Business Process Outsourcing: Implications for Process and Information Integration

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1 Business Process Outsourcing: Implications for Process and Information Integration A project proposal to the Industrial Advisory Board of the UCI NSF Industry/University Cooperative Research Center by Vijay Gurbaxani (vgurbaxa@uci.edu) and John Mooney (jmooney@uci.edu) Graduate School of Management and Center for Research on IT and Organizations (CRITO) University of California, Irvine, CA ABSTRACT Outsourcing of IT activities and services has become increasingly common over the past decade. In recent years, the domain of outsourced activities has been extended to IT-enabled business processes and services. Common areas include customer care, logistics, human resources, and accounting. Indeed, the vision of the value network is finally being realized as new classes of business service models emerge. While the external sourcing of business processes promises business impact and opportunity, it also presents significant new management and organization challenges. Specific challenges include the coordination of outsourced business processes with internal business processes across the firm s value chain, integrating and leveraging information from outsourced business processes with internal processes and data, and building an appropriate IT infrastructure that will allow for process and information integration with a variety of external services providers. The focus of this research project is to develop insights into best practices for sourcing governance, process coordination, information integration and IT infrastructure management in the context of business process outsourcing. The study aims to first develop a conceptual framework for business process outsourcing, that will facilitate the development of solutions to the management challenges associated with achieving a company s strategic goals. Second, we will use this framework to undertake an empirical analysis of the relationships between the strategic intent for business process outsourcing and approaches to information integration and IT infrastructure management that are associated with successful outcomes.

2 INTRODUCTION The IT outsourcing phenomenon of the past decade is being overshadowed in recent years by the increased interest in Business Process Outsourcing (BPO). Fuelled initially by the drive to cut operational costs, and enabled by sophisticated information technology (IT), many firms have chosen to externally source the execution and management of facilities, customer care, and logistics. Global economies of specialization and scale coupled with massive bandwidth are primary enablers of this trend. As firms become more reliant on the BPO approach, aware of its business benefits, and as additional BPO providers with innovative delivery models emerge, the domain of outsourced processes has extended to human resources, legal and financial research, employee development, finance, and engineering design. At the same time, the goals for BPO are broadening from the original goals of efficiency and cost reduction of transactional processes to include more revenue-driven strategic and transformational goals. Indeed, it has the potential to result in largescale transformation of the firm. This suggests that BPO is an important development, one that requires careful consideration by firms. The apparent benefits of BPO are accompanied by some significant organization, management, and technological challenges. The concept of outsourcing a number of key business processes to third party providers appears somewhat to be at odds with the notions of end-to-end integration, customer responsiveness, and real-time business. The key organization and management challenges are (i) how can firms obtain the business benefit of flexible external sourcing of business processes without losing the organizational benefits of internal coordination and integration; (ii) how do firms protect, integrate and leverage their information resources in BPO contexts where BPO service providers may be the originators and custodians of the underlying data, and where different service providers may have responsibility for different processes; and (iii) what are the most appropriate approaches for managing IT infrastructure so that it can enable BPO without compromising process and information integration. RESEARCH OBJECTIVES The focus of this study will be to develop insights into best practices for managing process and information integration in the context of business process outsourcing. Key research questions to be examined will include: What is the strategic rationale for adopting BPO? What are the critical process and information integration problems that arise in BPO contexts? What are the key organization, management, and technological solutions associated with successfully mitigating these integration problems. A related IAB project is examining the opportunities and implications of web services for strategic and IT flexibility. The underlying premise of that research is that in the context of ever increasing competitive environments, firms require higher levels of strategic flexibility (Hitt, Keats and DeMarie 1998). This in turn demands more flexible organizations and processes. The need for flexibility in organizational

3 arrangements and alliances is prompting a move away from tight integration toward loosely coupled arrangements (Sanchez 1997), which in turn require more flexible underlying IT infrastructures (Weill and Broadbent 1998). BPO offers an approach to achieving flexibility in business processes, while web services offer a mechanism for achieving flexible IT infrastructure (Hagel and Brown 2001). We therefore expect synergies to emerge between this project and the web services project. Similarly, another IAB project seeks to develop insights into the best practices surrounding the governance of externally sourced IT services. The study represents the initial phase of a long-term research program on the broader governance of IT in co-sourced environments. The study aims to develop a conceptual framework of the strategic intent and governance of externally sourced IT, and to apply this framework to a comprehensive empirical analysis of the relationships between the strategic intent for IT sourcing, successful governance mechanisms for externally sourced IT, and IT sourcing outcomes. Again, we expect that synergies will arise between it and the research project proposed here. RESEARCH PLAN and METHODS We propose to first develop a conceptual framework of the strategic intent for business process outsourcing, and the organization and management challenges associated with achieving these objectives without compromising process coordination and information integration across the entire value chain. Second, we will use this framework to undertake an empirical analysis of the relationships between the strategic intent for business process outsourcing and approaches information integration and IT infrastructure management that are associated with successful BPO outcomes. In the first year, we will draw upon secondary data to provide preliminary empirical support. This will be followed in the second year by a series of four indepth case studies of firms that have achieved successful BPO outcomes across a range of business processes. Firm-specific data will be collected via semi-structured interviews with multiple informants in each firm. These informants will be drawn from both technology and business areas, and from both executive and management levels. Cross-case analysis will provide opportunities to verify and extend the conceptual model, and to develop an integrative empirical model of the process and information integration challenges associated with BPO, and their solution. RESEARCH RELEVANCE and CONTRIBUTION The research is directly relevant to any organization contemplating or managing business process outsourcing that is seeking to understand the key issues involved in achieving positive business outcomes without compromising value chain coordination and information integration, and the management of appropriate IT infrastructure for BPO.

4 RESEARCH TASKS, DELIVERABLES, AND TIMELINE Task Deliverables Completion Collection of secondary data sources on BPO initiatives Development of conceptual framework for BPO Analysis of secondary data sources on BPO Development of a conceptual research model on the process co-ordination, information integration, and IT infrastructure management challenges associated with BPO Conceptual framework of strategic intent for BPO Summary report for IAB on the strategic intent for BPO based upon integration of findings from secondary sources Integrative conceptual model of the strategic intent for BPO and its management challenges Summary report for IAB on the organization and management challenges associated with BPO based upon integration of findings from secondary sources End October 03 End January 04 End January 04 End June 04 Conduct interviews for 4 case studies of BPO initiatives across process types 4 BPO case studies End January 05 Cross case analysis of case study interviews Development of practitioner oriented paper on strategic intent and management challenges associated with BPO Development of an integrative paper on the strategic intent and governance of externally sourced IT Results of survey analysis Practitioner paper for IAB members on managing BPO Integrative paper on the strategic intent and governance of externally sourced IT

5 BUDGET The proposed project budget is given below. Description Year Year Investigator and research assistance 20,000 13,500 Travel (for interviews) 6,500 Total $20,000 $20,000 BIBLIOGRAPHY DiRomualdo, A. and Gurbaxani, V. "Strategic intent for IT outsourcing," Sloan Management Review (39:4), 1998, pp Earl, M.J. "The risks of outsourcing IT," Sloan Management Review (37:Spring), 1996, pp Feeny, D.F. and Willcocks, L.P. "Core IS Capabilities for Exploiting Information Technologies," Sloan Management Review (39:3), 1998, pp Hirschheim, R. and Lacity, M.C. "The myths and realities of information technology insourcing," Communications of the ACM (43:2), 2000, pp Lacity, M.C. and Willcocks, L.P. "An empirical investigation of information technology sourcing practices: Lessons from experience," MIS Quarterly (22:3), 1998, pp Hagel III, John and John Seely Brown, Your Next IT Strategy, Harvard Business Review, October 2001, pp Hitt, M.A., Keats, B.W. and DeMarie, S.M. Navigating in the new competitive landscape: building strategic flexibility and competitive advantage in the 21 st century, Academy of Management Executive (12:4), 1998, pp Orton, J.D. and Weick K.E. Loosely coupled systems: a reconceptualization, Academy of Management Review (15:2), 1990, pp Sambamurthy, V. and Zmud, R.W. "The Organizing Logic for an Enterprise's IT Activities in the Digital Era -- A Prognosis of Practice and a Call for Research," Information Systems Research (11:2), 2000, pp Sanchez, R. Preparing for an Uncertain Future- managing organizations for strategic flexibility, International Studies of Management & Organizations (27:2), 1997, pp