IT OUTSOURCING: Success in the operational phase

IT OUTSOURCING: Success in the operational phase

IT OUTSOURCING: Success in the operational phase Master Thesis by Roland Booijen (259497) roland.booijen@inter.nl.net 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.

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

Contents 1 Introduction 1 1.1 Context 1 1.2 Topicality of the Subject 6 1.3 Definition of the Research Problem 7 1.4 Scope of the Research 8 1.5 Objectives of Sponsors 9 1.6 Deliverables of the Research 10 1.7 Methodology of the Research 10 1.8 Interim Table of Contents 12 1.9 Visualization of the research 14 2 (IT) Outsourcing Theories and Definitions 15 2.1 Introduction 15 2.2 Outsourcing Definitions 15 2.3 Definitions 19 2.4 History of 21 2.5 What differentiates IT from other Outsourcings? 22 2.6 Outsourcing Lifecycle 24 2.7 Motives and Disadvantages 25 2.8 Selective Sourcing 27 2.9 What is being Outsourced 30 2.10 Summary 32 3 Management Control 34 3.1 Introduction 34 3.2 What is Management Control 34 3.3 Transaction Cost Theory 35 3.4 Application to IT outsourcing and MC 38 3.5 Management Control in Practice 40 3.6 Summary 43 4 Business & IT Alignment 44 4.1 Introduction 44 4.2 What is Business & IT Alignment 44 4.3 Strategic Alignment Model 48 4.4 Summary 50 5 Research Model 51 5.1 Introduction 51 5.2 Perceiving Success 51 5.3 Propositions 54 5.4 Summary 57 Roland Booijen, April 2005 iv

6 Research Design 58 6.1 Introduction 58 6.2 Case Study Research 58 6.3 Research Subjects 59 6.4 Research Process 61 6.5 Summary 65 7 Analysis 66 7.1 Introduction 66 7.2 Analysis of a Case Study Research 66 7.3 Propositions 67 7.4 Other Observations of the Research 74 8 Conclusions 76 8.1 Research Questions 76 8.2 Research Outcomes 77 8.3 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

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 2005 1

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 2005 2

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 2005 3

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 2004. 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 2005 4

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. 2002 2007 Annual Growth BPO 9.3 15.6 11.1% IT outsourcing 4.2 10.5 20% Total outsourcing 13.5 26.1 16% 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 0,00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 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 2005 5

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. 2 http://www.giarte.com/ 3 http://www.gartner.com Roland Booijen, April 2005 6

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 2005 7

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 2005 8

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 2005 9

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 2005 10

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 2005 11

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 2005 12

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 2005 13

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 2005 14

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 2005 15

" 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 2005 16

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 2.2 - 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 2005 17

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 2005 18

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 2005 19

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 2005 20

"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 2005 21

Along with the rapid technological developments, this affects the internal IT department s state of control. They are gradually losing control. This lack of control initiates the next phase. Governance In the nineties, the number of vendors delivering IT services has been reduced and the length of those contracts extended. This decision, made by business management, was meant to increase control, which should lead to the predictability of the results of IT services and the control of its costs. This is the stage where the outsourcing of IT services originated. The long-term contracts with single or few vendors changed the position of the internal department and they can now be wrapped up in the external vendor or start a joint venture. Competition In the fourth phase, the information management sector slowly matured and the number of vendors delivering IT services has expanded again. The increase of vendors has led to competition, which forces them to decrease their prices and improve their service levels. IT services can be managed as a portfolio; when a vendor does not satisfy, it can be replaced by another. The importance of outsourcing IT grows bigger, it does not only contain secondary processes. Also primary processes can be outsourced. These four phases have been visualized in Table 2-1 below, along with their characteristics, the degree that business interferes with IT services and the number of IT service vendors that are contracted. High Degree of business management interferes with IT services Low 3. Governance Information Management Checking of execution Long term contract Result obligation 1. Autarky Internal IT department Execution No Contracts/budgets Effort obligation 4. Competition Information Management Governance en coordination Multiple long term contracts Result obligation 2. Chaos Purchasing IT department Execution and subcontracting Short term contracts Effort obligation Little Number of IT service service-providers that are contracted Many Table 2-1 - Characteristics of Beulen's phase model 2.5 What differentiates IT from other Outsourcings? Managers that approach IT outsourcing like any other make or buy decision make a mistake. Unlike other functions, such as security, catering and mailrooms, IT cannot easily be handed over to a service-provider. What is the reason that IT outsourcing should be treated differently from other types of outsourcing (Lacity et al, 1996)? Roland Booijen, April 2005 22

IT is not homogeneous but comprises a wide variety of activities. Managers usually see the importance of IT applications that enable business operations and management processes in a unique way. However, they often miss the value of less critical systems, such as accounting systems. The value of these systems can be found in the crossfunctional integration of business processes. Outsourcing has become more complicated since IT cannot be isolated. Also the lack of knowledge of the outsourcers business processes that serviceproviders have, make outsourcing more difficult. IT capabilities continue to evolve at a dizzy pace; thus predicting IT needs beyond three years is difficult. A lot of companies decided to outsource their IT systems because they thought the service-provider would arrange access to new technologies they could not approach themselves. When the deal was closed, they usually signed for current technology with hazy references to future technologies. After a few years, they found out that the now outdated contracted technology was an obstruction for the adoption of new technologies. Predicting future IT needs is very hard, if not impossible. This is a famous quote by Thomas Watson, chairman of IBM in 1945:"I think there is a world market for maybe five computers" (Van der Zee & Wijngaarden, 1999). There is no simple basis for gauging the economics of IT activity. In every industry, the improvement of price and performance occurs, although this doesn t happen anywhere as fast as in IT. Computing becomes constantly more powerful at lower costs, as Gordon Moore already predicted in his world famous Moore's law (1965). This trend can be seen in both private computing as business computing. The rapid change makes it difficult to estimate the IT costs over a longer period of time. Many companies feel lucky to sign a contract with a serviceprovider that offers a 25 percent cost reduction. This feeling often turns into dissatisfaction when the company pays above-market prices after a few years in the contract. Economic efficiency has more to do with IT practices than inherent economies of scale. However economies of scale do occur in IT, they can be achieved at such low volume that many medium-sized companies and most large-sized companies are able to realize. According to Lacity, most service-providers do not reach economical efficiencies by economies of scale, but by implementing better management practice. The fact that they could implement these management practices themselves, should also be considered by organizations that have outsourcing aspirations. There are large switching costs associated with IT sourcing decisions. Outsourcing deals can mostly be reviewed and evaluated. When it has become clear that the service-provider performs insufficiently, people can simply choose a new service-provider. This would be the case with an advertising agency or a security contract. Most of the time, this doesn't apply for IT outsourcing. The investments in this type of sourcings are very high. When decided to switch from service-provider, these investments are lost. Due to the costs involved, switching vendors in an IT environment is a complicated decision. All these reasons point to the fact that IT outsourcing is different from other outsourcings, and should also be treated like that. It is far more complex and critical in business processes, so special attention is needed for these problems. Roland Booijen, April 2005 23

2.6 Outsourcing Lifecycle Apart from being part of a change-process, outsourcing can also be looked upon as a process itself. The stages an outsourcing process can pass through, were defined by Delen in his WCIT sourcing cycle. This model is a lifecycle describing all phases of a sourcing cycle (Delen, 2002). Figure 2.3 Delen's WCIT sourcing cycle, adapted version (Joeglal, 2004) The first and most important task considering an outsourcing is the business case. In this essential step, the business case is examined. This makes sure that the outsourcing organization has a clear description of its problem. From here, the make- or buy decision can be made. When decided to continue with the outsourcing process, the service-provider must be selected. The focus should only be on the costs of all providers that proved to be able to deliver the desired quality level. It is also possible to renew the contract of an already existing outsourcing. In that case we skip step two. After the selection of the right service provider, the IT service must be migrated to the regarding service-provider. This can be a costly process when the IT systems are strongly intertwined with several business processes. The left side of the model shows an organization that chooses to execute the former outsourced activities by themselves. This could also be a situation where the activities already performed by the own IT department, are kept in-house. The link between the fourth and the fifth block shows the migration from the outsourced IT service and its processes back into the own organization. Roland Booijen, April 2005 24

2.7 Motives and Disadvantages There are several reasons for a company to opt for outsourcing, the advantages depend on the situation of the outsourcing organization. A lot of research has been conducted concerning the advantages and disadvantages of outsourcing. Beulen (1997) and Van der Zee & Wijngaarden (1999) categorized different motives for outsourcing. The motives are categorized below under economical, strategic, operational and emotional motives in no specific order. Economical Motives Cost The costs can be decreased by using the efficiency of large IT suppliers. They can often apply bulk-purchasing and rationalize the processes. Control A better anticipation of the costs can be made, because hidden costs are visualized. By this way, the organization gets control over its costs. Risks The organization carries several risks over to the service-provider. Future unexpected costs like fast technology obsolescence are now handled by the service-provider. Increase venture capital The outsourcing provides an opportunity to liquefy the organization's tangible and intangible IT assets, by selling the resources to the service-provider and leasing them back. Strategic Motives Focus on core business As stated in paragraph 2.2, the core business is a very important driver. It can often be seen that when organizations tend to focus on their strategic issues, the managers spend their time more effectively. Where the computing tasks are a commodity and non-core, they should be outsourced. Innovation The outsourcing organization can acquire better access to technical and business specific knowledge through the service-provider. The larger scale of the service-provider enables opportunities such as research facilities. Transformational Outsourcing specifically for attaining new organizational capabilities. Linder (2004) distinguished four different varieties of transformational outsourcing. Rapid Startup, to scale up for new business; Pathway to Growth, to fix a key process that stands in the way of growth; Change Catalyst, to signal broad change and focus on adding value; Radical Renewal, to improve core operating capabilities radically. Operational Motives Quality Through outsourcing it is possible to achieve higher service levels, which the organization on its own could not achieve before. The business demands higher service level than the internal IT department could deliver. Flexibility and capacity When a certain service is outsourced, the organization can react on fast changes of the demand of IT services of the business. This by means of the variable deployment of their IT capacity. Transition While an organization is migrating to new hardware or software platforms, the old platforms are often outsourced. They manage and operate these systems until the migration is complete and the new systems proved reliable. Roland Booijen, April 2005 25

Emotional Motives 'Bandwagon' effect A not so good motive to consider outsourcing is the so-called 'bandwagon' effect. Organizations want to outsource just because other organizations outsourced their IT too. They try to imitate others, which is a rather irrational motive. Faith When business management has lost their faith in the IT department, they can eliminate them to outsource the IT activities. Through sourcing alternatives, high-quality standards will be applied to the existing staff. Uncertainty The service-provider can show a better insight into the added value of the IT function, when the internal IT department is not able to provide this information. Disadvantages When an organization has no problems with cost, quality, flexibility or any of the other above named motives, at least on these criteria they have no reasons to consider outsourcing. But even if they have these problems, there are still reasons to refrain from outsourcing. A few general disadvantages of outsourcing are stated below (Earl, 1996; Bouman, 1996). Possibility of weak management If the IT service scores low on operational performance, organizations will be tempted to outsource this function. But if the reason of this lack of performance is the management s bad performance on the IT function, will this management be able to manage the external provider? Business uncertainty If a firm decides to outsource IT services because of cost or focus, it can be assumed that it expects its future directions and needs are clear. In the past however, it happened more than once that a strategy changed over time, which led to the conclusion that the outsourcing had been a bad option after all. Hidden costs When an outsourcing is made with cost reduction as the main objective, there is a specific promise of long term cost savings and early cash flow benefits. Organizations tend to forget the setup costs and the cost of managing an external provider. Also, when services outside the SLA are not specified in the contract well enough, they may be charged at exceptionally high costs. Loss of innovative capacity In the long run, a company wants to maintain innovative capacity in IT. By this way, they can exploit these technologies for new ways to provide IT services to business. In an organization that has outsourced these functions and sold its resources to a service-provider, the innovative capabilities are lost. Of course, these innovation capacities can be bought from the service provider, but they are not naturally included in the contract. Too specific Sometimes the IT services are so specific that the costs for outsourcing will become too high. The service-provider will only be interested in acquiring knowledge about these specific systems when the returns are very high. Lack of trust Many service-providers claim that they run the processes better at lower cost. But besides stating this, they should also be able to prove it. Due to the combined risks, one should not start with outsourcing when the necessary trust is not available. Roland Booijen, April 2005 26

Personnel and organization A large struggle for outsourcing deals with the personnel and organization. Mainly at large organizations, the staff is not very pleased with a possible outsourcing to a smaller result-oriented company with a different company- and management culture. Also the remaining personnel can suffer from decline in performance and moral (Elmuti et al, 1998). An example of this kind of negative impact is the strike that almost shut down General Motors plants in North America in 1996. Strategic concern The IT services can be of such crucial importance to business, that outsourcing is ruled out in the interest of the continuity of the primary processes. When an interest in outsourcing arises within the organization by one of the former stated motives or perhaps a different one, the disadvantages of outsourcing should also be thoroughly discussed. By considering these disadvantages, solutions for the problems can be sought prematurely. When the disadvantages overrule the advantages, the outsourcing should be excluded and other options should be sought to achieve the desired goals. 2.8 Selective Sourcing When the first outsourcing deals were signed, the majority of organizations outsourced their whole IT services department. After a few years in the contract, these long-term mega-deals often led to trouble. According to Lacity (1996), many organizations made a misassumption during the preliminary research phase in the trajectory. They often asked themselves: "Should we outsource IT or should we execute the activities ourselves?" The real question they should have asked themselves is: "Where and how can we take advantage of the developing market for IT services?" How to outsource From that point of view Lacity found out that successful companies carefully select which activities they should source and which type of sourcing they should use. This way of outsourcing is called selective sourcing, though also referred to as smart sourcing. Within that research she developed a framework (Figure 2.4) especially created for selecting the sourcing option. Figure 2.4 - Lacity's sourcing option selecting model (Adapted from Johansson, 2003) Roland Booijen, April 2005 27

According to this framework, contracts can be categorized along two dimensions (Lacity, 1996): The purchasing style The first dimension described by the framework is the purchasing style, which contains two purchasing styles: transactional and relationship style. Transactional style refers to one-time contracts detailed enough to be the original reference document. Relationship style refers to the less detailed, incentive contracts based on expectations that customer and vendor will be in business for many years. The purchasing focus - The second dimension is the purchasing focus. Organizations can have a resource or a result focus. A resource focus signifies that organizations buy resources from a service-provider, such as hardware, software, personnel and know-how, but they manage the delivery of the IT activity themselves. With the result option, service-providers manage the delivery of the IT activity to provide the company with the specified results. Type of contracts Within these two dimensions, four types of contracts emerge: buy-in, contract-out, preferred supplier and preferred contractor. When a company applies the buy-in strategy they buy resources from the service-provider for temporary needs. For example: When the market-department launched a new campaign, an organization buys temporary extra hosting capacity for the hosting of their website. Using the contract-out strategy, the service-provider is fully responsible for delivering the results of the IT activity. This option is often used to outsource data-centers and appears most successful when able to clearly define their needs in an airtight contract. When having a relationship style and a resource purchasing focus, the organization should have a preferred supplier strategy. Hereby they develop a close relationship with a service-provider in order to access its resources for ongoing IT activities. The advantage for the service-provider is that they rely on a stream of revenue. In return, the outsourcing party gets volume discount and a serviceprovider that is familiar with the organization. By means of a preferred contractor strategy, companies contract with a service-provider that helps them to mediate risks. The vendor is responsible for the delivery and management of the IT activity. To ensure a good performance of the service-provider, the contract must be based on incentive. By this way, shared goals can be created. Which activities to outsource In that same research, Lacity also developed a framework for selecting the right activities to outsource. Outsourcing several activities and keeping others in-house requires treating IT as a portfolio. Firstly, the IT activities should be analyzed for their contribution. "Commodities as payroll operations should be outsourced" is an often-heard statement. According to Lacity s research this is too simplistic, for two reasons. One can't just claim an activity as being strategic or a commodity. The former named payroll activity can be strategic for some kinds of organizations, but this might differentiate critically from their competitors. Secondly, certain activities can change over time from commodity to strategic or the other way around. Due to, for example, economical circumstances or changing competition, this can change. Roland Booijen, April 2005 28

The ability to pay by credit card in restaurants once was a critical differentiator, because there were only few restaurants where that was possible. This feature has slowly grown into a commodity and credit cards are no strategic advantage anymore. That's why Lacity (1996) also created a framework for organizations to select which IT activities are candidates to be outsourced. Now each organization can analyze the delineation of its IT activities for its own business context. The framework was created along two dimensions: Figure 2.5 Framework for selecting candidates (Adapted from Lacity, 1996) Contribution to business operations This dimension contains the contribution of the IT activity to business operations. This can either be a critical contribution or a useful one. For instance, a nuclear power plan will find their security monitor system critical, while the employee planning system for managers will be considered as useful. Contribution to business positioning The second dimension comprises the contribution of the IT activity to the business positioning. An IT activity can differentiate an organization from its competition. An airline reservation system can be considered a differentiator when people specifically choose this organization due to their reservation system. Although some IT activities are considered commodities, it does not entail they should not be executed competently. Critical commodities are significant for performing normal business operations, but they don t differentiate in competition. ATM machines in supermarkets for example, are critical for their business, but every supermarket has them. These are only to be outsourced under strict conditions, when it has been proved that the service-provider is able to deliver the required service levels. The useful commodities add value to the business but they don t distinguish the organization from competition. These activities are very likely to be outsourced. Some examples are payroll and accounting systems. Operations that both differentiate and are critical for business should be remained in-house. These strategic systems should never be outsourced. When expertise or know-how is needed, an organization could hire resources from external service-providers. These activities should be under the company s own management. Useful differentiators should not even exist. Unfortunately, reality shows they do. It distinguishes the organization from the competition in a way that is not critical to Roland Booijen, April 2005 29

success. This is often because the IT department does not understand business or has a distinct agenda. To summarize, selective sourcing entails a rational way for selecting the IT activities that could be outsourced and how. The former stated frameworks help to treat the IT activities as a portfolio. 2.9 What is being Outsourced If organizations can select which components of their IT services they outsource (which has been illustrated in the last paragraph), it is interesting to know what IT activities are being outsourced by the Dutch market. Morgan Chambers has studied this in 2001(Kranenburg, 2002) among 500 IT decision makers. Figure 2.6 Activities most outsourced by Dutch companies (Morgan Chambers, 2001 derived from Kranenburg, 2002) If we compare these numbers to a research conducted by Gartner (Mac Neela et al, 2004) in the USA, we see that the Dutch market stays behind. 4 We can compare the overlapping activities helpdesk (21% higher), voice and telecom (38% higher) and mainframe operations (11% higher). The Dutch market prefers to outsource the more operational processes compared to strategic processes (Kranenburg, 2002). This might imply that when the Dutch market matures, strategic outsourcing processes will increase; it will expand its purchased services to the strategic level. However, it is also possible that the cultural differences between Europe and the United States play a part. 4 Please note that the Morgan Chambers research is from 2001 and the Gartner research from 2004. Roland Booijen, April 2005 30

Because the scope of our research entitles the outsourcing of the operations and management of hosting, desktop services and ERP-systems, we will continue to discuss these three services. These three services were chosen because they are outsourced most in the Netherlands. In our definition, Network services and desktop management comprise the desktop services, supplying a desktop with network facilities. Hosting is the second most outsourced activity in the Netherlands. ERP management actually relies on multiple activities as stated above. Some of these are: desktop management (the front-end of the ERP application), mainframe operations (transactions on the main ERP server) and network services (communications between de front-end and the ERP servers). Hosting Thanks to the explosive growth and growing maturity of the Internet during the nineties (Coffman & Odlyzko, 2001), it became an interesting medium for organizations. Nowadays, virtually every organization presents itself on the internet. Although the businesses have improved the understanding and marketing of their organization, they still lack in hosting their site. Hosting is costly, complex, specialized and very dynamic, which makes it a good candidate for outsourcing (IBM, 2000). Hosting is the process of making web-services available on the internet. In our definition, this can encompass maintaining the web services itself. Outsourcing of hosting is rather standard; research has shown that most top websites outsource their hosting services (Jupiter Communications, 1998). A website should be effective, available, easy to use and scalable. Schaaf recommends outsourcing hosting services because: "Hardly any global 2,500 firm can match the data center, network or staff expertise of a hoster. Firms that have managed so far to run e-commerce from corporate campuses will be hard-pressed to keep up as traffic loads increase, complexity shoots up and data center diversity becomes an imperative." (Schaaf, 1999) Desktop Services Desktop outsourcing is often applied by organizations, as they have come to think of it as a commodity IT service. Gartner (Mac Neela, 2004) found that 13 percent of the worldwide outsourcing market consists of desktop outsourcing. It is a low risk type of outsourcing and highly visible, which makes it exceptionally attractive to outsource. This market is rather standardized and delivers all computer tools an employee would need during his work, such as hardware (laptop, desktop pc) software (operating systems, office packages) and network facilities (internet, intranet). Due to the dependency of the computing of employees, in spite of being a commodity, the serviceprovider must be capable and reliable. Any disruption in the service disables the employee to fulfill his task, which can disrupt the company s primary and secondary processes. We define desktop outsourcing as managing and delivering all standard facilities an employee would need to fulfill its job. A computer, standard software (operating systems and packages as MS Office) and network facilities belong to this definition. Non-standard software, such as very specific tools used in certain functions or ERP client sides, do not belong to desktop outsourcing. They belong to respectively application outsourcing and ERP outsourcing. Roland Booijen, April 2005 31

ERP-Management In our research, the outsourcing of ERP systems lies within our scope, which entails its managing and operational functions. Enterprise Resource Planning (ERP) systems are highly developed and complex information systems. They integrate several functional information systems, such as finances, personnel planning and logistics, into a seamless suite of business applications across the company, and thereby allowed for streamlined processing of business data and core-functional integration (Gupta, 2004). It does not only deliver a unified view of the business that encompasses all functions and departments, but also an enterprise database where all business transactions are entered, recorded, processed, monitored and reported. (Umble, 2003) An ERP system is customizable, standard application software which includes integrated business solutions for the core processes (e.g. production planning, sales planning) and the main administrative functions (e.g. payroll and accounting) (Rosemann, 1999). An important characteristic of ERP systems is that they can be build up modularly; even standard applications can be customized to fit every business. The modules usually represent a functional area of an organization and can be separated into four fields: Financials - Such as asset accounting, cash management & forecasting and product-cost analysis. Human Resources For example payroll, personnel planning and travel expenses. Operations and Logistics For instance inventory management, plant maintenance and serviceprovider evaluation. Sales and Marketing Such as order management, pricing and sales planning. Instead of developing an IT system in-house, more and more companies are turning off-the-shelf ERP solutions to plan their IT resources more effectively and manage their legacy systems (Holland & Light, 1999). The top four ERP products have a 60-70% feature overlap, which makes them rather comparable. The top four consists of SAP, Oracle, Peoplesoft and Baan, in which SAP dominates the market and outsells all three other service-providers combined. Organizations sometimes forget about the extra costs involved in buying an ERP system. According to the Gartner Group, companies may spend up to three times as much money on consultants as they do on the ERP system itself (Computer Technology Research Corporation, 1999). Al-Mashari (2003) complements Gartner by mentioning the human resources that are required during the implementation project, aside from its integration with other applications and the purchase of the additional new hardware and databases to store the ERP data. 2.10 Summary In this chapter we have answered the first research question: What is outsourcing? Terms have been defined which will be used in this thesis considering outsourcing and more specifically IT outsourcing, in order to make clear what they really mean. This was followed up by a review of the Dutch history of IT outsourcing, to give further insight into the way it has developed to what it is today. Roland Booijen, April 2005 32

Differences between IT outsourcing and other types of outsourcing have been shown to prove that IT outsourcing is different and should thereby also be treated differently. We looked upon outsourcing as a continual process by Delen's lifecycle. Furthermore, the reasons why organizations choose to outsource their IT activities have been dealt with, but also the disadvantages of outsourcing, which can be interpreted as reasons not to outsource (performing them in-house) or as points to give extra attention when choosing to outsource. Lacity's selective sourcing frameworks were discussed to show how benefits of selective sourcing over total outsourcing could be applied. It basically gives managers that are assigned to review all outsourcing options a framework to find out which activities they should outsource in what way. Finally, we looked at the activities that are usually outsourced in the Dutch market, where we zoomed in on the activities that are part of our scope. The former paragraphs gave an impression of all general facets of IT (outsourcing). Now we will continue to focus on the aspects that relate to our specific research. Roland Booijen, April 2005 33

3 Management Control 3.1 Introduction In hierarchical based organizations, Management Control was intended to increase the probability that the employees will behave in ways that lead to the attainment of the organizational objectives. These control systems were supposed to lead to better organizational results. However, Management Control does not become dispensable when a certain activity is outsourced. Even stronger, Management Control becomes more important, because not only the internal organization needs to be controlled. The service-provider, who took over the activities, also needs to be controlled. These outsourced activities are often very important and intertwined with primary processes. This is why the organization must ensure the continuity of these activities. In this chapter, we will look at Management Control in an outsourcing situation. We will apply the transaction cost theory, to show why Management Control is important in an outsourcing situation, in order to ensure the service-provider delivers its services as promised. We will also show what role ITIL can have in controlling the service-provider. 3.2 What is Management Control The within-firm control systems have been studied for a rather long time. They have been conceptualized and categorized in various ways: formal versus informal controls, behavioral versus outcome controls, mechanistic versus organic controls, bureaucratic versus clan controls (Langfield- Smith et al., 2003). Now that the boundaries of firms are slowly fading, it is interesting to see how control systems are changing. The interfirm control systems (control systems between multiple organizations), and in our case especially outsourcing relationships, have been studied by Van der Meer-Koostra, Vosselman, Speklé and Langfield-Smith for the last years. They tried to expand the existing knowledge of Management Control systems from within firm situations to interfirm situations, primarily by means of the Transaction Cost Theory. First we would like to define what Management Control actually is. Speklé (2001) describes it as a purposive process or a set of devices and mechanics, that through its influence on the behavior of actors within an organization, intends to contribute to the achievement of some pervasive objectives of that organization. Merchant and Simons (1986) note that the focus of control systems relies on two key concepts: the behavior of the organizational participants and a concern with the effect of this behavior on organizational outcomes. Merchant and Simons speak of organizational participants. In an outsourcing situation, these organizational participants can also be part of the service-provider. These people work for the service-provider, but deliver services to the outsourcing organization. Because Speklé's definition is Roland Booijen, April 2005 34

focused solely on the within firm situation, we will now alter his definition to define what Management Control is in an outsourcing situation. Management Control in an outsourcing situation are all purposive processes or a set of devices and mechanics, that through its influence on the behaviour of actors within and outside (where the focus relies on outside) the outsourcing organisation, intends to contribute to the achievement of some pervasive objectives within scope of the outsourced services of the organisation. Definition of "Management Control in a outsourcing situation" In other words: by means of Management Control, one tries to attain the service-level that was demanded in the original service level agreements and remain in control of the deal. This can be achieved by influencing both the service provider (for example by benchmark clauses) as the own internal organization (for example by reducing the number of internal requests to the service provider), whereas the focus relies on the external side. Management Control deals with controlling the contributions of individuals (whether they are outside or inside the organization) to ensure the quality. By using the transaction cost theory, we will now demonstrate why this control is necessary. 3.3 Transaction Cost Theory The transaction cost theory will be used here to explain why Management Control is needed in outsourcing deals. It often proves useful to understand why things happen the way they do. We will first discuss the theory itself before reflecting it on outsourcing and Management Control. Building on the insights of Coase and developed by Williamson, the transaction cost theory differentiates itself from the Neoclassical world. In the Neoclassical, theoretical world, all information is costless and all actors are rational. If all actors are considered to behave opportunistically, all future behavior can be described in the contract at zero costs. Actors can calculate the most optimal solution ex ante and turn these into 'complete contracts'. Organizations are in these nothing more then a bundle of contracts, which do not make the firm any different from other contracts (Groenewegen, 2003). The transaction cost theory has been developed by Williamson when he found a discrepancy between the original economical theories and the organizational reality (Lacity and Hirschheim, 1993). Those original theories predict that goods and services are most efficiently produced in organizations that have specialized in that product or service, as they then were able to achieve economies of scale. Williamson wondered how it was possible that large bureaucratic organizations could arise during the 20th century (Perrow, 1986), since this was not possible according to former theories. Roland Booijen, April 2005 35

The essence of the TCT is that using a market is not frictionless (Aubert, 2004). These imperfections lead to costs, so organizations must make a trade-off deciding which transaction should take place within the organization (the 'make' decision) and which transaction occurs outside the own organization (the 'buy' decision). According to Coase (1937) the transaction costs are lower within organizations because of their hierarchical structure, but internal transaction costs do exist. In this context, transactions are the exchanges of goods or services between economic actors, who are technologically separate units, placed inside or outside the organization (Williamson, 1985). Transaction costs consist not only of planning, adapting and monitoring task completion, but also activities around the contract such as negotiations and the definition of the contract. One could wonder how time (since Coase original theory dates back to 1937) and the arrival of ICT influenced these transaction costs. ICT made the delivery of services easier (less costly) and made the internal cost grow higher. Both these events made it more attractive to choose the 'buy' option. Nevertheless, it should be kept in mind that transaction costs still remain. Transaction cost framework Williamson (1975) created a framework (Figure 3.1) for transactions costs. The human factors are on the left side of the model, the right side shows the environmental factors. The transaction cost theory has two underlying assumptions, the first being the bounded rationality and the second being opportunism. Figure 3.1 - Transaction cost framework (Williamson, 1975) Those two factors result in information asymmetry (Aubert, 2004). Bounded rationality refers to the limitation of the human mind. Even when all information is available, the human mind is sometimes not able to make the right decision. Groenewegen (2003) makes an analogy with a game of chess: where the player has all the information he needs (the rules and the positions of the pieces). Still, he cannot always make the best decision possible, since there are just too many moves the opponent can make in the upcoming turns. Concluding, bounded rationality refers to the human mind as being rational, but only limited (Simon, 1961). Roland Booijen, April 2005 36

The arrow that links it up to uncertainty/complexity stands for the problems that arise in uncertain or complex situations in combination with the human bounded rationality. In uncertain situations (as some long-term market developments), not all the information is available. When the situation is not complex, all uncertainties can be handled in a contract, but when the situation is both uncertain and complex, the number of possible outcomes is too large for the human mind to handle. This would also not have been a problem if human beings did not have another characteristic: opportunism. Human beings can also behave opportunistically; the actors can be characterized by 'self interest seeking with guile' (Willamson, 1985). This behavior is not displayed constantly though; the issue is that the information on the opportunistic behavior of the other part is not known ex ante. Opportunism has a link with the environmental factor 'small numbers'. The term 'small numbers' refers to the number of suppliers in the market. When the market has just a few supplier of a specific product of service, they can unite and behave opportunistic towards the buyer. In a so-called 'perfect competition' this can only been done once, after the buyer found out the opportunistic behavior of its supplier he can directly shift to another supplier. There are also a few other situational factors that determine the height of the transaction costs and herewith the decision to make or buy the product or service. Aubert (2004) states that the asset specificity can be measured by comparing the cost of an asset and the value of its second best use. Money, for instance, has no asset specificity. When a deal is being cut off, the money can be fully spend on another transaction without losing any value. Knowledge is an example of an asset with high specificity. The time (and thus money) spent attaining the knowledge, cannot be made undone. The more specific the assets are, the higher the transaction costs will be. Aubert (2004) also conducted a study to test an explanatory transaction cost model to the level of IT outsourcing. He hypothesized that asset specificity and uncertainty have a negative influence on the level of outsourcing. Furthermore, he suspected that the business skills had a negative influence and technical skills had a positive influence on the level of outsourcing (i.e. an activity that requires high knowledge of business should not be outsourced and technical skills are generic activities and should be outsourced). The analysis of the data supported, at least in part, his model. The only unexpected result was that the business skills did not play a significant role. This has been attributed to the rather low level of business skills required to perform IT operations. The uncertainty discussed before is also a factor that increases transaction costs. Uncertainty in the quantity of the service-levels or the definitions of the service-levels itself, will lead to higher transaction costs. This is also the case when there is uncertainty in measurement. This will lead to higher transaction costs and thus a preference for an internal governance structure. The frequency on which the transaction will occur also influences the preference of the make-buy decision. When a transaction will occur only once or a few times, it may not be worth the initial investments involved with an internal governance structure. Roland Booijen, April 2005 37

3.4 Application to IT outsourcing and MC The transaction cost theory (TCT) can directly been applied to IT outsourcing and the way Management Control (MC) should be configured. It can be used as a framework for analyzing the outsourcing option. The market structure represents the purchase of the service from a serviceprovider and the internal governance structure represents the in-house option. However, the theory can also be used as an explanation why control is more needed in certain situations. A multiple service-provider situation for example, which is obviously a more complex situation, will be more expensive to control. The TCT defines three distinct modes of hierarchical interfirm governance structures: markets, hybrids and hierarchies (Van der Meer-Kooistra, 2000; Speklé, 2003). These three different structures all have their own way of attaining control. The market structure is characterized by unspecific assets, a large quantity of suppliers and the output can easily be measured. When a supplier behaves opportunistically, suppliers can be switched without any trouble. This is how organizations derive control in a market structure. The hybrids have a high degree of asset specificity, high independency of both parties and output is measured difficultly. They need to develop specific relation skills to ensure continuity. Furthermore, they should rely on long terms contracts with additional safeguards to ensure fulfillment. The hierarchies deal with transactions having asset specificity that can be caught into highly specified contracts. The frequency of these transactions is high and the quantity and quality of the transaction can be described within the contract. Hierarchical governance attains control primarily by means of authority, bonus & fines structures and monitoring. Clearly, in relation to the scope of our research (focusing on the outsourcing of the management of hosting, desktop service and ERP), the hierarchical structure fits our research the best. The outsourced components have transactions that have asset specificity that can be caught into highly specified contracts. The frequency of these transactions is high and the quantity and quality of the transaction can be described within the contract. Hierarchical governance attains control primarily by means of authority, bonus & fines structures and monitoring: the better these are configured, the better the delivered services will match the demanded services Transaction cost theory factors in relation to outsourcing De Looff (1996) examined the TCT variables in relation to IT outsourcing. The following aspects are derived from his book. Basically, the relationship between IT outsourcing and TCT is clarified in the following quote: IT outsourcing leads to lower production costs and higher transaction costs. IT outsourcing should be chosen if the savings on production costs caused by economies of scale outweighs the increase in transaction costs caused by the threat of opportunism. (De Looff, 1996) Roland Booijen, April 2005 38

Opportunism, being a human behavior, also occurs in IT outsourcing. The service-providers can behave opportunistically by abusing their knowledge to sell services or products the client could have attained at lower price or did not even need at all. This could also be done by misrepresenting their abilities during the service-provider selection, in order to acquire the deal. The client can also be made dependant on purpose, to assure contract renewal. The probability that opportunism will occur, or even has a chance to occur, depends on several variables, which we have treated earlier in this paragraph. The asset specificity is relevant to IT outsourcing, since customization to the client is often required. Three types of asset specificity are detached. The site specificity takes place when for example face-to-face contact is needed between staff or physical security measures are needed. The physical asset specificity refers to customization of the equipment that is required. Besides, the human asset specificity relates to the knowledge personnel must have. When very specific knowledge is required, the asset specificity will rise. Within IT outsourcing, we saw different components that can be outsourced (paragraph 2.9). The site specificity depends on the organization that commits outsourcing. To illustrate, you could imagine a rather commodity like hosting. Hosting an internal website for the Ministry of Defense could require the servers to be located in a secure environment. The height of the human asset can also be dependant of the outsourcing organization itself; some organizations are so complex that lots of knowledge must be required to understand them. This inevitably requires more time spent on learning about that organization. But not only the organization that outsources determines the asset specificity; the component that is outsourced is also important. The more commodity services (desktop outsourcing, hosting) require less human and physical specificity than the specialized services (managing ERP-systems, application outsourcing). Therefore, the asset specificity depends on the component that is being outsourced, but also on the outsourcing organization itself. The number of suppliers of IT services may seem high. However, when the asset specificity is high, the number of adequate suppliers may prove rather low. There is quite a lot of uncertainty regarding IT outsourcing. Uncertainty about the future capabilities of IT, which seem to move so fast that nobody can make accurate predictions. More uncertainty relates to the future business needs of IT, which can diverge by changing market circumstances and changing strategies. Complexity in IT systems can be high, because the supported business processes are complex or the required technology has a high complexity degree. Integrating different systems is also a complicated task. The bounded rationality relates to IT outsourcing in the knowledge and skills of the outsourcing organization to specify requirements for the relevant services, to select appropriate serviceproviders and to draw a tight contract to control the service-provider. Roland Booijen, April 2005 39

The Use of Management Control Management Control can be used as a measure to perform a counteract against opportunism. When the service-provider is aware of the fact that information is gathered by his client, the chance of displaying this behavior is smaller. Would they behave opportunistically, there is a large chance the outsourcing organization will find out and draw their conclusions. The gathered information helps to overcome the information asymmetry that exists between the outsourcing organization and the service-provider, which feeds opportunistic behavior. If the outsourcing concerns high asset specificity, the service-provider has often spent lots of money to obtain the relevant knowledge and means. When the client finds out that the service-provider displays opportunistic behavior and therefore terminates the contract, the service-provider will be left behind with assets that have no use. Therefore, the chance of a service-provider displaying this behavior is smaller in these high asset situations. The bounded rationality of men is the reason that contracts are bound to be incomplete, the human mind is simply not capable of creating 100% complete contracts. Incomplete contracts need Management Control to fulfill the contractual gaps with the acquired information. The information is necessary for knowing where the gaps in the contract are and how they should be fulfilled. The fact that these contractual gaps are bound to occur must be acknowledged, and when closing a deal, measures must be taken to solve this problem. If not, problems will arise during the deal. Concluding, to overcome the information asymmetry between the service-provider and the outsourcing organization, which comes about by human flaws opportunism and bounded rationality, Management Control is essential. 3.5 Management Control in Practice Until now, we have looked at Management Control from a theoretical point of view, but how does it actually work in reality? What tasks should the Demand organization perform to be in control of the IT outsourcing? As discussed before, the Management Control task of the Demand organization is a tactical task and primarily focused on the service-provider, but in a smaller extent to the business side of the organization. What exactly are the tasks a Demand organization should perform to be in control? A good and most used 'best practice' standard is ITIL (Information Technology Infrastructure Library), used for IT service management. ITIL is a customizable framework of best practices to achieve quality service and overcome difficulties associated with the growth of IT systems (Wikipedia, 2004). ITIL describes a systematic, professional approach to managing IT services. Though not specifically made for an outsourcing situation, it is well applicable in this field. In Figure 3.2 the ITIL framework and its procedures can be seen. In ITIL, service-management is divided in two parts: the service delivery (tactical tasks) and service support (operational tasks). Roland Booijen, April 2005 40

Service Delivery is synonymous with the provision of IT services that come up to the customer s expectations. Service Support contains the processes that support the efficient provision of IT services. Figure 3.2 The ITIL framework The ITIL-framework is initially made for organizations that perform their IT tasks themselves. Things change within the framework when an organization outsources some of its IT functions. The operational tasks will disappear, just as some small parts of the tactical tasks. In the rest of this paragraph, we will focus on the components that do matter in outsourcing and explain why the other procedures are not relevant anymore, to create a system of Management Control. The descriptions of these procedures are mainly derived from Itil.org (Itil.org, 2004), the more obvious procedures will not be explained. Service Delivery In an outsourcing situation, Capacity and Availability Management remain important, but are now partly performed by the service-provider. The control element should remain in-house. For instance, the bandwidth of a growing organization could eventually become insufficient. The service-provider could give the outsourcing organization advice when the bandwidth becomes critical, but the control element stays in the outsourcing organization. The service-provider should give adequate input like reports on these items to the outsourcing organization. Financial Management should be performed by the Demand organization in an outsourcing situation. Financial management is responsible for the identification, calculation, monitoring and Roland Booijen, April 2005 41

onward allocation of costs for the customer s contracted IT services. So this contains benchmarking the prices paid for the services, bonus/fine structures in the contract and charging the costs on to the end-users to make them aware of the costs. This bonus/fine and benchmark systems should be installed from the start of the contract, because it is very hard to negotiate over these items during the contract. As for Capacity and Availability Management, this does require input from the serviceprovider on several items. Service-Level Management also remains a task to be performed by the outsourcing organization. The Demand organization should be a central function of IT service management and is responsible for qualitative and quantitative control of the services which the service-provider performs for its customers. Tasks that are relevant here are negotiating and agreeing over the service-levels with both business and the service-provider. Making sure that as many service-levels are recorded as needed and that they are made SMART (Specific, Measurable, Attainable, Realistic and Tangible). The objective of IT continuity management relies in safeguarding the performance in any eventuality based on planning and implementation of preventive measures. This task, which should be based on a higher-level business continuity plan, should prevent the probability that critical services break down and reduce the impact if it happens after all. This task can be performed by the serviceprovider (usually on the lower levels) or by the outsourcing organization itself (usually on the higher levels). Costumer Relationship Management (CRM) concerns developing and nurturing a good professional working relationship between customers and service providers. This is an important task for demand management, as the relationship has often proved important. The relationship works both ways between the Demand organization and business (supply role) and between the Demand organization and the service provider (demand role). Service Support These more operational tasks are almost totally shifted over to the service-provider. Incident, Problem, Configuration (operation and administration of IT assets) and Release Management (releasing bundled changes in hard- and software) are now all being performed by the serviceprovider, although information (reports) must be handed over to the Demand organization. Also, the Service Desk is being performed by the service provider, although some organizations choose to perform this task themselves because of the existing internal organizational knowledge. Change management is a task placed on the border of operational and tactical level. Change Management remains partly inside the Demand Organization: they should be the interface between requested changes from the business to the service provider. A Change Advisory board (CAB) should be established using people from both business and Demand organization. They should decide over priorities, risks and costs of changes. They also should manage the size of the flow of change requests, since each change costs a certain amount of money. Except for the service-management processes we just discussed, ITIL mentions another important task that is very relevant in an outsourcing situation: Project Management. In an outsourcing situation, certain services and SLA's are recorded in a contract. Everything the outsourcing Roland Booijen, April 2005 42

organization requests that falls outside the documents mentioned above, will be treated as extra projects. These are often paid on hourly basis and therefore, strong control must be exercised. 3.6 Summary In the last chapter, we discussed the subject Management Control and its relation to interfirm (outsourcing) structures. Due to the fact that outsourced IT activities are strongly intertwined with primary processes, we need to make sure they are executed correctly by the service-provider. To show the need for control in these situations, we used the Transaction Cost Theory. We explained the meaning of it and how it is related to Management Control. The human characteristics opportunistic behavior and bounded rationality appeared responsible for the need for Management Control. Afterwards we looked at Management Control in practice and we used the ITIL methodology to sketch how an outsourcing situation often looks like in reality. Roland Booijen, April 2005 43

4 Business & IT Alignment 4.1 Introduction As business and IT have become increasingly intertwined with one another, the alignment of these two became extremely important. In his stages theory, Nolan has been studying the subject of business and IT alignment since the seventies. Business & IT Alignment grew to an issue that concerns most enterprise managers. A research (Figure 4.1) by the Society for Information Management among three hundred enterprise managers (at CEO or CIO level) shows this is the primary concern. In addition, the Computer Sciences Corporation has examined these management issues and shared the same conclusions. Figure 4.1 Top-10 Concerns by enterprise managers (Luftman, 1999) Although this topic is on top of the list of managers priorities, they also acknowledge that they didn t apply this alignment very well. A research among 68 respondents performed by Gartner stated that only 36% of the respondents found their business and IT aligned to a large degree or more (Mac Neela, 2004). In this chapter, we will thoroughly discuss the subject of Business & IT Alignment. We will define Business & IT Alignment and explain why it is useful for IT outsourcing. Then we will focus on the most influential model on this topic, the Strategic Alignment framework by from Henderson and Venkatraman. 4.2 What is Business & IT Alignment Over the last years, IT changed from its traditional back-office role into a more strategic role and thus became more intertwined with business. Organizations had to be able to change not only their IT architecture, but also their business strategies by means of IT innovation. Traditional methods for developing business strategies proved not suitable to take full advantage of IT (Luftman, 1999). Business & IT Alignment is usually defined rather vaguely in articles, if defined at all. Even the term alignment is not always used; the terms balance, coordination, fit, linkage and harmony are also Roland Booijen, April 2005 44

applied to the same meaning (Maes, 2000). Reich and Benbasat (1993) define Business & IT Alignment as: "the degree to which the IT mission, objectives and plans support and are supported by the business mission, objectives and plans". This comprises interaction between the business and IT on several levels. Maes (2000) criticizes this definition for the lack of the continual component of Business & IT Alignment. Our definition will incorporate the process characteristic Maes discussed, by adding the views of Burn (1997) to this topic. Business & IT Alignment is the degree to which the IT mission, objectives and plans support and are supported by the business mission, objectives and plans. Alignment however, is not a one-time activity but a constant balancing act between a lead or lag strategy. Definition of "Business & IT Alignment " In a non-outsourced organization, this strategic alignment task should be performed by the CIO (or similar functions) with his supporting staff. We deliberately say "should". Too often, organizations have no special functions for this alignment task and therefore perform insufficient. Prior Research Empirical studies have proved that alignment between business and IT strategic orientation was linked to IT effectiveness and business performance (Chan et al, 1997). In Chan's influential research, she developed four separate tools to measure business strategic orientation (STROBE), IT strategic orientation (STROEPIS), IT effectiveness and business performance. In the business strategic orientation she measured company characteristics (such as company proactiveness, company risk aversion, company innovativeness), and in the IT strategic orientation she measured the IT support for these characteristics. Her expectation was that the fit (Business & IT Alignment) among these two, was a stronger predictor for business performance and IT effectiveness than those items separately. She proved to be right, which can be seen in Figure 4.2. The alignment among these two proved the strongest predictor. Figure 4.2 Coefficients of Chan's model Roland Booijen, April 2005 45

So can we use Chan's method in our research? Unfortunately not, the scope of her research was far more focused on high-level information systems, whereas our research concerns a different scope. Therefore, her research also focuses on a higher level of Business & IT Alignment, the overlap Business strategy characteristics and the IT supportiveness of these characteristics. Instead of that, we are interested in a lower level Business & IT Alignment, due to our scope. In addition the type of research she conducted doesn't fit our case study research (which will be explained in chapter 6). Our approach will be measuring the maturity in the processes that provide Business & IT Alignment instead of measuring the overlap Business strategy characteristics and the IT supportiveness of these characteristics. This will not only prove the state of alignment, but how alignment can be reached. However, though the need for alignment is scientifically proved in multiple papers, the process of diagnosing, achieving and maintaining this alignment has not been thoroughly covered (Avison, 2004). Luftman (1997) wrote articles about this subject, yet fails to test the theories and methods in a practical manner in real life situations and organizations (Avison et al, 1999). Also Chen et al (2004) wrote about how to achieve and sustain alignment, but they focused solely on business and IT architectures. However, Luftman continued his research and published a book (2003) about this matter. He describes how to diagnose, achieve and maintain this alignment by means of a maturity-scan on 6 components: Communications Maturity Facilitating effective communications between Business and ICT. Competency/Value Measurement Maturity Facilities for being able to measure performance. Governance Maturity How well the company connects its business strategy to IT priorities. Partnership Maturity The relationship between the business and ICT. Technology Scope Maturity All technology aspects, such as watching emerging technologies. HR Skills Maturity Human resource capabilities. This form of measurement will also be applied in our research. However, the relevant questions and components itself will be applied to an outsourcing situation. During our research, we will not include the HR skill and Technology maturity, since all technology and IT people are now outsourced to the service-provider and thus is his responsibility. The primary enablers of alignment were researched among 500 Fortune 1000 companies during 1992-1997. The top three consisted of: the support of senior management, the involvement of IT in strategy development and the understanding of business by IT (Luftman, 1999). In the same article, the inhibitors are distinguished: the lacking relationship between IT and non-it, lacking capabilities of IT in prioritizing and the failure of IT to meet commitments. Relation to outsourcing Business & IT Alignment has not been researched in relation to outsourcing. When an IT activity is outsourced, Business & IT Alignment remains important and its design does not really change. The Roland Booijen, April 2005 46

only thing that changes is the organizational structure. In a non-outsourcing situation, the alignment takes place between the business and IT service department (Figure 4.3). Figure 4.3 Business & IT Alignment in the old situation. In an outsourced situation, the alignment takes place primarily between the business and Demand organization and to a lesser extent between the Demand organization and the service-provider, where the Demand organization formulates the required IT services to be ordered at the service provider (Figure 4.4). Whereas in a non-outsourcing organization the CIO and his staff execute this task, we often see the CIO function incorporated in the Demand organization. In this document, we will use the situation that the CIO function is incorporated in the Demand organization; however we are aware of situations where this is not the case. In those situations there are two organizations, the Demand organization (focused on Management Control) and the Alignment function (CIO and staff). Figure 4.4 - Business & IT Alignment in the new situation. How Business & IT Alignment is performed and its relation to a successful outsourcing has never been related nor researched. In an outsourcing situation, Business & IT Alignment is a process that must be performed by the Demand organization to find discrepancies in the services ordered by the service provider and actually required by business. Too often, services are ordered that do not correspond with the requirements or needs of the business. For instance, by ordering the expensive service A, while the less expensive service B should be ordered because they have a cost-cutting strategy. These discrepancies can arise during the change of circumstances (by changing markets, chancing business strategies or new IT capabilities) or even exist from the moment the contract was signed. Other than the correct translation of business demands to IT specifications for the service-provider, the Demand organization must also be aware which elements are important to business for control measures. By this way, Management Control can be configured better and more efficiently. Roland Booijen, April 2005 47

So Business & IT Alignment enables the outsourcing organization to demand the right services and it enables the organization to have control over the right (most important) components. 4.3 Strategic Alignment Model Because the Strategic Alignment model of Henderson and Venkatraman lies at the foundation of almost every other theory regarding Business & IT Alignment, we will now further discuss this model. They developed a model for conceptualizing and directing the emerging area of strategic management of information technology. According to Henderson and Venkatraman, the inability to realize value from IT investments is, in part, due to the lack of alignment between the business and IT strategies of organizations. In their vision, strategy encompasses both the formulation and implementation (1993). While making this model, they made two important and fundamental assumptions. The first assumption is that strategic choices within external and internal domains should be consistent, a generally accepted axiom. The second assumption they made is that due to changing strategies and market circumstances, strategic alignment is not an event, but a process of continuous adaptation and change (Henderson and Venkatraman, 1993). The Strategic Alignment model consists of two main building blocks, namely the strategic fit and the functional integration. The strategic fit brings alignment within the external and the internal domains. The external domain can be looked upon as the business arena in which the firm competes. In this domain, decisions are made dealing with (Maes, 2000): Scope, defining the choice for focusing on a certain market segment (or multiple segments) Core-Competencies that make a contribution to the selected strategy Governance, selecting and using inter-organizational relationships to obtain desired competencies In an outsourcing situation, not much is changed within these processes. On the contrary, these processes made the decision for outsourcing. The scope, creation of the business strategy and its belonging core-competencies are still performed by business. When extra non-core competencies are desired or internal competencies are being considered non-core, outsourcing becomes a possibility. A possible outcome of these processes could be outsourcing, although outsourcing itself doesn't change these processes. On the contrary, the internal domain is concerned with issues that belong to the following matters: Work processes that are required for operations Development and acquisition of human resource skills that are required to manage and operate the processes An administrative business infrastructure / IT infrastructure Roland Booijen, April 2005 48

When the IT is outsourced, at least part of the IT infrastructure and processes are performed by a service-provider. Nothing changes at the business side, but an interface must be created between the other blocks in the Strategic Alignment model, which will be discussed later. On the other side, functional integration is meant to attain alignment between the IT domains and the business domains. Strategic fit and functional integration together bring alignment within four domains along two dimensions: the external & internal dimension and the business & IT dimension. Those four domains are: business strategy (business and external focus), I/T strategy (IT and external focus), organizational infrastructure & processes (business and internal focus) and I/S infrastructure & processes (IT and internal focus) (Henderson and Venkatraman, 1993). A graphical representation of this schedule can be found in Figure 4.5. The objective of this model is to provide a way to align information technology with business objectives, in order to realize value from IT investments (Maes, 2000). Also, it helps in two other ways (Avison, 2004): it helps to achieve competitive advantage through IT and it provides direction and flexibility to react to new opportunities. Figure 4.5 Strategic Alignment Model in a non-outsource situation (derived from Maes, 2000) When an organization has outsourced some or all of its IT processes, the I/S (IT in our thesis) infrastructure and processes block is (partly) outsourced. In this picture can already be seen that the block has interfaces with the other components. Thus, there must be an organization that handles these interfaces. The Demand organization fulfills these tasks; they translate the IT strategy into the required IT infrastructure and processes. They are the interface and formulate the IT infrastructure and processes to support the business infrastructure. Roland Booijen, April 2005 49

Like mentioned earlier in this chapter, the CIO is not necessarily part of Demand organization (although this was often the case in the organizations we visited). The link between the Business strategy and the It Strategy is, and was also before, handled by the CIO (and supportive staff, which could be the Demand organization). The Strategic Alignment model in an outsourcing situation would look like this: Figure 4.6 - Strategic Alignment Model in a outsource situation (adapted from Maes, 2000) 4.4 Summary In this fourth chapter, we've discussed the subject Business & IT Alignment. We have defined it and related it to our outsourcing context. Former literature on this topic has been studied and the importance proved very strong. Business & IT Alignment is not only important in an outsourcing context, to be able to demand the right services from the service-provider, but also to know on which elements the Management Control should be focused. Afterwards, we touched upon the Strategic Alignment model by Henderson & Venkatraman, because this lies at the foundation of almost every theory regarding Business & IT Alignment. We showed how the model changes and which position the Demand organization and CIO should take. Roland Booijen, April 2005 50

5 Research Model 5.1 Introduction As we already saw in the introduction of this thesis, Giarte discovered there is room for improvement in running outsourcing contracts. This dissatisfaction can be caused by decisions that were taken a priori and cannot be corrected anymore, such as the selection of an incompetent service-provider or the lack of a business case. Companies often make the mistake to consider the management process to be completed when the contracts with the service provider are signed. They selected the activities they would like to outsource, they chose the outsourcing style and they even selected a competent service-provider. Now they believe they can just sit back and watch the service-provider perform the outsourced activities. This is exactly where it goes wrong. The focus relies on the ex ante activities, while the ex post activities are at least as important. In order to be successful, there are some activities that an outsourcing organization must perform during the relationship. These activities are the center of this research. 5.2 Perceiving Success Obtaining success during an outsourcing relationship is the ultimate goal of the research. Success is a commonly used word. In this thesis, we will use the definition of success of outsourcing (from the viewpoint of the outsourcing organization, the scope of this research) as follows: An outsourcing is successful when the outsourcing organization is satisfied to the extent that they would like to continue outsourcing with the same service-provider under the same conditions (conditions may be adjusted under changed market or organizational circumstances). Definition of "Successful outsourcing" The exception stated above, that conditions may be adjusted under changed market or organizational circumstances, is necessary in the definition. We will illustrate this by the following example: an outsourcing company is totally satisfied with the service-provider and its current conditions. However, due to certain market circumstances, the organization is bound to downsize. This will affect the conditions in the contract, but does not make them dissatisfied with the last outsourcing. In our definition, the success of the outsourcing is determined by the satisfaction of the organization over the outsourcing deal. But where does that satisfaction take place in the organization? In other words, who should be satisfied within the organization to speak of a successful outsourcing and what influences the satisfaction of these decision makers? Roland Booijen, April 2005 51

How does the process of satisfaction over the outsourcing come about, and what is the connection with Business & IT Alignment and Management Control? In order to answer these questions, we will first look at the positioning of Management Control and Business & IT Alignment between the Business and Demand Organization of the outsourcing organization and the service-provider. To illustrate this, Figure 5.1 has been created. Figure 5.1 Positioning of Business & IT Alignment and Management Control What can be seen in this picture is the segmentation of the outsourcing organization in two parts, namely the business and the Demand organization. The service-provider delivers the services to the outsourcing organization on an operational level. The two parties are attached to each other by means of a contract and supported by a Service Level Agreement (SLA). Management Control operates on tactical level. Primarily, it takes place between the Demand organization and the service-provider, but to a lesser extent it occurs between the business and Demand Management (Chapter 3). Business & IT Alignment is a strategical issue, which will primarily take place within the own organization between the business and the Demand organization, but to a lesser degree also between the service-provider and the Demand organization (Chapter 4). Acquiring Information The satisfaction that eventually determines the degree of success is located in the business part and the IT part of the outsourcing organization. Within these two departments, three groups of deciders can be identified (on strategical, tactical and operational level). Firstly, the management within the business is important, since these people evaluate the business case. They will set up certain goals, which they plan to attain by outsourcing their IT. Their satisfaction will primarily be based on the fulfillment of these goals. This is the more strategical satisfaction. The second group within the business consists of the end users of the systems. If they constantly have problems with the service provided, they will be dissatisfied on the operational level. It is well possible to imagine a situation in which one group is satisfied and the other is not. For example, business management chose outsourcing to reduce costs. The cost-cutting targets were reached, Roland Booijen, April 2005 52

and the management was satisfied. However, the end users received a service that constantly crashed and didn t work properly and are therefore dissatisfied. The Demand organization is the third group that is influential on the satisfaction over the outsourcing. It is the group that acts like an interface between the service-provider and the outsourcing organization and is set on a tactical level. A service-provider can fulfill the goals set by business management and deliver a good service to the end users. Still, they can have a very negative relationship with the Demand organization. The Demand organization is continuously in a conflict-situation with the service-provider. This situation has been discovered in our research and the organization was indeed dissatisfied with the service-provider and will not extend the contract when it expires. Previously in this chapter, we discussed the issue that several decisions or actions, taken before the operational phase, have influence on the success of an outsourcing. To deal with this phenomenon, we will introduce the term pre-factors. These factors leave their marks on the entire length of the deal. They may influence the success of the outsourcing to such degree that it is doomed to fail. In addition to the pre-factors, other factors we expect to have influence on the perceived satisfaction of the outsourcing and concern the operational phase are: The perceived satisfaction over the delivered services The satisfaction that the users of the systems in the business perceive. If the systems often crash, lack functionality or when every change in the system takes ages to implement, then the satisfaction is bound to fall. We predict that the quality of the delivered services should improve when Business & IT Alignment and Management Control are more mature. We expect that this will raise satisfaction. Quality reports Complete and correct information about the quality of the delivered services should be reported by the service-provider. This information will be used to steer Management Control, but it also has a direct impact on satisfaction (when for instance the service provider reports to be unable to fulfill their agreed service levels). External information - Satisfaction is fed by external information. In practice, this information largely consists out of information price-quality ratio. When performed correctly, the information is gathered in the Management Control process and appropriate actions should be taken. The Price-quality ratio is very important. Although a service might be great, people will be dissatisfied when they need to pay an exorbitant price for it. However, 'horror-stories' from literature and practice made us believe that certain companies, that have not implemented good Management Control, turn this information into immediate satisfaction or dissatisfaction. These sardonic called 'golf court comparisons' let managers share their prices, without proper benchmarks of what is or is not included in the deal. By this way, satisfaction is raised or dropped without valid reasons. When the above statements are summarized and combined with an extended version of Figure 5.2, the following model, which includes our expectations, can be created. Roland Booijen, April 2005 53

Figure 5.2 Factors we expect to influence the satisfaction The business (B) gets the service delivered by the service-provider (SP). Business & IT Alignment (B&IT) aligns between the business and demandmanagement organization ( DM) and to a lesser degree between the business and the service-provider. Management Control (MC) takes place from the Demand organization to the service-provider and to a lesser extent also to the internal business. Our expectation is that satisfaction (S) remains in business and Demand organization (as discussed above) and is determined by the pre-factors, indirectly via external information, quality reports and the perceived service by the users of the system. 5.3 Propositions As mentioned before, the research has running contracts as his scope. The PhD dissertation of Delen (2005) was used as a source of inspiration for this research. Delen studied decision and control factors in relation to the success of an outsourcing. He primarily focused on the first four phases of an outsourcing trajectory: preliminary research, vendor selection, contract and migration and to a lesser extent the operational phase. This research will zoom in on the success of the operational phase to complete the whole outsourcing trajectory. Further in this paragraph, we will relate Management Control and Business & IT Alignment with satisfaction (and thus success) to finally come to several propositions on this topic. Management Control and Success Factors that Delen found to be strongly related to the success of an outsourcing in the operational phase are: a solid contract, financial agreements and performance management. These factors overlap with our definition of Management Control. In addition, Alborz et al. (2003) studied key factors that influence the successfulness of an IT outsourcing relationship. The research incorporates several other studies (among Kern, Klepper, Goles, Lacity) into one model. It distinguishes three phases: the pre-contract phase, contract-phase and post contract-phase. Roland Booijen, April 2005 54

Alborz et al. examined currently known models on the success of outsourcing from literature (often approached from different angles) and mapped the factors of each study (this outline can be seen in Appendix C). For instance, Kern and Willcocks discovered the following factors: intent, contract structure, interaction and behavior to influence the success of an outsourcing. Goles and Chin found the client capabilities, supplier capabilities, quality and relationship to have influence on the outsourcing. All the important factors found by the original authors were mapped to activities along the three phases. This finally wound up in a model that identified several important activities during an outsourcing. Working Relationship Management, Governance, Contract Management, Performance Management and Knowledge Management were the most influential factors of the post contract phase, which is the phase we focus on. These items overlap with the activities we found to be important during Management Control as discussed in paragraph 3.5. The Management Control of outsourcing has been defined as: all processes or mechanisms, aimed at both the internal organization as the service-provider, that are in control of the delivered servicelevel. We suspect that an increase of the outsourcing s Management Control will enable them to steer the delivered services better, which will increase the satisfaction with the service-provider and thus improve successfulness. The outsourcing organization will enlarge the chances to receive the demanded services. As already discussed in paragraph 4 of chapter 3, the hierarchical structure fits our research the best. The transactions of these outsourced components have asset specificity that can be caught into highly specified contracts. These transactions have a high frequency and the quantity and quality of the transaction can be described within the contract and additional documents. In hierarchical governance, control is mainly attained by means of authority, bonus & fines structures and monitoring. The better these are configured, the better the delivered services will match the demanded services. The propositions have boundaries because they cannot raise satisfaction higher than a certain level, due to the fact that pre-contractual circumstances have already set boundaries. If an organization has made mistakes in it pre-contractual phase, maturing Management Control will increase satisfaction, but only limited so. Proposition 1: Improving Management Control in a outsourcing situation will lead to higher satisfaction. Figure 5.3 - Proposition 1 Roland Booijen, April 2005 55

Business & IT Alignment and success Although a service-provider can deliver the exact same services as demanded by an organization, the organization can still be dissatisfied. This can happen because the service-levels of the services that are outsourced do not match the service-levels actually required by the business. This can result in dissatisfaction, for instance when the business needs higher service-levels, the perceived quality is not sufficient. Dissatisfaction can also occur when the service-levels are too high. In this case, the service-provider will charge for the delivered services, though the business does not need them. This mis-alignment can be caused by pre-contractual mistakes, but it is also possible that the business needs change over time by an alteration of strategy or circumstances. As we saw in Chapter 4, Gartner showed that few companies had their IT sourcing strategy aligned with their business. We would like to examine to what extent the maturing of the Business & IT Alignment level influences the rate of satisfaction. This proposition uses the same boundaries as discussed at Management Control. Proposition 2: Improving Business & IT Alignment in an outsourcing situation will lead to higher satisfaction. Figure 5.4 - Proposition 2 However, as shown before in Chapter 4, this is not the only use for Business & IT Alignment in outsourcing context. It also contributes to the correct implementation of Management Control. Hypothetically speaking, an organization could have a perfect way of Management Control, but due to a lack of alignment, they might focus their control on the wrong elements. This could even create the effect that Management Control makes sure the business gets X while they actually need Y. This is why we expect a higher level of Business & IT Alignment to contribute to the effect of Management Control. Proposition 3: Improving Business & IT Alignment in an outsourcing situation will lead to a higher contribution of Management Control. Figure 5.5 - Proposition 3 Roland Booijen, April 2005 56

When we incorporate all propositions into one model, this will lead to the following figure: Figure 5.6 All propositions combined The way we intend to study these propositions will be closer examined in chapter 6. 5.4 Summary In this chapter, we defined what a successful outsourcing actually is. Afterwards, we related previously conducted research to this study. Concerning our findings from the literature research, we expect Management Control and Business & IT Alignment to have a positive influence on the success of an outsourcing. From this point of view, three propositions were created and will be tested in the empirical research. Subsequently, we looked how Management Control and Business & IT Alignment are positioned in an outsourcing organization. This was followed up by our views about where and how satisfaction is perceived, which will be tested during the interviews. Roland Booijen, April 2005 57

6 Research Design 6.1 Introduction In the previous theoretical chapters, the foundation has been laid to answer the research questions formulated in the first chapter. Insight has been acquired into the subject of outsourcing and several propositions have been formed showing our expectations (based on literature) on how reality works. By this way, we aim to answer the research questions eventually. In this second part of the thesis, we will apply ourselves with the actual answering of the research question, by checking whether the previously formed propositions are valid and our created model shows how things work in real life. To gain this information, a research has been conducted at eleven large Dutch organizations that outsourced (parts of) their IT and find themselves in the operational phase. In the rest of this chapter, the research methodology will be presented. This is an important part of every research, because it provides insight to the reader how the data were gathered and validated. We will also show how the research has been conducted. This includes information on the type of the research, the protocol that was handled during the research and the instruments that were used. 6.2 Case Study Research According to Churchill junior (1995), it is desired to make a research framework or project plan that is used while gathering and analyzing the data, to eventually answer the research question and the derived propositions. In this paragraph, we will set forth the decisions made during this research, explain why they are made and which implications they might have. As discussed before, due to a lack of former literature that relates Management Control and Business & IT Alignment with outsourcing, the nature of this research will be exploratory. We chose a case study research, because it fits our situation the best. One of the most important reasons is that we have a relatively small research group, too small to make a statistical analysis. According to Yin (2003), the case-study is able to answer question like how and why, does not require control of the behavioral events and focuses on contemporary events. All these characteristics apply to our research. We will now illustrate the meaning of a case-study research by showing two definitions: A case-study examines a phenomenon in its natural setting, employing multiple methods of data collection to gather information from one or a few entities (people, groups or organizations). The boundaries of the phenomenon are not clearly evident at the outset of the research and no experimental control or manipulation is used. (Benbasat, Goldstein & Mead, 1987) Roland Booijen, April 2005 58

A case-study is an empirical inquiry that investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident. (Yin, 2003) The design of the case-study research we conducted concerned a multiple case study with an embedded unit of analysis. This basically means that at several organizations we will analyze the status of Management Control, Business & IT Alignment and the course of satisfaction over time at several organizations. A statistical analysis is not reliable, because a case-study has relatively little research subjects and the researched components are not measurable fully objective. This is why a more qualitative analysis is necessary. In addition, the organizations were not selected from the total population on a completely random base. The entire population of research subjects consisted of large Dutch organizations that are in the operational phase of IT outsourcing (falling inside our scope). Using a non-random selection from a population makes a statistical analysis invalid. To assure the validity of a case-study research, or in that matter any social science method, four common logical tests are relevant (Yin, 2003). Construct validity Establishing correct operational measures for the concepts being studied. Internal validity Establishing a causal relationship, whereby certain conditions are shown to lead to other conditions, as distinguished from spurious relationships. In an exploratory research as ours, the internal validity is not of interest. External validity Establishing the domain to which a study's findings can be generalized. Reliability Demonstrating that the operations of a study such as the data collection procedures can be repeated, with the same results. In the Research Process paragraph, further on in this chapter, we will discuss how we tried to assure the validity of our research using the tests above. Each case will be studied according to an established pattern. Only in the final phase, all cases will be compared with each other and analyzed together. 6.3 Research Subjects Initially, 22 large Dutch organizations have been selected to participate in this research. These organizations were known to find themselves in an outsourcing trajectory. This group represents a fairly large part of the total population of large Dutch organizations that outsourced their IT. After contacting these organizations by e-mail or telephone, 11 organizations agreed to participate in the research. The reasons for the rejection of the other organizations were: lack of time, not willing to share the information (competitive reasons) and not fitting our scope (finding oneself in the precontract or contract phase, outsourcing business processes instead of IT). Roland Booijen, April 2005 59

During the research, sensitive information was gathered. Because of the obvious competition all organizations will be left anonymous in the report. Still, to give an impression which organizations were involved, we will characterize the size of the organizations and in which branches they are active. The size of the organizations was rather diverse, the smallest having 185 employees and the largest over 27.000 employees in the Netherlands. It must be noted that not every employee was involved with the outsourcing in each organization (regarding the desktop service component). 82 % of the organizations we studied had more then 3000 employees (Figure 6.1). The organizations work in several different branches (both profit and non-profit), which will raise the validity of the research. The division of these branches can be seen in Figure 6.2. Size of Researched Organizations 18% More than 3000 employees Less than 3000 employees 82% Figure 6.1 - Size of Researched Organizations Branches of the Researched Organizations 27% 46% Industry Government Semi-Government Service-delivery 18% 9% Figure 6.2 - Branches of the Researched Organizations The persons within these organizations that we interviewed were all responsible for the outsourcing itself (CIO-level, although different titles are being used within some organizations) or the contract between the outsourcer and the service-provider (contract-manager). Because one organization made two people available for this interview, a total of 12 people were interviewed during the research. Roland Booijen, April 2005 60

6.4 Research Process Pre-process To be able to acquire the needed information and to validate the results, we designed a process for conducting the research and made precautions for the validation. Before entering the field-research phase, a representative and thorough literature research has been performed. From that point, we created a questionnaire with open questions, which was used in every interview (the questionnaire itself can be found in the appendix). It was structured in a way that the more general questions regarding the outsourcing were treated first (for instance the contract length, reason of outsourcing). By this way, the interviewee was able to come into the subject. A general course of the satisfaction among outsourcing organizations can be compared to Gartner's hypecycle (which does not only apply to outsourcing, but also many other phenomena). The satisfaction rises till after the contract phase, after which it collapses and slowly recovers in time (Figure 6.3). In the questionnaire, we will ask whether the interviewee recognizes this picture and how this course of satisfaction occurred in their organization, which will provide valuable information. Figure 6.3 Gartner hypecycle applied on outsourcing (adapted from Kateman, 2004) To enable ourselves to obtain the status of Management Control and Business & IT Alignment within the investigated organizations, we did not only develop a set of questions on relevant topics about those two subjects. We also created maturity levels (which can be found in the appendix) on each of these questions, to be able to compare these items more objectively. These maturity levels were intensively discussed with a group of five sourcing consultants. This maturity scan is not scientifically validated, but it gives us a handle during our exploratory research. As discussed in chapter 4, we will use a research method based on Luftman (2003). His maturity-scan for determining the state of Business & IT Alignment has been adapted to a comparable maturity-scan for Management Control and Business & IT Alignment situation outsourcing. Roland Booijen, April 2005 61

An example will be given to show how this maturity scan works. During the interview, we proposed the following question on the subject of Management Control: "Does the service-provider report to the Demand organization? How and on which way?". The interviewers tried to score the answer in one of the following maturity levels: 1. The service-provider does not report. 2. The service-provider offers incidental reports with changing components or only a limited set of the service. 3. The service-provider reports on pre-arranged moments in time about a part of the services as agreed in the SLA. 4. The service-provider reports on pre-arranged moments in time about every service as agreed in the SLA. There is sometimes a discrepancy between the reports and reality. 5. The service-provider reports on pre-arranged moments in time about every service as agreed in the SLA. The reports give a correct image of reality. Following Luftman's (2003) example, we categorized the questions of both Management Control and Business & IT Alignment into a number of categories. For Business & IT Alignment, we will use Luftman s components (except for HR Skills and Technology Skills, as discussed in chapter 4). We will now show the components with their corresponding questions and their origin (CBS is the consultant brainstorm session, as discussed above). The relevant maturity levels can be consulted in the appendix. Communication s Maturity - How well does IT understand the business processes? (Luftman) - What consultative structure exists between the Demand organization and Business on tactical and operational level? (CBS) - To what degree do contacts exist between the business and service-provider on strategical level? And which role does the Demand organization play in those contacts? (CBS) Competency/Value Measurement Maturity - How are IT projects prioritized? (Luftman) - What is the role of Business in the assessment of new IT applications? (CBS) - What is the relationship between SLA norms and the demands and wishes of Business? (CBS) Governance Maturity - How does the transformation from Business strategy to IT Strategy come about? (Luftman) - Who has final responsibility over IT in the organization and who governs it? (Luftman) - What is the relationship between Business and the Demand organization considering changes in processes and systems? (CBS) - Which responsibilities do Business and Demand organization have considering functional management? (CBS) Partnership Maturity - How does Business consider IT? (Luftman) - About what, by whom and how is Business being informed? (CBS) Roland Booijen, April 2005 62

The same subdivision into categories has been made for Management Control. Their questions have been assigned to the, in outsourcing relevant, ITIL processes that we discussed in chapter 3. Aside from these ITIL processes, three other higher-level competencies to support these processes are necessary for Management Control: Governance, Communication and Financial Control. These categories have been created in the consultant brainstorm session and are based on Luftman's categories. Just like we did with Business & IT Alignment, we will write down the origin of each question. Some questions are still derived from Luftman's research. We found these questions better suitable under our Management Control label. For instance, the benchmarking topic was included in Luftman's Business & IT Alignment research, but in our research, it fits better under Management Control. The corresponding maturity levels can be found in the appendix. ITIL Processes - Which role does the Demand organization play in changes? Who has authorization over changes? (CBS) - How are the costs of changes being mapped and checked? (Luftman) - For which services have service-levels been recorded and how have those norms been determined? (CBS) - Do internal and external service-levels differ? (CBS) Governance - Has a Demand organization been established? How does it look like? (CBS) - Which competencies are represented in the Demand organization? How has it been developed? (CBS) - What types of measures follow from consultations with the service-provider? (CBS) - How are suggestions of improvement by the service-provider being assessed? (CBS) - In the case of a large project-based change, how is it being controlled? (CBS) - How clear is the borderline of the responsibilities between the service-provider and the outsourcing organization? (CBS) Communication - Do permanent linking-pins exist within the Business for the Demand organization and has this formally been arranged? (CBS) - What agreements have been made with the service-provider with regard to consultations? (CBS) - Does the service-provider report to the Demand organization? How and what? (CBS) Financial Control - Has a benchmark clause been incorporated in the contract and how is it being used? (Luftman) - Has a cost comparison ever been conducted? What were the results? (CBS) - Is there a bonus/penalty system, and how is it being used? (CBS) - How does the relation of the charging between the used services and the end-users look like? (Luftman) - How are bills being checked before they are paid? (CBS) Roland Booijen, April 2005 63

Field-research During the interviews, we visited the organizations with our questionnaire and maturity-levels. All questions were open and the maturity levels were not shown to the interviewee (this to prevent people wanting to 'score' as high as possible). The in-depth interviews lasted approximately 1,5 to 2,5 hours, which was enough to examine the matter thoroughly. We asked the organizations to deliver supportive material (documents, reports) to improve validity, which not every organization was able or willing to do. Each organization was visited with two interviewers and every conversation was tape-recorded. Notes were made during the interviews. After each interview an interview-report was made using the notes, the tape-recorded conversation and the supplied material. Using the maturity levels developed in the previous phase, we assigned a maturity level on each question. This report was made by one of the interviewers and afterwards discussed with the other interviewer. When different maturity levels were assigned by the interviewers at a specific question, the specific question was discussed thoroughgoing until consensus was reached. When the field-research was completed, all interview-reports were analyzed (which will be treated in chapter 7). By comparing the findings from the field-research, we tried to find patterns to form a profound total image. Validity Except for the four logical validity tests discussed in the first paragraph, there are also validity problems regarding the interviews itself. Interviews can contain (Yin, 2003): Bias due to poorly constructed questions We tried to counteract against this by discussing our questions with a group of 5 sourcing consultants. We also used the first interview as a pilotinterview, which visualized the unclear questions so these could be improved. Response bias Each interviewee had plenty of knowledge of the outsourcing in their organization. Moreover, we asked the interviewee to represent the organizational opinion and not their personal opinion. Inaccuracies due to poor recall We tape-recorded each conversation (except for one) and conducted each interview with two interviewers. The interview-report itself was discussed among the interviewers, to rule out as many inaccuracies as possible. Reflexivity The effect that an interviewee answers what the interviewer wants to hear. We tried to anticipate this by not showing our maturity-levels to the interviewees, keeping the questions open and being aware of the fact that this phenomenon exists. In addition to these countermeasures, we also asked the organizations to supply us with reports and documents (which not every organization was able to do). This way we tried to improve the validity of the interviews. Roland Booijen, April 2005 64

Yin (2003) stated some measures for the four logical validity tests (actually three in our case, the internal validity test is not relevant in an exploratory research). For the construct validity we used multiple sources of evidence where possible (interviews and additional material) and set up a chain of evidence. A chain of evidence allows the external observer (reader of this document) to follow the derivation of every evidence, ranging from initial research questions to ultimate case study conclusions. The external validity deals with the difficulty to find out whether the findings of a research are applicable outside the immediate case study. Whereas survey research relies on a statistical analysis, a case study research relies on an analytical analysis. Therefore, we used replication logic in our multiple case study. The objective of the reliability test is to be sure that, if a later investigator follows the same procedures as described by the initial researcher and conducts the same study all over again, he should arrive at the same findings and conclusions. The goal is to minimize the errors and biases in a study. We made a standard questionnaire and described which maturity level belonged to each situation. The errors within an interview were minimized using the countermeasures mentioned above. 6.5 Summary In this chapter, we examined the structure of research. What type of research do we conduct and what are its implications? We discussed the disadvantages of this type of research and the countermeasures we have taken to react on these disadvantages. In addition, we looked at the research process by illustrating what has been done in the pre-process and the field-research. Afterwards, the way of interviewing, the questionnaire and the created maturity-levels were discussed. Roland Booijen, April 2005 65

7 Analysis 7.1 Introduction The analysis of a case-study is the most difficult part of the research, because there are no standard analyses to be executed like during a statistical analysis. During our field research, we conducted 11 interviews that provided us with a lot of information (both qualitative as quantitative). In this chapter we will analyze these data and reflect them on our former stated propositions. We will first explain how case-studies can be analyzed according to Yin (2003). Afterwards we will discuss the acquired data in relation to all three propositions as suggested in chapter 5. Besides, we will also look for other remarkable outcomes of the research. 7.2 Analysis of a Case Study Research As already stated above, the analysis of a case-study is rather difficult, because strategies and techniques have not been well defined (Yin, 2003). Every case-study should strive to have a general analytic strategy, defining priorities for what should be analyzed and why. Before starting the research, a strategy should be developed to prevent oneself from arriving at the analysis phase with irrelevant data. We chose to make a more objective analysis by coding the individual case-studies in a numerical form. This is only possible when embedded units of analysis within the case-study must be conducted, which applies on our research. Such quantitative coding can still not be analyzed in a statistical way, but it does provide us with a certain framework to have more grip while analyzing. We will focus on this quantitative coding in the next paragraph. Yin also provided us with three general strategies for analyzing data which we will use during the analysis. Relying on theoretical propositions The propositions that were created in chapter 5 help to set focus on elements that are relevant. The propositions assist to organize the way of researching. Thinking about rival explanations A second general strategy to analyze is considering rival explanations. Are there maybe other causes for the found results? Developing a case description Developing a descriptive framework for organizing a case study. This strategy is less preferable for us, because it is primarily used for descriptive research, while we conduct explorative research. We will first analyze the gathered data per individual organization, to compare these afterwards with the rest of the researched organizations. For the overall analyzing technique we will use a crosscase synthesis. This technique, especially created for multiple cases, will enable us to find patterns Roland Booijen, April 2005 66

between the individually analyzed cases. We will compare the individual cases to be able to judge our propositions to be correct or incorrect. This research will not give statistical information about each component in which it determines the success in the operational phase. Because this is an exploratory research, it will only lay the first steps towards this. These first steps will solely determine if it is plausible that Management Control and Business & IT Alignment influence the success in the operational phase of an outsourcing. When this is the case, further research must be conducted on this subject. If we find no indications whatsoever to support our propositions, no further research is necessary in this field. 7.3 Propositions Of course we have to deal with the former stated pre-factors, factors that might have influenced the outsourcing before the deal even started. How do we measure the factors that only influenced the operational phase and exclude the pre-factors? As can be read in chapter 6, we asked the organizations to sketch how their satisfaction over the deal elapsed over time (based on Figure 6.3). During our research we experienced some different courses of satisfaction. We can roughly state that we found 5 different courses among the organizations we studied. 1. The organization whose satisfaction did not really change over time. 2. The organization which did experience a dip in their satisfaction but totally recovered. 3. The organization which did experience a dip in their satisfaction, and did recover though not totally. 4. The organization which did experience a small dip in their satisfaction and did not recover. 5. The organization in which the satisfaction collapsed and did not recover at all. We grouped these 5 courses in three different groups, a group in which the satisfaction elapsed fairly well (course 1 and 2, which will get a 'good' label), a group that performed average (course 3 and 4, which will get a 'average' label) and the last group that performed badly (course 5 which will get a 'bad' label). Striking however, was that no single organization performed better then initially expected. Because the organizations are promised anonymity, we cannot give insight into the performance of the investigated organizations. We can, however, show how many organizations performed well, average or bad. In table 7.1 we see the organizations along with some characteristics and the judgment over their satisfaction. Due to layout reasons, the table is split in two. Roland Booijen, April 2005 67

Table 7.1 Characteristics of the researched organizations If we take a closer look at this table, we can already see several things. First, the length of the contracts. The common view on the length of a contract is that it should not be too long, since at the end of the contract, the service-provider will feel the urge to perform better, hoping to continue the relationship. However, this is not something that we see in our data. The length of the contracts is rather equally divided among the good, average and bad satisfaction-courses. We also don t see that organizations which are further in the contract are more satisfied. The length of the contract does play a role, but is not ultimately decisive for the success. Roland Booijen, April 2005 68

Likewise, we don't see any patterns in the reasons for outsourcing among the organizations, nor in the branches these organizations work in. The reasons for outsourcing are rather diverse, though cost-reduction and flexibilisation are most common. Still, we don't see a pattern suggesting that for example all organizations that have cost-reduction motives, are more or less satisfied. At first sight, the components that have been outsourced do not seem to be important. We see for instance ERP outsourcing and desktop outsourcing in all three categories. We will however take a closer look to this subject while checking the propositions that were created. Maybe more Management Control is needed in an ERP outsourcing than in a desktop outsourcing to reach the same satisfaction levels. First Proposition The first proposition mentioned in chapter 5 looks like this: Proposition 1: Improving Management Control in an outsourcing situation will lead to higher satisfaction. Figure 7.2 Proposition 1 We analyzed the answers given by the organizations during the interviews and scored them in the maturity-scan we created. When the answer did not fit the exact maturity-levels (i.e. actually having maturity level 4, but configured one element extremely bad), we discussed the matter with the two interviewers and assigned an adapted score. It also occurred that the interviewee could not answer the question or that the specific situation was not applicable on the organization. These questions were not incorporated in the calculation of the means. During this overall analysis we will research whether a pattern exists between the course of satisfaction and the scores that were assigned during the individual analyses. During the interview with organization 11, we acquired not enough information to form a well-founded individual analysis. Therefore we will not incorporate this individual analysis in the overall analysis. In the following table, we can see the good (green), average (yellow) and bad (red) organizations, with their corresponding average score from the Management Control component of the maturity scan. This is, however, no statistical analysis. It will only give an indication to support the proposition. Therefore, it will not be able to conclude statements like an organization needs a score of 3.9 to be successful. It is only meant to check whether we see a pattern between the satisfaction course and the level of Management Control or not. Also must be noted that every question is weighted equally in this analysis, something that obviously is not true. Nevertheless, we do not suspect that the analysis will have a totally different outcome when the questions would be weighted. The overall outcome of the analysis will Roland Booijen, April 2005 69

presumably not look very different. In addition, we are not conducting statistical research, we are only interested if we see patterns between the two factors. Also, in such a small research group, it is impossible to weigh the questions. Level of Management Organization Control 1 3,4 2 4,1 3 4,0 4 3,5 5 3,6 6 3,8 7 3,2 8 3,0 9 3,5 10 3,2 Table 7.3 The Level of Management Control among the organizations When we take the average of each group, we get the following results: Good 3,8 Average 3,4 Bad 3,2 Table 7.4 - The Level of Management Control among the different satisfaction levels. The data acquired during the research supports our proposition. The averages show that a higher level of Management Control makes an organization more satisfied over the outsourcing. Yet, we see two notable scores among the rest, namely organization 1, which has a rather low score while being fully satisfied, and organization 6, that has a rather high Management Control score, while the satisfaction is only average. If we have a look at the individual analyses of these cases, can we see some indications why these two organizations score differently compared to the rest? Organization 1, as can be seen in table 7.1, has a rather deviant type of outsourcing. It only outsourced the service-management of all servers and hardware. This is the most operational form of outsourcing and therefore we expect that this type of outsourcing needs lesser Management Control to be even satisfied. In organization 6 we see the opposite situation; a rather high level of Management Control, but only an average amount of satisfaction. When we take a closer look at the individual analysis of this organization, we see that it signed such a bad contract that it was bound to fail. This is a typical situation in which pre-factors are executed so badly that satisfaction can never be reached. The first proposition can be accepted: the higher the level of Management Control within the organization, the more the organization is satisfied with the outsourcing. Also we see that within Roland Booijen, April 2005 70

organizations with a more operational form of outsourcing, less Management Control is needed to reach satisfaction. Components of Management Control Last chapter we divided our questionnaire into several components. We will now analyze the averages along these components, to be able to view whether some components are more differential than others. In other words, are some components more influential than others? ITIL processes Governance Communication Financial Control Components ITIL processes Governance Communication Financial Control Good 3,4 4,2 4,6 3,5 Average 3,4 3,7 3,9 3,0 Bad 3,1 2,9 3,2 3,5 Table 7.5 - Maturity levels of the components of Management Control. What attracts the immediate attention, is the high score on Financial Control at the bad organization. Due to the fact that only one organization was appointed as 'bad', we suspect this high score is due to so-called scientific noise. The rest of the data displays a rather clear picture. The distinguishing capacity of the organizations with good satisfaction can be found in the overlaying processes Governance, Communication and Financial Control, and not in the ITIL processes itself. Second Proposition The second proposition we created, related the satisfaction levels with Business & IT Alignment. Proposition 2: Improving Business & IT Alignment in an outsourcing situation will lead to higher satisfaction. Figure 7.6 - Proposition 2 We will run the same type of analysis as we did with the first proposition. Similarly to the case of Management Control, the individual questions within the research all are weighted equally. In table 7.7 we see the Maturity levels concerning Business & IT Alignment as we analyzed it among the individual organizations. Roland Booijen, April 2005 71

Level of Business & Organization IT Alignment 1 3,2 2 3,0 3 3,1 4 3,7 5 2,8 6 3,0 7 3,2 8 3,2 9 3,0 10 2,5 Table 7.7 - The Level of Business & IT Alignment among the organizations. Just like Management Control, we will take the average of each group: Good 3,2 Average 3,2 Bad 2,6 Table 7.8 - The Level of Business & IT Alignment among the different satisfaction levels. What immediately catches the eye is the lack of difference between the organizations with a 'good' and average satisfaction course. If we look at the individual marks, we can see that organization 4 has a remarkable high level compared to the other 'average' organizations. Nevertheless, it does not perform better concerning satisfaction. At this time, organization 1 does not perform significantly different from the other 'good' organizations, as was the case with Management Control. It is likely that the form of the outsourcing (being more operational of more strategic) does not influence the level of required Business & IT Alignment. The difference between the averages as shown in table 7.8 of the 'good' and the 'average' organizations is not striking. On the other hand, we do see a fairly large difference between the 'bad' organization and the others. This is why we suspect that a lack of Business & IT Alignment is primarily a fail-factor. If there is an insufficient amount of Business & IT Alignment, organizations will be dissatisfied over the outsourcing. However, based on the lack of difference between the 'average' and 'good' organizations, we state that Business & IT Alignment will lose its significance after a certain level. So Business & IT Alignment is more a foundation to enable success being possible, a pre-condition for success. This is also an indication that our third proposition is correct, which will be discussed later in this chapter. We will accept the second proposition party: Business & IT Alignment does influence the success, but only to a certain level. Business & IT Alignment is more a pre-condition to enable success. Roland Booijen, April 2005 72

Components of Business & IT Alignment When we look back at the components we defined last chapter concerning Business & IT Alignment, we can make a comparison in table 7.9: Communications Maturity Competency/Value Measurement Maturity Governance Maturity Partnership Maturity Components Communications Competency/Value Measurement Governance Partnership Good 3,3 3,0 3,3 3,0 Average 3,2 3,2 3,2 2,8 Bad 2,3 2,7 2,8 3,0 Table 7.9 Maturity levels of the components of Business & IT Alignment. We immediately see that the problem within in the 'bad' organization lies in the communication component. The most distinguishing capacity of the 'bad' organizations on one side and the 'average' and 'good' organizations on the other side relies on the communications field. Communication is of course very important, because several parts of an organization need to be aligned, in which communication is indispensable. This was also affirmed in our research by one of the interviewed CIO's: "An outsourcing will certainly fail to succeed if consultative structures are not implemented well. Third Proposition The third proposition that we stated related the influence of Business & IT Alignment to the contribution of Management Control. In other words, can we see organizations with a similar level of Management Control in which the one with a higher level of Business & IT Alignment shows higher satisfaction? Proposition 3: Improving Business & IT Alignment in an outsourcing situation will lead to a higher contribution of Management Control. Figure 7.11 - Proposition 3 We will take a look at table 7.12 to find organizations with a similar level of Management Control. Roland Booijen, April 2005 73

Organization Level of Management Control Level of Business & IT Alignment 1 3,4 3,1 2 4,1 3,1 3 4,0 3,3 4 3,5 3,8 5 3,6 2,8 6 3,8 3,0 7 3,2 3,1 8 3,0 3,4 9 3,5 3,1 10 3,2 2,6 Table 7.12 - Table 7.7 - The Levels of Management Control and Business & IT Alignment among the organizations. In this analysis, we will not compare the other organizations with organizations 1, because this was an exceptional situation as discussed above. The organizations we can compare with each other, because they have a similar level of Management Control and a different satisfaction level, are organizations 7 & 10 and organizations 8 & 10. Both comparisons have the same outcome. Organization 10, which in both cases has a considerable lower level of satisfaction, also shows a significant lower level of Business & IT Alignment. This suggests that our proposition is correct. Though, a rival explanation could be that the lack of Business & IT Alignment of organization 10 simply disables any chance of success as concluded at the second proposition. Due to this reason and together with the analysis we performed at the second proposition, this strengthens the idea of Business & IT Alignment being a precondition to enable success in an outsourcing. The third proposition will not be accepted as it is, but together with the second proposition it will be changed into the assumption that Business & IT Alignment works as a pre-condition for success. 7.4 Other Observations of the Research During an interview with one of the organizations we came across a very interesting remark by the interviewee. The CIO of the most satisfied organization told us why he thinks that his outsourcing is so successful. The CIO had already performed outsourcing three times before, within different organizations. During these outsourcings, mistakes were made, but he learned from them. According to this person, his experience with outsourcing in the past is the reason for success during his current outsourcing. Roland Booijen, April 2005 74

Another remarkable discovery was (although being part of the pre-process) the reasons for the initial raise of the satisfaction. Of course, we spoke to a reasonable amount of organizations and we found out that this raise is caused by two different reasons. The first reason is the lack of right communication with the internal organization. The satisfaction is often not managed by higher management. Employees frequently expect miracles to happen concerning the IT services. The second reason for the initial satisfaction-raise, that we heard regularly during the research, was that of the promising salesteam. During the pre-process in which a service-provider is selected, each service-provider sends in a salesteam to acquire the deal. During this phase, the salesteam often makes promises of which the service-provider already knows it cannot carry out. However, the outsourcing organization does not find this out before all contracts are signed and the outsourcing is already in transition or even operational. This intentional exaggerating cannot be prevented to happen, but when organizations are familiar with the fact that this happens, counter-measures can be taken. We will now continue to the final chapter in which the conclusions of the analysis and the research as a total will be discussed. Roland Booijen, April 2005 75

8 Conclusions 8.1 Research Questions At the beginning of this research we showed interest in the rather low satisfaction rates that organizations have regarding their outsourcing. Due to this lack of satisfaction, we saw many organizations change their service-provider after the termination of the contract. Our goal was to find out whether the organizations could do anything during the operational phase to improve satisfaction. In the introduction of this thesis we posed our main research question: How do Management Control and Business & IT Alignment influence the success of a running IT outsourcing? Before being able to answer this question, several sub-questions were needed: 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 does one acquire information about this success? These questions were answered in respectively chapters 2, 3, 4 and 5. In the second chapter, we focused on outsourcing in general to answer the first sub-question. During the third and fourth chapter we explained our interest in Management Control and Business & Alignment. In the fifth chapter we defined success in an outsourcing relationship and the way how Management Control and Business & Alignment can influence success. After that, we created three propositions and an accompanying model, illustrating how reality looks like in our opinion, based on the literature research. We conducted the case-study field research and analyzed the data in chapter 7. In this analysis we ran a cross-case analysis to find patterns in the data. This enabled us to acquire insight on our propositions. Roland Booijen, April 2005 76

8.2 Research Outcomes In the analysis we looked towards the influence of Management Control on success, the influence of Business & IT Alignment on success and whether a higher level of Business & IT Alignment strengthens the effect of Management Control. This has been done in order to answer the main research question. While analyzing, several conclusions have been drawn. Management Control indeed has a positive influence on success. Our data showed that the higher the level of Management Control, the higher the level of satisfaction over the outsourcing and thus success. Based on the data, we also expect that organizations with a more operational form of outsourcing need a lower level of Management Control to reach the same level of satisfaction. From the components we defined in chapter 6, the distinguishing capacity of the more satisfied organizations does not rely on the ITIL processes itself, but on the overlaying processes Governance, Communication and Financial Control. Business & IT Alignment proved to work differently than expected. Business & IT Alignment worked as a pre-condition to enable success. So a certain level of Business & IT Alignment is necessary to make satisfaction possible. After that level, more Business & IT Alignment will not make an organization more satisfied. We did not see any prove in our data that more operational outsourcing needed less Business & IT Alignment to reach the same satisfaction levels. Our data showed that Communication was the main problem at the 'bad' organization. In our data we found indications for our third proposition (whether a higher level of Business & IT Alignment strengthens the effect of Management Control) to be correct. However, this could also be explained as the same pre-condition effect we referred to earlier. This is why we will not accept this proposition for now. Our research model, as posed in chapter 5, initially looked like this: Figure 8.1 Initial research model. After our research and the corresponding analysis we would like to adapt the model. No explicit proof has been found for the strengthening effect of Business & IT Alignment to Management Control. In addition, we found that Business & IT Alignment is more a pre-condition to success; after a certain level it will lose its influence (dotted arrow). The final model, illustrating our view on this matter after the research, is as follows (Figure 8.2): Roland Booijen, April 2005 77

Figure 8.2 Final research model. 8.3 Future Research Directly related to this research, we would like to do some suggestions for future research. After this explorative research, we would first like to see a research among a larger group that would allow some statistical analyses. This will give more validity and show more insight to what exact degree Management Control and Business & IT Alignment and their corresponding components have influence on success. During this research, we also came across some other interesting topics. The initial raise of satisfaction by organizations proved to be rather interesting, although it does not belong to our researched operational phase. We found two explanations during our research. We are interested in what organizations could do to prevent this unfounded raise of satisfaction. Which countermeasures could be taken to fight this effect? Another observation of our research is the great effect that experience brings to the successfulness of outsourcing. This is the reason we expect that maturation of this outsourcing industry will eventually make organizations more satisfied with outsourcing. This can be achieved by accepting the importance and acquiring knowledge over the configuration of the own organization. We would like to see some future research in this subject whether our observation can be statistically proved. In paragraph 2.4, we discussed the course of history of IT outsourcing in the Netherlands. Currently, we find ourselves in a state of competition. Within a competition phase, the specialization of suppliers is a normal phenomenon. If we look at the service-providers in the Netherlands, no specialization can be seen. Every large service-provider in the Netherlands offers the total package. We do not see large service-suppliers specialize in any outsourcing activity. We wonder, and are therefore interested in research concerning this area, why specialization does not take place in this industry. Roland Booijen, April 2005 78

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Looff, L.A. de. "A model for information systems outsourcing decision making", PhD Dissertation TU Delft, September 19, 1996. Luftman, J. "Enablers & inhibitors" InformationWeek pp. 283, Sep 1998. Luftman, J. & Brier, T. "Achieving and sustaing Business-IT Alignment" California Management Review, volume 42, 1999. Luftman, J. " Assessing IT/Business Alignment" Information Strategy: The Executive s Journal, 2003. Luftman, J., "Competing in the Information Age: Align in the Sand", Oxford University Press, 2003; Mac Neela, A. "Managers at European IT sourcing summit think cost is king." Gartner Research Note, July 2004 Maes, R. et al "Redefining business IT Alignment trough a unified framework" PrimaVera Working paper volume 19, 2000. Merchant, K. & Simons, R. "Research and control in complex organizations: an overview." Journal of accounting literature: volume 5 pp. 183-203, 1986. Mooijman, R. "Demand management onder de loep" IT beheer Magazine volume 5, 2003. Moore, G. "Cramming more components onto integrated circuits Electronics", Volume 38, Number 8, April, 1965 Office of the CIO, "Terms", 2004 Opheij, W. & Willems, F. "Shared Service Centers: Balanceren tussen pracht en macht". Holland Management Review nr. 95, 2004 Outsourcing Management Zone, The. "Outsourcing: Information, Resources and Guidance". 2003. Perrow, C. "Complex Organizations: A Critical Essay", Englewood Cliffs Prentice-Hall, 1986. Prahalad & Hamel "The Core Competance of the Corporation". Harvard Business Review, May- June, 1990. Reich, B. & Benbadat, I. "Development of measures to investigate the linkage between business and information technology objective" Working Paper 93-MIS-011, 1993 Rosemann, M. "ERP-software-characteristics and consequences" in: Proceedings of the 7th European Conference on Information Systems, Copenhagen, 1999 Roland Booijen, April 2005 82

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B Questionnaire The questionnaire that we used during our interviews at the ten organizations is shown below (Dutch). Algemene vragen 1. a) Welke componenten (hosting/werkplekdiensten/erp beheer) betreft de outsourcing? b) Kunt u binnen de scope aangeven welke onderdelen de leverancier doet en welke u zelf bent blijven doen? 2. Wat was uw belangrijkste argument voor uitbesteding? 3. Hoe lang is de termijn van het contract? En in welk jaar bent u nu? 4. Hoeveel mensen zijn er geoutsourced en door hoeveel mensen worden de outsourcende partij nu aangestuurd? 5. Wat is de afhankelijkheid van IT binnen uw business processen? 6. Hoe tevreden was de business over de geboden oplossing en de leverancier op het moment van het afsluiten van contract? (In een cijfer uitgedrukt) 7. Hoe tevreden is de business nu over de leverancier? (In een cijfer uitgedrukt) 8. Zou uw organisatie opnieuw uitbesteden na afloop van dit contract? 9. Zou uw organisatie dat dan ook willen doen met dezelfde partij? 10. Als uw organisatie toen de kennis van nu zou hebben? Wat zou er dan anders verlopen zijn? 11. Hoe is de relatie tussen uw organisatie en de service-provider? 12. Wat bepaalt voor u de kwaliteit van de dienstverlening? Management Control 1. a) Is er een demand organisatie ingericht? Hoe ziet die organisatie eruit? b) Welke competenties zijn vertegenwoordigd in de demand organisatie, hoe is deze organisatie ontstaan? 2. Welke rol speelt de demand organisatie in changes? Wie autoriseert hierbij? 3. Hoe worden kosten van changes in kaart gebracht en gecontroleerd? 4. Zijn er vaste aanspreekpunten binnen de eigen business organisatie voor de demand organization en is dit formeel geregeld? 5. a) Welke afspraken zijn er gemaakt mbt overleg met leverancier? b) Wat voor sturing volgt uit deze overleggen? 6. Rapporteert de leverancier aan de demand organization? Hoe en wat? 7. a) Voor welke diensten zijn er service levels vastgelegd en hoe zijn de normen daarvan vastgelegd? b) Zijn er verschillen tussen interne en externe service levels? 8. Is er een benchmark clausule in het contract en hoe wordt deze gebruikt? 9. Heeft er ooit een kostenvergelijk plaatsgevonden? Hoe was die uitkomst? 10. Hoe worden verbeteringsvoorstellen van leverancier beoordeeld? 11. Indien er een grote projectmatige wijziging is hoe vindt dan de sturing plaats? Roland Booijen, April 2005 84

12. Hoe duidelijk is de scheidslijn tussen de verantwoordelijkheden van de leverancier en uw organisatie? 13. Is er een bonus/malus regeling of vergelijkbare regeling? Hoe wordt deze gebruikt? 14. Hoe is de relatie tussen de doorbelasting van de kosten voor dienstverlening en gebruiker/klant? 15. Hoe vindt controle plaats op facturen voordat deze betaald zijn? Business & IT Alignment 1. Welk overleg is er tussen de demand-organisatie en business op tactisch en operationeel niveau. 2. In welke mate zijn er contacten tussen de service-provider en uw business op strategisch niveau? Welke rol speelt het demand management daarin? 3. Hoe is de vertaling van de Business strategie naar de ICT strategie geregeld? 4. Wat is de rol van business in de beoordeling van nieuwe ICT toepassingen? 5. Hoe worden IT projecten geprioriteerd, door wie? 6. Wie is binnen de organisatie eindverantwoordelijk voor ICT en wie stuurt deze aan? 7. Waarover, door wie en hoe wordt de business geïnformeerd? 8. Wat is de relatie tussen SLA-normen en business eisen en wensen? 9. Hoe is verantwoordelijkheid voor het functioneel beheer geregeld, welke rol heeft demand/it en welke rol heeft business hierin? 10. Wat is de relatie tussen de business en demand management ten aanzien van wijzigingen in processen/systemen? 11. Hoe goed begrijpt de IT de business-processen. Waar blijkt dat uit? 12. Hoe beschouwt de business de IT? Roland Booijen, April 2005 85

C Maturity-scan Control Vraag Control 1a Niveau 1 Niveau 2 Niveau 3 Niveau 4 Niveau 5 Er is geen demand organisatie Er is iemand op ad hoc basis Er is iemand (of meerdere Er is een aparte demand Er is een aparte demand ingericht als aanspreekpunt voor de mensen) naast zijn organisatie (e.e.a afhankelijk organisatie (e.e.a afhankelijk van leverancier beschikbaar "normale"werkzaamheden van de omvang) belast met de de omvang) belast met de belast met de aansturing van aansturing van de leverancier. aansturing van de leverancier. de leverancier. Er is echter Er is een globale beschrijving Er is een complete beschrijving geen beschrijving van van processen en TVB's van de organisatie inclusief de processen en TVB's processen en TVB's. 1b Demand organisatie wordt Demand organisatie wordt Demand organisatie wordt De demand organisatie is De demand organisatie is volledig bemand door oud ICT volledig bemand door oud ICT deels bemand door oud ICT grotendeels samengesteld samengesteld o.b.v. benodigde medewerkers met alleen een medewerkers met medewerkers met wisselende o.b.v. benodigde competenties competenties op gebied van technische achtergrond voornamelijk een technische achtergrond op gebied van service mgt, service mgt, kosten mgt en achtergrond kosten mgt en algemene algemene onderhandel onderhandel vaardigheden. vaardigheden Inzetten van oud-medewerkers ging voor de benodigde competenties. Roland Booijen, April 2005 86

Vraag Niveau 1 Niveau 2 Niveau 3 Niveau 4 Niveau 5 Control 2 Geen, er alleen contacten tussen leverancier en klant/gebruiker Beperkte rol. Changes geïnitieerd door de demand organisatie of leverancier zijn bekend. Een groot deel van Demand organisatie speelt een hoofdrol in de totstandkoming van de besluitvorming. Er glippen nog wel eens changes Demand organisatie heeft een duidelijke rol in het hele proces. Er is echter nog niet voor alle soorten changes vooraf Demand organisatie regisseert het change proces. Per soort change is vooraf vastgelegd wie betrokken is bij besluitvorming de changes vanuit de gebruikers kant gaat echter langs de demand organisatie zonder invloed door waar demand organisatie pas later weet van krijgt vastgelegd wie men bij de besluitvorming moet/ gaat betrekken 3 Niet Zeer beperkt. Van de grote wijzigingen weet men wat de geoffreerde kosten zijn. Redelijk. Men weet wat de kosten zijn van standaard wijzigingen en heeft offertes van de niet standaard wijzingen. Controle van facturen van leverancier met eigen administratie vindt niet plaats. Er is een goed inzicht in kosten voor wijzigingen.men heeft beperkte controle mogelijkheden t.a.v. facturen en gerealiseerde changes Volledig overzicht tussen uitgevoerde wijzigingen (standaard en non standaard) de kosten daarvoor en de "veroorzaker". Tevens heeft men een goed vergelijk tussen gevraagde en gefactureerde changes 4 Geen formele vaste aanspraakpunten De demand organsiatie heeft wel aanspreekpunten binnen de business. Deze zijn echter niet formeel daartoe aangesteld. Aanspreekpunten van nature onstaan. De demand organsiatie heeft wel aanspreekpunten binnen de business. Deze zijn formeel aangewezen maar niet duidelijk te koppelen aan een organisatieonderdeel Binnen de afzonderlijke onderdelen van de organisatie zijn formeel aparte medewerkers aangewezen als linking pin naar de demand organisatie. Er vindt met deze personen op ad hoc basis afstemming plaats Binnen de afzonderlijke onderdelen van de organisatie zijn formeel aparte medewerkers aangewezen als linking pin naar de demand organisatie.er vindt met deze personen op vastgestelde tijden afstemming plaats Roland Booijen, April 2005 87

Vraag Niveau 1 Niveau 2 Niveau 3 Niveau 4 Niveau 5 Control 5 Er zijn geen afspraken gemaakt t.a.v. overleg Er zijn gaandeweg wat afspraken t.a.v. overleg gemaakt maar deze worden niet altijd nagekomen, er is geen vaste agenda/structuur en overzicht van deelnemers Er is een overlegstructuur. Overleg vindt echter alleen plaats op operationeel niveau. Er vindt overleg plaats op verschillende niveaus volgens een vaste structuur. Agenda wisselt nog en regelmatigheid ontbreekt. Er zijn op verschillende niveaus formeel afspraken belegd. Volgens een vaste agenda worden met een vaste groep van deelnemers de overleggen ingevuld 5b Er zijn geen overleggen Uit de overleggen volgt enkel Uit de overleggen volgt meestal Uit de overleggen volgt meestal Vanuit de overleggen volgt altijd reactieve sturing reactieve sturing, op een enkel pro-actieve sturing, op een op alles een pro-actieve sturing onderwerp pro-actieve sturing. enkel onderwerp reactieve sturing. 6 Geen rapportage door Incidentele rapportage door Leverancier rapporteert op Leverancier rapporteert op Leverancier rapporteert op leverancier leverancier met wisselende vastgestelde tijden over een vastgestelde tijden over alle in vastgestelde tijden over alle in onderdelen of slechts een deel van de in de SLA de SLA afgesproken de SLA afgesproken onderdelen beperkte set van de afgesproken dienstverlening. onderdelen van van dienstverlening. De dienstverlening dienstverlening. Soms is er rapportage geeft een juist beeld discrepantie tussen rapportage van de geleverde en werkelijkheid dienstverlening 7a Er zijn geen service levels Voor enkele onderdelen van Voor enkele onderdelen van de Voor bijna alle onderdelen van Voor bijna alle onderdelen van vastgelegd de dienstverlening zijn service dienstverlening zijn service de dienstverlening zijn service de dienstverlening zijn service levels gedefinieerd maar die levels gedefinieerd en die zijn levels gedefinieerd maar die levels gedefinieerd en die zijn zijn niet SMART ook SMART zijn niet/onvoldoende SMART ook bijna allemaal SMART Roland Booijen, April 2005 88

Vraag Control 7b Niveau 1 Niveau 2 Niveau 3 Niveau 4 Niveau 5 Er zijn geen interne servicel Er zijn wel interne service Er is bewust ruimte gelaten levels. levels maar die zijn precies tussen interne en externe hetzelfde als de externe service levels. service-levels 8 Er is geen benchmark Er is een benchmark clausule Er is een benchmark clausule. Er is een benchmark clausule Er is een benchmark clausule clausule die nog niet is gebruikt en dit En men heeft het idee om deze die reeds is gebruikt maar over die op vastgestelde momenten waarschijnlijk ook niet gaat binnenkort te gaan gebruiken de uitkomst en aanpassingen wordt gebruikt. Afwijkende worden wordt nu onderhandeld kostenstructuren worden o.b.v. het onderzoek bijgesteld 9 Nooit een kostenvergelijk Er is wel eens globaal naar de Er heeft wel een basis Er heeft een gedegen Er heeft een gedegen plaatsgevonden kosten gekeken. Echt een kostenvergelijk kostenvergelijk plaatsgevonden kostenvergelijk plaatsgevonden duidelijke uitkomst was er plaatsgevonden. De uitkomst waarbij voor het totaal duidelijk waarbij per geleverde dienst echter niet gaf slechts een grove indicatie was hoe er werd gescoord duidelijk was hoe er werd van de score gescoord 10 Zijn er niet of men gaat ervan Beperkt. Men bekijkt de Grote wijzigingsvoorstellen Van alle belangrijke changes Afhankelijk van vooraf uit dat de voorstellen begrote kosten a.h.v. vaste worden (beter dan kleine) vindt een toetsing plaats op gedefinieerde impact en omvang technisch inhoudelijk en qua uurtarieven. Indien kosten beoordeeld op kosten en zowel kosten als techniek.met van de wijziging wordt door de kosten kloppen passen binnen budget wordt techniek. Heeft nog wel het name de kosten kant wordt business and demand wijziging geaccordeerd karakter van steekproef o.b.v. o.b.v. historie beoordeeld en organisatie de regie gevoerd (soms beperkte) beschikbare gewogen. Techniek wordt bij over de controle van het kennis grote twijfel bij interne voorstel. Indien nodig wordt deskundige of extern getoetst extern een second opinion gevraagd en/of wordt intern de juiste kennis gemobiliseerd Roland Booijen, April 2005 89

Vraag Niveau 1 Niveau 2 Niveau 3 Niveau 4 Niveau 5 Control 11 Vanuit organisatie geen sturing. Indien er sturing is komt die voort uit initiatief van de leverancier Organisatie levert beperkte capaciteit voor sturing. Leverancier werkt met projectleider. Business niet betrokken Organisatie levert beperkte capaciteit voor sturing. Leverancier werkt met projectleider. Business wordt geïnformeerd of zijdelings betrokken Organisatie levert een projectleider en de leverancier ook. Er is in beperkte vorm een projectorganisatie en de Business wordt geïnformeerd of zijdelings betrokken Er is een volledige projectorganisatie waarin zowel de demand organisatie als de leverancier een projectleider levert. Waar nodig wordt de business betrokken in het project. Stuurgroep stuurt en controleert 12 Scheidslijn tussen verantwoordelijkheden leverancier en eigen organisatie m.b.t. dienstverlening is onduidelijk Globaal kan men aangeven wie wat doet Men heeft een redelijk tot goed inzicht in de scheidslijn van verantwoordelijkheden. Er zijn nog wat grijze gebieden. E.e.a. is niet of onvoldoende beschreven Men goed inzicht in de scheidslijn van verantwoordelijkheden. Er zijn geen grijze gebieden. E.e.a. is deels beschreven maar komt in SLA, contact en DAP nog Er is een hele duidelijk scheiding tussen verantwoordelijkheden van de leverancier en die van de eigen organisatie. Deze is ook duidelijk in de betreffende documenten beschreven onvoldoende tot uiting 13 Nee Er zijn mondelinge afspraken over b/m regeling mocht dat nodig zijn. Er is in het contract iets opgenomen over b/m. Hoe het precies in de praktijk werkt is onduidelijk Er is een redelijk concrete regeling. De hoogte van de malussen staat niet in verhouding tot de contractwaarde / schade Ja. Er is een duidelijke regeling die ingaat op wijze van toepassing en b/m tredes. De hoogte van de malussen staat goed in verhouding tot de contractwaarde / schade 14 Er zijn geen afzonderlijk diensten benoemd. Kosten zijn alleen op hoogste niveau benoemd. Er zijn wel diensten gedefinieerd maar er is geen relatie gelegd met kosten Er zijn diensten gedefinieerd en er is een begonnen een relatie te leggen tussen kosten en diensten. Volledige relatie tussen gedefinieerde diensten en kosten inclusief de wijzigingen. Kosten worden niet doorbelast Volledige relatie tussen gedefinieerde diensten en kosten inclusief de wijzigingen. De gebruiker betaalt. Roland Booijen, April 2005 90

Vraag Niveau 1 Niveau 2 Niveau 3 Niveau 4 Niveau 5 Control 15 Niet Wordt bij incidenten gecontroleerd, enkel op basis van gegevens leverancier Wordt bij incidenten gecontroleerd, op basis van verzamelde gegevens en rapportages van de leverancier Wordt altijd gecontroleerd, enkel zijn niet overal eigen gegevens van. Altijd gecontroleerd Volledig op basis van eigen gegevens en rapportage van de leverancier Roland Booijen, April 2005 91

D Maturity-scan Business & IT Alignment Vraag Niveau 1 Niveau 2 Niveau 3 Niveau 4 Niveau 5 B&T 1 Er is geen overleg tussen demand en business Incidenteel informeel overleg. Op zowel tactisch als operationeel niveau Voor belangrijke projecten/wijzigingen vindt overleg plaats. Op zowel tactisch als operationeel niveau Er is een geformaliseerde overlegstructuur die ten dele wordt gebruikt/nagekomen. Op zowel tactisch als operationeel niveau Er is een geformaliseerde overlegstructuur die volledig wordt gebruikt/nagekomen. Alle zaken worden via de geëigende kanalen besproken en afgestemd. Op zowel tactisch als operationeel niveau Geen enkel overleg Informeel overleg op strategisch Formeel overleg op Informeel overleg op Formeel overleg op strategisch 2 niveau. Demand organization strategisch niveau. Demand strategisch niveau. Demand niveau. Demand organization wordt niet betrokken bij overleg. organization wordt niet organization initieert en initieert en begeleid het overleg. betrokken bij overleg. begeleid het overleg. 3 Er is geen koppeling tussen Soms wordt voor afzonderlijk ICT Er is een business planning Er is een proces voor business Er is een jaarlijks proces rondom business strategie en ICT gerelateerde projecten gekeken /strategie en een ICT planning en voor ICT planning. businessplanning waarin ook een strategie hoe de business strategie eruit projectenkalender waarbij Er vindt wel afstemming plaats afstemmingsronde en koppeling ziet voor alle projecten een maar dit is nog niet binnen 1 met ICT plaatsvindt relatie wordt gelegd naar proces geformaliseerd strategie Roland Booijen, April 2005 92

Vraag Niveau 1 Niveau 2 Niveau 3 Niveau 4 Niveau 5 B&T 4 Business speelt geen rol bij de beoordeling van nieuwe ICT toepassingen Incidenteel en bij toeval komt een mogelijke nieuwe toepassing ter sprake. ICT beslist uiteindelijk over invoering Overleg over het onderwerp is wel gepland maar vindt alleen plaats als ICT denkt een geschikte toepassing te hebben gevonden. Eventuele toepassing Business en ICT hebben op vastgestelde momenten overleg over nieuwe toepassingen. Ideeën daarover komen van ICT. Gezamenlijk wordt de afweging gemaakt Business en ICT hebben op vastgestelde momenten overleg over nieuwe toepassingen. Ideeën daarover komen van beide kanten en gezamenlijk wordt de afweging gemaakt t.a.v. bruikbaarheid gezamenlijk besloten maar zwaartepunt bij ICT t.a.v. bruikbaarheid 5 Er vindt geen prioritering van projecten plaats. Alles gaat op volgorde van binnenkomst of andere niet business relevante motieven De demand organisatie bepaalt de prioriteit van projecten op basis van de reeds beschikbare informatie De demand organisatie bepaalt de prioriteit van projecten en vraagt de business zo nu en dan om input daarvoor Gaande weg het jaar wordt in overleg tussen business en demand organisatie de prioriteit bepaalt en waar nodig bijgesteld De business bepaalt proactief de prioriteit van projecten d.m.v een vooraf opgestelde projecten kalender voor het komende jaar. Gebeurt in overleg/instemming met de demand organization 6 De aansturing van ICT wordt gedaan door een demand manager en/of hoofd ICT die alleen t.a.v financiën rapport naar het management (bv CFO) De aansturing van ICT wordt gedaan door een demand manager en/of hoofd ICT die rapport naar het management (bv CFO). Binnen het management is ICT echter een rest portefeuille van bv de CFO Er is een duidelijke aansturing van ICT vanuit een hoger niveau van de organisatie. Dit is geregeld via een CFO of andere functie. Er is geen aparte CIO of vergelijkbare functie waar een duidelijk kennis en aandachtsgebied aanwezig is Er is een duidelijke aansturing van ICT vanuit een hoger niveau van de organisatie. Dit is geregeld via een CIO of vergelijkbare functie. De verantwoordelijke manager rapporteert aan de hoogste laag binnen de organisatie maar maakt daar geen deel van uit. Er is een duidelijke aansturing van ICT vanuit het hoogste niveau van de organisatie. Dit is geregeld via een CIO of vergelijkbare functie die onderdeel uitmaakt van de hoogste management laag van de organisatie. De relatie ICT business is op strategisch niveau belegd in de aansturing Roland Booijen, April 2005 93

Vraag Niveau 1 Niveau 2 Niveau 3 Niveau 4 Niveau 5 B&T 7 Er wordt niet gerapporteerd door leverancier en niet door demand managent. Er wordt beperkt gerapporteerd door leverancier en niet door demand managent. Beperkt betekent niet op alle Er wordt volledig gerapporteerd door leverancier en niet door demand managent. Beperkt Er wordt volledig gerapporteerd door leverancier en beperkt door demand managent. Beperkt betekent Er wordt volledig gerapporteerd door leverancier en volledig door demand managent op de voor de business relevante items. componenten / of technisch inhoudelijk betekent niet op alle componenten / of technisch inhoudelijk niet op alle componenten / of technisch inhoudelijk 8 Er is geen relatie gelegd bij de totstandkoming van de SLA Er is door ICT geprobeerd o.b.v bestaande kennis een globale vertaalslag te maken tussen SLA en mogelijke business wensen Er is door ICT aan de business gevraagd aan te geven wat men nodig heeft voor de bedrijfsvoering. O.b.v. die input heeft ICT de vertaalslag gemaakt ICT en Business hebben gezamenlijk een proces doorlopen om service levels te bepalen die noodzakelijk zijn voor bedrijfsvoering. Er heeft geen terugkoppeling van een De overeengekomen service levels zijn allemaal voortgekomen uit de door de business geformuleerde eisen en wensen. Via een vertaalslag en terugkoppeling is de uiteindelijke SLA opgesteld concept SLA plaatsgevonden 9 Functioneel beheer ligt zowel qua inhoud als aansturing volledig bij demand management Aansturing van functioneel beheer ligt bij demand management maar voor inhoudelijke zaken vindt wel afstemming met de business plaats Functioneel beheer heeft een rapportagelijn en is aanspreekpunt voor vast business onderdeel maar wordt nog door demand organisatie aangestuurd Functioneel beheer is als functie belegd bij de business. Wordt nog wel gezien als een IT functie Functioneel beheer is volledig binnen de business geïntegreerd, stemt waarnodig af met demand management of IT Roland Booijen, April 2005 94

Vraag Niveau 1 Niveau 2 Niveau 3 Niveau 4 Niveau 5 B&T 10 De demand organisatie neemt alle beslissingen t.a.v wijzigingen zonder raadpleging van business De demand organisatie neemt alle beslissingen t.a.v wijzigingen maar raadpleegt de business wel De demand organisatie neemt alle beslissingen t.a.v wijzigingen maar raadpleegt Business neemt op basis van voorstellen van demand management beslissingen t.a.v Business neemt alle beslissingen t.a.v wijzigingen in proces en de daaraan gerelateerde systemen. bij grote wijzigingen de business bij alle relevante wijzigingverzoeken en voorstellen wijzigingen in proces en de daaraan gerelateerde systemen. 11 ICT heeft geen tot slechte kennis van de business processen Op hoofdlijnen kent ICT de business processen maar gedegen kennis van proces en de onderliggende ICT toepassingen ontbreekt Men kent de business processen volledig maar de relatie naar ICT processen en diensten is niet aanwezig Men kent de business processen volledig maar de relatie naar ICT processen en diensten is beperkt aanwezig ICT is volledig bekend met de business processen en de wijze waarop die door de verschillende ICT toepassingen worden ondersteund. 12 Blok aan het been en Kostenpost maar wel Op sommige punten IT belangrijk voor realiseren Volledige partner noodzakelijk bij veroorzaker van de kosten. noodzakelijk noodzakelijk. Toegevoegde van business. Kennis van het succesvol uitvoeren van waarde nog te beperkt. IT is business nog te verbeteren. IT business een enabler is een driver Roland Booijen, April 2005 95