University Tilburg) en Erik Beulen (University Tilburg). Not only universities, but also commercial institutes explore outsourcing. Giarte 2 and Gartner 3 are examples of companies that conduct market research. "Is the subject of IT outsourcing still a topical subject?" one might wonder. We would reply to this question affirmative. In our opinion, IT outsourcing can still be called a relevant area of research. This certainly applies to the Netherlands, where the real growth of outsourcing is yet to come, if we compare its state of affairs to the Anglo American countries. Comparatively speaking, not many research has been conducted aiming at the Dutch market in 1 Please note that the 'relation' in Figure 1.4 is not the same as our definition of an outsourcing relationship Roland Booijen, April

12 particular. This research will be a useful addition to the existing knowledge of IT outsourcing and deliver a considerable amount of data and information on the Dutch market. 1.3 Definition of the Research Problem In these further paragraphs, the research will be discussed substantively. The research problem and associated research questions will be dealt with in this paragraph. The scope and objectives of this research will be addressed in respectively paragraph 1.4 and 1.5. Afterwards, the deliverables of the project will follow. The primary objective of our research is to improve the success of an IT outsourcing of an organization that already finds itself in the operational phase. To achieve this, we will study two factors we expect to have influence on the success of an IT outsourcing. In addition, an IT outsourcing maturity model will be developed to be used during the interviews. This will help to gain insight into the current status of several aspects regarding the outsourcing of the researched organizations. The research will roughly take place in two ways. Firstly, by determining how the companies scored on our rating of the different aspects of an outsourcing relationship. Secondly, through measuring the satisfaction of the concept of outsourcing in general and the satisfaction of the corresponding service-provider in particular. The factors will concentrate on the following components of an outsourcing: Management Control: Is the outsourcing organization in the driver s seat or is it just a passenger of the service provider? Business & IT Alignment: Does IT deliver what the business needs and does Management Control steer on the right elements? These aspects have been selected because we expect Management Control and Business & IT Alignment to be the main aspects that can be influenced during a running contract; this will be made clear further onwards in this thesis. The outsourcing organization already signed a contract with the service provider, containing a service level agreement (SLA). After that, the service delivered by the provider is mainly steered by means of Management Control and Business & IT Alignment. When allowed by the contract, the service itself can also be adjusted during a running contract, but this is often a task that consumes a lot of time and money. Roland Booijen, April

13 The nature of this research is an exploratory one, because no known research has been conducted combining the factors above with IT outsourcing. This will be the first step into that direction. For that reason, the main research question will be: How do Management Control and Business & IT Alignment influence the success of a running IT outsourcing? In order to answer the research question above, the following sub-questions have been formulated, which play an important role while conducting this research. 1 What is (IT) outsourcing? 2 How does Management Control influence the success of an IT outsourcing relationship? 3 How does Business & IT Alignment influence the success of an IT outsourcing relationship? 4 What is a successful outsourcing relationship? And how can information regarding this success be acquired? 1.4 Scope of the Research In this part, the subjects that are being handled within this thesis are clearly delimited. This markingout is necessary so it is known exactly which subjects are being discussed in this thesis and which subjects are left out of this research. The research will deliver concrete points of improvement on a number of components of an outsourcing relationship of an organization. The aim will be on companies that have outsourced in the following sections (preferably all three of them): Hosting Desktop Services Enterprise Resource Planning (ERP) In the second chapter of the thesis, we will zoom in on these sections and define their precise definitions. The points of improvement that will be extracted from the created outsourcing-scan can be divided into two separate areas: Control: Were the proposed amendments correct and also rightly implemented? Is the way of supervision within the outsourcing organization and between the outsourcing organization and the service-provider correct? Is there being reported correctly and to right people? Roland Booijen, April

14 Business & IT Alignment: Are the IT services in line with the business? How is this being tuned within the organization? How does the organization deal with demand-management? Different sections of outsourcing will not be included in this research, just like other points of improvement but the ones stated above. If other aspects emerge throughout the research that also prove to be interesting, we will include them in the conclusions as recommendations for further research. The organizations interviewed during the research are located in different sectors of the economy. Aside from companies in the private sector, for example the financial sector and production companies, we would also like to interview organizations in the public sector like ministries and care institutions. 1.5 Objectives of Sponsors The objectives of the research vary among the involved parties. They can roughly be divided into four groups: the author of the thesis, the Erasmus University of Rotterdam (EUR), Verdonck, Klooster & Associates (VKA) and the concerning organizations that have been interviewed during the research. For the author of this thesis, the knowledge on the subject of outsourcing, in particular IT outsourcing, will be increased. Another target of this project is to graduate for the study Informatics & Economics Master program at the Erasmus University. Regarding the Erasmus University, this research will serve as an addition to the existing knowledge of IT outsourcing. At the same time, it will provide qualitative and quantitative data and information from the market research. Therefore, the market knowledge on IT outsourcing will be increased. Likewise, this research also increases the knowledge of VKA on the IT outsourcing market in the Netherlands. Besides, the IT outsourcing-scan can also be used in assignments to attain a quick impression regarding the state of the outsourcing relationship of a specific organization. The IT outsourcing-scan delivers information about elements which are not good enough and where corrections are necessary. In addition, the information may provide reasons to perform an audit on an element of the outsourcing relationship The companies or institutions that cooperated on the interviews will receive an IT outsourcing-scan on their organization. This will deliver the following results for the concerning organizations: Error recovery An error recovery will take place with regard to the mistakes that are present in the running contract. Learning points The research will deliver learning points and points of improvement for a new outsourcing, may that prove to be the case. Roland Booijen, April

15 Audit advice If necessary, it will contain an advice for an audit, which will zoom in on established components. 1.6 Deliverables of the Research At the end of the trajectory a number of deliverables need to be realized. Thesis The thesis itself becomes a scientific foundation for the product of the IT outsourcingscan. This thesis can be used as a book of reference, to clarify why the set-up of the outsourcing-scan looks the way it does. IT outsourcing-scan The concrete product of this research is the IT outsourcing-scan, which will be used during the research. Its contents have been discussed in the former paragraphs of this chapter. This scan will be established by the scientific foundations in the thesis. Report For the participating companies, a report will be written. We hereby apply the created IT outsourcing-scan to the participating companies. The contents of these reports are described in paragraph 1.5 Article - When the research has come to an end, there is a possibility that its findings appear to be so interesting that there is a possibility to publish them in an article in a scientific or management journal. 1.7 Methodology of the Research In this chapter, the methodology of the research will be discussed, concerning the steps which are planned during research for answering the research-question and realizing the deliverables. This provides insight into the way the research will take place. The research can be roughly divided into three phases, namely the preliminary research, the field research and the data analysis. These phases are rendered below, including a short description. Preliminary research First, literature on the subject of outsourcing has been studied. After that, a deepening was made into the subject IT outsourcing. By reading up on articles from journals such as "MIS quarterly" and the "European Journal or Information Systems", as well as reading books like "Information Systems Outsourcing" from Lacity and Hirscheim, knowledge about the subject has been gathered. Especially reading recent news from the world of IT outsourcing provided a clearer picture of this subject and the theories at its basis. Also, by means of conversations and interviews with consultants of VKA and other authoritative experts on the outsourcing field, the knowledge concerning IT outsourcing has been expanded considerably. Roland Booijen, April

16 Eventually, this knowledge was used to create models that illustrate which factors effect an outsourcing relation. Dependent on those factors, questionnaires have been established, which are reviewed and where necessary adapted during the interviews. Due to the lack of current models on this subject, the goal of the empirical research is an exploring one. To be able to rate the organizations on several aspects, a maturity-scan was created. These questionnaires, maturity-scan and models were exhaustively discussed with both the two supervisors and several other consultants of VKA with outsource knowledge. At this stage, the selection and contacting of companies that will be interviewed in the next stage of the research, took place. Field research This exploratory research will be held using a cross case study strategy. The organizations will be visited using the questionnaires and maturity-scan created at the previous stage of the research. These organizations have also been selected at the previous stage. The interviews were conducted with the help of a VKA consultant. By carrying out these interviews, multiple purposes were served. First of all, it has been investigated how Business & IT Alignment and Management Control influence the success of an outsourcing. Secondly, the interviews provided insight how the perceived satisfaction is accomplished. The interviews were conducted in several sectors, both commercial and non-profit organizations. Within the organization, the interviews were conducted at CIO level or with the person who supervised the outsourcing. Data analysis An amount of qualitative and quantitative data has been extracted from the interviews. When the interviews had been finished, the results were analyzed using a cross case study analysis and afterwards converted into the final deliverables (paragraph 1.6). The used method of research is validated by Yin (1993). While conducting the interviews, the questionnaire was adjusted where necessary. Therefore, the first interview has been used as a pilot for the rest of them. The questionnaires and the maturityscan were created in order to assign a maturity level on several aspects of the following components of an outsourcing relationship: Management Control Business & IT Alignment While analyzing these results, we expected to be able to relate the success of an outsourcing to the maturity in the components above. In addition, insight was acquired into the process how organizations perceive satisfaction over an outsourcing. Roland Booijen, April

17 The final results of the maturity scan itself were radar charts per organization, in which the score per component was visualized. By doing so, the bottlenecks of the outsourcing relationship could be identified at a single glance. Figure 1.5 shows how a radar chart could look like. Figure 1.5: Radar chart example 1.8 Interim Table of Contents To sketch a picture of the construction of the thesis now, we will present the concept of the rest of the chapters of the thesis chapters. Chapter 2: (IT) Outsourcing theories and definitions In the second chapter, the definitions concerning (IT) outsourcing will be examined. In real terms, many authors appear to have a slightly different definition of outsourcing. They attribute different meanings to various terms, for example insourcing. Gradually, we will focus on a specific part of outsourcing, namely IT outsourcing. We review several aspects of IT outsourcing as its history in the Netherlands, advantages and disadvantages and outsourcing as a process. Chapter 3: Management Control This chapter concentrates on the control issue. Among others, the following questions will be answered: What is the actual meaning of being in control? Which specific control elements play a role? When is a person in control and how can this be achieved? We will relate this subject to outsourcing and will apply the Transaction cost theory to show the need for control from an economical theory. Chapter 4: Business & IT Alignment In essence, this chapter will be organized in the same way as chapter 5. We will deal with the question: What does Business & IT Alignment really mean and how is it related to outsourcing? Besides, it will be discussed how Business & IT can be achieved by means of the Strategic Alignment model of Henderson and Venkatraman. Chapter 5: Research Model Roland Booijen, April

18 The knowledge acquired in the former chapters will now be applied to create propositions about the relations we expect on the following areas: Management Control and Business & IT Alignment. We will also discuss the way satisfaction is perceived within an organization. Chapter 6: Research Design The propositions created in the former chapter need to be investigated. This chapter will discuss the research process and the type of research that has been applied. The validity of the research plays an important part and will also be examined. Chapter 7: Analysis In this chapter, we will analyze the acquired data, to check whether our propositions are correct or incorrect. Besides checking the propositions, we will also discuss how a case-study should be analyzed and disclose other interesting results from the research. Chapter 8: Conclusions Within this chapter, the conclusions that flow from this research will be discussed. For example: To what extent have the research questions been answered? What recommendations can be made towards organizations? Also, suggestions for future research will be treated. Roland Booijen, April

19 1.9 Visualization of the research The visualization of the research is provided below. This presentation of the research allows us to interpret the methodology in a glance. Evaluation & Feedback Sub question 1 Chapter 2: (IT) Outsourcing Theories and Definitions Main research question Sub question 2 Chapter 3: Management Control Chapter 5: Research Model Chapter 6: Research Design Chapter 7: Case study Analysis Chapter 8: Conclusion Sub question 4 Sub question 3 Chapter 4: Business & IT Alignment Research questions Theoretical research Empirical research Conclusions Roland Booijen, April

20 2 (IT) Outsourcing Theories and Definitions 2.1 Introduction This chapter presents findings from the literature research and an answer to the first sub researchquestion that we formed in chapter one, namely: What is (IT) outsourcing? In order to answer this question, we will take a look at several aspects of (IT) outsourcing. We will discuss several definitions regarding (IT) outsourcing. Furthermore, the history of IT outsourcing will be reviewed to create an historical context. It will also be clarified why IT outsourcing should be treated differently compared to other outsourcings. Afterwards, we will continue with Delen's Outsourcing lifecycle, to define outsourcing as a continuous process. Then, we will treat the motives and disadvantages of IT outsourcing, followed up by Lacity's selective sourcing framework. Subsequently we take a look on what has been outsourced in the Dutch market and we will zoom in on those components entailed in our scope. This chapter will be finalized by applying two economical theories on outsourcing. 2.2 Outsourcing Definitions Although the meaning of outsourcing has been defined in the introduction in a nutshell, we will now elaborate on definitions dealing with outsourcing. Here we will introduce and define the most important terms used in this thesis. This will enable every reader to interpret the terms equally and correctly. This clarification is extremely useful since some authors use different terminology regarding outsourcing, as is the case for the word "insourcing". Outsourcing We would like to begin with the term that is at the foundation of this research and most of the other terms that are discussed in this paragraph. In the literature one can find many definitions of outsourcing. Let's examine some definitions of the most influential authors in this area. "Strategic use of outside parties to perform activities, traditionally handled by internal staff and resourced" Greaver, M, 1999 in "Strategic outsourcing, A structured approach to outsourcing decision and initiative." "Outsourcing is the decision taken by an organization to contract or sell the organization assets, people, process and/or activities to a third party supplier, which in exchange provides and manages assets and services for monetary returns over an agreed period of time." Kern & Willcocks (1999) in "Exploring IT outsourcing relationships, theory and practice" Roland Booijen, April

21 " the transfer or delegation to an external service provider of the operation and day-to-day management of a business process." The outsourcing management zone (2003) Based on the fact that these three definitions do not contradict, we have chosen to use the definition created by Kern and Willcocks, because it forms the best description of the term. This definition will be used throughout the rest of the thesis. Outsourcing is the decision taken by an organisation to contract or sell the organisation assets, people, process and/or activities to a third party supplier, which in exchange provides and manages assets and services for monetary returns over an agreed period of time. Definition of "outsourcing" If something is outsourced by an organization it is obvious that another organization will carry out that processes or tasks in return for a financial compensation. The external entity, as referred to in the definition of outsourcing, will be called a service-provider. In literature, this organization is sometimes called an insourcer (Symons, 2004). However, other authors use the term insourcing for the practice of evaluating the outsourcing option, but confirm the continued use of internal IT resources to achieve the same objectives as outsourcing (Hirscheim & Lacity, 2000). This concept is involved with the Shared Service Center, which we will discuss further on in this chapter. To avoid confusion, we will not use the term insourcing or insourcer where possible. A service-provider is the mirror reflection of the outsourcing organization in the outsourcing deal. They take over the tasks or processes that used to be performed by the outsourcing organization; in return they get a financial compensation. The deal can include the transfer of assets and people to the service provider. Definition of "service-provider" There are several phases (Figure 2.1) in a trajectory of outsourcings from the preliminary analysis until the operational state (Van der Zee, 1997). The focus in this research is the relationship between the outsourcing organization and the vendor in the operational state. But what exactly is an outsourcing relationship? Kern, Willcocks, Alborz and Goles are all researchers on the area of outsourcing relationships, but why is this relationship so important? According to Klepper and Jones (1998), maintaining a positive client-vendor relationship is the key to achieve benefits from IT outsourcing. Goles & Chin (2002) have defined an outsourcing relationship as follows: Roland Booijen, April

22 Preliminary Research Vendor Selection Contract Migration Operational Figure 2.1: Phases in a outsourcing trajectory (Van der Zee, 1997) An outsourcing relationship is a ongoing linkage between an outsourcing serviceprovider and customer that has a long-term orientation and an mutual recognition and understanding that the benefits attained by each firm are at least in part depended on the other firm. Definition of "outsourcing relationship" Demand organization In traditional organizations, the internal IT department is responsible for delivering IT services throughout the entire organization. User groups can express their wishes and commentary on the delivered services directly to the IT department, who will adjust their delivered services based on user input. But now, the service delivery part has been taken over by an external vendor. What remains is the directing function. The function that fulfils this internal role is the Demand organization, though sometimes also called the retained organization or other names. This organization directs both the internal business function (supply role, they see the Demand organization as the provider of the services) and the external IT function (demand-role, the service-provider looks upon the Demand organization as customer of the services). The demand-organization could be seen as the bridge between the business and the IT (Figure 2.2). The Demand organization is the internal function, within the outsourcing organization, which fulfils the role as linkage between the internal business and the external IT service-provider. Definition of "Demand organization" Figure The Demand organization Mooijman (2004) makes two important statements about the configuration of the Demand organization. The Demand organization should not perform any operational activities. These activities are outsourced; therefore they should not be incorporated in the Demand organization. Many companies interfere with operational activities, whereas they should only be controlling the output of the service-provider. Roland Booijen, April

23 The second statement involves the personnel of the Demand organization. When companies commit outsourcing for the first time, they often have difficulties considering human resources. How many people should be in the Demand organization and which capabilities should they have? From their own experience, consultants claim that a good rule of thumb is that 8 to 15 percent of the number of outsourced personnel is sufficient for the fulfillment of the necessary activities. It is critical to realize that employees of the Demand organization require other skills and capabilities than the former IT personnel; the activities will move up to the tactical level. So in many cases it would not be wise to simply keep a part of the IT personnel behind to form the Demand organization (unless of course they do have the required skills and capabilities). Shared Service Centers Shared Service Centers (SSC) are an interesting topic in the outsourcing world. In an SSC, all similar processes that are executed roughly the same way, are aggregated in a new semiautonomous organization that delivers its services to other departments. Its objective is to improve the quality of the service and save costs at the same time (Opheij & Willems 2004). The SSC has a result obligation, which is not only based on the fulfillment of the requirements stated in the contract, but also on their supplied information. Its relation with outsourcing can be derived from their shared goals. Outsourcing and SSC are just two different ways of achieving the same goal. The relationship with outsourcing becomes more clear when we regard it as an internal outsourcing. This means controlling the SSC as if it were an external entity. (Hirscheim & Lacity, 2000). The reason for explicitly treating SSC in this document can be seen in their use of the same techniques that we use to improve the success in outsourcing deals. Due to its nature, the foundation of an SSC is particularly interesting for large organizations like the government, multinationals and educational institutes. SSC does not necessarily bundle IT tasks as application development and helpdesks, but can also be created for financial administration, mailroom and security. When proved to be successful, an SSC can even been privatized or sold. This has been the case with PinkRoccade, that was formed by a privatization of the Dutch department of internal affairs and a few takeovers (Delen, 2005). The definition we will use in this document is (based on Delen 2005, Opheij & Willems 2004): A newly formed department that takes over certain business processes with the accompanying resources within the own organization and delivers those processes back as services on basis of result obligation. Definition of "Shared Service Center" Core Competence One of the main reasons for outsourcing has always been the focus on core competence. We will discuss more reasons for outsourcing further on in this chapter. A word close to core competence Roland Booijen, April

24 but certainly not to be confused with, is core business. Many people use these two words interchangeable, but there is a big difference between them. "One should never outsource its core business" is an often-heard statement, however this is incorrect. It should actually be: "One should never outsource its core competences". This can be proved by defining core business and core competences. The focus on core business can be seen as a company focusing on their primary processes. The core competencies are defined by Prahalad & Hamel (1990). Their definition will be used in this thesis. A core-competence is a bundle of skills and technologies that: Provides potential access to a wide variety of markets; Makes a significant contribution to the perceived customer benefits of the end product; Is difficult for competitors to imitate Definition of " Core competence " The former misconception can be rejected by giving two examples. Ford's core business is the production of automobiles. According to the first statement, Ford should produce every car totally on its own. Reality shows that they purchase certain components from other manufacturers. Apparently, these components do not contain core competence. Moreover, a core competence can even be non core business. A helpdesk (a secondary process) for a computer manufacturer that is very supporting, can even become a core competence. When people buy a specific brand because they appreciate the helpdesk so much, it becomes a differentiator. Core competencies are not fixed, they can change in response to changes in a company's business and technological environment. Core competencies are flexible and able to evolve over time. As business adapts to new circumstances and opportunities, its core competencies will have to do the same. For example Nike Inc, the world's largest supplier of athletic shoes who originally started out as a manufacturer, completely outsourced its production. Now, they only focus on sales, development and marketing, which are their core competencies. 2.3 Definitions We'll now leave the general outsourcing field and make a deepening into IT outsourcing. Just like we did with the general outsourcing definitions, some terms concerning IT outsourcing will be discussed. Firstly, Information Technology will be defined, after which this will be combined with our former outsourcing definition. Although some authors denote the activities and resources involving the information-facilities and IT services by means of other terms (IS, IT, ICT), we will use IT and IT outsourcing throughout this thesis. Roland Booijen, April

25 Information Technology Information Technology (IT) is probably one of the most used terms in business nowadays. Information should not be confused with knowledge, but unfortunately this happens occasionally. The term information is used broadly in colloquial speech. This, and the fact that it is used for different meanings, makes it hard to define. From our view, information covers data to which meaning is assigned, according to context and assumed conventions. Knowledge is derived from information. (Miller, 1999). As Carr already stated in his famous article "IT doesn't matter", Information Technology is a fuzzy term. We will now, with the help of existing literature, compose the definition of In7formation Technology as it will be used in the rest of the thesis (Carr, 2003 ; Office of the CIO, 2004). Any equipment or interconnected system or subsystem of equipment, that is used in the automatic and digital acquisition, storage, manipulation, management, movement, control, display, switching, interchange, transmission, or reception of data or information. The term information technology includes computers, ancillary equipment, software, firmware and similar procedures, services (including support services), and related resources. Any equipment, interconnected system or subsystem of equipment that is used in the automatic and digital acquisition, storage, manipulation, management, movement, control, display, switching, interchange, transmission, or reception of data or information. The term information technology includes computers, ancillary equipment, software, firmware and similar procedures, services (including support services), and related resources. Definition of "Information Technology" Information Technology outsourcing Now Information Technology has been defined, we can continue defining IT outsourcing. The process used to define outsourcing will be maintained. A selection of IT outsourcing definitions from literature will be stated from which we will derive our own definition. Information Technology outsourcing: " is a decision taken by an organization to contract-out or sell some or all of the organization s IT assets, people and/or activities to a third party service-provider, who in return provides and manages the services for a certain time period and monetary fee " Lacity, Willcocks, Kern (2000) in Risk mitigation in IT outsourcing strategy revisited: longitudinal case research at LISA". " implies commissioning an external IS supplier to perform certain IS activities for an organization, such as information planning, system development, or maintenance and operation of information systems. This may include transferring IS staff and resources to the supplier" de Looff (1996) in "A model for Information Systems outsourcing decision making". Roland Booijen, April

26 "The use of a third party service-provider to provide information products and services that were previously provided internally " Lacity, Hirscheim (1995) in "Beyond the Information System Outsourcing Bandwagon". These definitions do not refute one another, so now we can compose our own definition of Information Technology outsourcing. Information Technology outsourcing is the concept of an organization contracting-out IT activities to a third party vendor, who in return provides and manages the services for a certain period of time in exchange for a monetary fee. The deal can include the transfer of IT assets and people involved with IT to the external entity. Definition of "Information Technology outsourcing" Now that we have defined the terms dealing with outsourcing and IT outsourcing, we will continue with a short summary of the history of IT outsourcing in the Netherlands. 2.4 History of For a better understanding we will briefly describe the history of IT outsourcing in the Netherlands. Which path did it travel to arrive at the point where it is today? Beulen (2002) distinguishes four phases in the development of the Dutch IT outsourcing market. Autarky Until the mid seventies, IT services were mainly performed by the internal IT department. In this phase the companies had their own computing power and developed their own applications. Large central mainframe-based departments arose that fulfilled the internal information necessities. No Service Level Agreements (SLA) were concluded between the business and the internal IT department. These companies usually had a central budget for IT services and the costs were charged to the business units by a formula. Because of the lack of SLA's, the automation department only had an effort obligation. This obviously did not contribute to the quality level of the service. All employees worked for the organization and outsourcing is still an unknown phenomenon in this era. Chaos Capacity reasons caused the shift to the next era. In the mid seventies, a capacity shortage of qualified IT personnel came into existence. Moreover, a technological event occurred. Mainframe computers were slowly replaced by distributed architecture. This shortage of personnel was set off by hiring external personnel. This led to an evolvement for the IT department, now they also had a purchasing function and responsibility for the project. During this era, the contracting of external personnel keeps expanding. On top of that, external IT vendors are not only delivering extra capacity, they also start to execute entire projects on their own. Roland Booijen, April