Outsourcing trends are changing business practices as both vendors and clients enter into different types of outsourcing arrangements to build business relationships across international boundaries. Moreover, as organisations enter into new knowledge domains in distributed settings, they have realised the need for a strategy to deal with increasing demands and expectations of the stakeholders involved. Thus the current offshore outsourcing environment has led to many classifications in outsourcing arrangements between clients and vendors, as both sides weigh their risks and benefits for knowledge sharing.
This section begins with the definition of the term “offshore outsourcing” and then synthesises prior research to highlight the global outlook and show the different trends in the area of offshore outsourcing. It aims to give a broader view of the current offshore environment from both the client and vendor’s point of view.
2.2.1 Definition
The term “offshore outsourcing” is comprised of two distinct terms: “offshore” and “outsourcing”. The terms offshoring and outsourcing are often used as synonyms in the literature, but offshore is about location (onshore or offshore), and outsourcing is about governance (in-house or outsourced) (Agerfalk & Fitzgerald, 2008). These terms are used in the context of many industry domains, but primarily imply the use of an agent or supplier existing outside the client’s country shores, to undertake sourcing of some internal functions.
Offshore outsourcing has been defined in IS literature as a strategy where IT functions are out-tasked or transferred or subcontracted to another party. This is evident by some definitions used in IS literatures, which are as follows:
……… is a “buy” strategy or out-tasking to third parties located in a country different from that of the client. Another strategy is the “build” strategy, which implies ownership of the offshore resources, such as captive centres or subsidiaries (Carmel & Tija, 2005, p. 103).
……… refers to the subcontracting of an activity by a client organisation to an independent provider working from an overseas destination (Vlaar, Fenema, & Tiwari, 2008, p. 228).
……… is the transference of an IT function, from a client company to a supplier organisation located outside the borders of the client company’s country (Jennex & Adelakun, 2003, p. 25).
………refers to a commercial subcontracting arrangement, where a contractor entrusts a foreign sub contractor with a commission to produce the software products or services (Nahar, Kakola, & Huda, 2002)
Thus the terms “outsourcing”, “subcontracting”, “out-tasking to third parties” or “buy” have been used interchangeably to describe the practice of paying an external party for performing an internal IS function. The term “outsourcing” is preferred in this literature.
2.2.2 Synthesis of outsourcing concepts used in literature
In order to adequately address the diversity of research in outsourcing, this study will first synthesise the outsourcing concepts used in the published literature.
2.2.2.1 Organisational arrangements in outsourcing
Dibbern et al. (2004) use a broad term IS sourcing to define an organisational arrangement instituted with an external agent for obtaining IS services and the management of resources and activities required for producing these services. The organisational arrangements refer to the formal structure of the responsibility for delegation of tasks within the IS functions. The IS functions may be characterised as commodities to include software applications development, application maintenance, network management, and similar functions. The functions could be handled either internally (insourcing) or externally (outsourcing). Building on previous literature, Dibbern et al (2004) further define four fundamental parameters in the context of organisational arrangements for outsourcing:
1. degree (total, selective and none);
4. time frame (short term/long term).
Offshore outsourcing may include any combination of the four parameters (degree, ownership, mode and time-frame). The combination of specific instances of degree and ownership parameters yields different types of outsourcing arrangements:
a. Spin-offs are situations when the ownership is internal, but the function is either totally or selectively outsourced (Heinzi, 1993; Reponen, 1993).
b. Joint ventures are when spin-offs are jointly owned between the clients and the vendors (Carmel & Tija, 2005; Fitzgerald & Willcocks, 1994; Marcolin & McLellan, 1998).
c. Traditional outsourcing is when the function is completely outsourced and there is no joint ownership of resources (Earl, 1996; Gold, 2005).
d. Selective outsourcing is when the function is selectively outsourced and there is no joint ownership of resources (Gold, 2005; Lacity, Willcocks, & Feeney, 1996).
Table 3 shows the four outsourcing arrangements – spin-offs, joint ventures, traditional and selective – based upon specific combinations of ownership of resources (i.e. internal, partial or external) and degree of outsourcing (i.e. total or selective) by the client.
Table 3 Types of sourcing arrangements Ownership Degree of
outsourcing
Internal Partial External
Total Traditional
Selective
Spin-offs (wholly owned subsidiary)
Joint venture Selective
Source: Dibbern et al, 2004
However, at the Gartner Outsourcing Summit in July 2003 in Las Vegas, audience polls revealed that traditional outsourcing firms were building extensive offshore capabilities, resulting in spin-offs and joint venture arrangements in the emerging offshore outsourcing environment. As a consequence business operations are spread across many countries, and offshore centres are becoming strategic centres. These centres are performing work
containing intellectual property related to the client’s products or processes and expertise related to the core competency of the client company. However, some clients prefer selective outsourcing arrangements, and keep key strategic functions of project/program management in-house and use outsourced staff only at certain points of control (Eppinger & Chitkara, 2006; Gold, 2005; Kaiser & Hawk, 2004).
The choice of outsourcing mode could lead to single client and vendor arrangements or multiple clients and vendors arrangements or any such combination of the two. Use of several vendors gives clients some independence and reduces the risk of having too much work ingrained with a particular vendor (Kaiser & Hawk, 2004).
Table 4 displays the different outsourcing modes.
Table 4 Outsourcing mode Vendor
Client
Single vendor Multiple vendors
Single client Simple dyadic (1:1) Multi-vendor (1: n)
Multiple clients Multi-client (n:1) Complex relationship (n:n)
Source: Dibbern et al, 2004
The fourth parameter i.e. timeframe refers to the contractual length of the outsourcing arrangement. This may vary from very short contracts to mid-term or long-term contracts (Lacity & Willcocks, 1998).
This study will look at different outsourcing arrangements involving a combination of ownership and degree of outsourcing (refer Table 3). The outsourcing arrangements used by the ten vendors participating in this research study are described in Chapter five.
2.2.2.2 Categories of outsourcing vendors:
The category of vendor involved is an important consideration in an outsourcing arrangement. Mitchell and Fitzgerald (1997) have identified five categories of vendor. In
addition, a sixth category, freelancers, has also been identified in the literature (Dibbern et al., 2004; Knolmayer, 2002).
The six categories are:
a. IS consultancies/ solutions providers – global players providing services in all IS functions
b. Systems houses – specialise in system integration c. Hardware vendors – specialise in IT hardware
d. Ex-IS departments – focus on industry specific sourcing
e. Generic outsourcers – specialise in managing functions, especially infrastructure f. Freelance personnel – provide day to day service provisions
This study examines the outsourcing categories of large, medium and small solution providers involved in the IT function of global software application development in a two- country context.