A review of the existing literature on IS outsourcing indicates that there are several stages through which most, if not all, outsourcing projects progress.
These stages are graphically represented in a process map shown in Figure 1.
Each stage will be briefly introduced in this section. A detailed discussion with examples will follow in subsequent sections. Two decisions regarding IS outsourcing must be made in the early stages of the project: strategic intent and outsourcing level.
Strategic intent refers to the outsourcing company’s goals for the project.
DiRomualdo and Gurbaxani (1998) discuss strategic intent in three categories:
IS improvement; business impact; and commercial exploitation. IS improvement is aptly named — companies pursuing outsourcing for IS improvement seek to reduce costs and enhance efficiency of IS resources (DiRomualdo & Gurbaxani, 1998). Business impact is concerned with improving the IS contribution to
Strategic
Intent Outsourcing
Level
Project Renewal or Termination Project Management &
Monitoring Contract Negotiation
Vendor Selection
Figure 1. Information systems outsourcing process map
company performance within existing lines of business (DiRomualdo & Gurbaxani, 1998). Companies using IS outsourcing for commercial exploitation focus on leveraging technology-related assets, including applications, infrastructure, and knowledge, in the marketplace through the development and marketing of new technology-based products and services (DiRomualdo & Gurbaxani, 1998).
Decisions relating to outsourcing level can be dichotomized as either total IS outsourcing or partial IS outsourcing. Lacity, Willcocks, and Feeny (1996) coined the term “selective outsourcing” to describe the practice of outsourcing only part of a company’s IS activity. Selective outsourcing is defined as the decision to source selected IT functions from external providers while still providing between 20% and 80% of the IT budget internally (Lacity & Willcocks, 1998).
Total outsourcing, by contrast, is the decision to transfer more than 80% of the IS budget for assets and accompanying management responsibility to an external vendor (Lacity & Willcocks, 1998).
Once decisions are made regarding strategic intent and level of IS outsourcing, companies must then select a vendor (or vendors). Issues presented in the literature as relevant to vendor selection decisions include benchmarking vendor costs against internal costs (Hall, 2003), evaluating vendors’ capabilities and resources to complete the project (Ferguson, 2004; Kim & Chung, 2003;
Willcocks & Lacity, 1999a); and completing due diligence of prospective vendors (Lankford & Parsa, 1999). Additionally, Kern, Willcocks, and van Heck (2002) discuss the implications of a “winner’s curse” for selecting IS outsourcing vendors. While vendor selection is obviously a critical component of the outsourcing process, contract negotiations with the chosen vendor codify many important elements of the relationship between vendor and outsourcing company (for clarity, the company that purchases outsourcing services will hereafter be referred to as the client).
Contract negotiations between client and vendor are discussed to some extent in much of the IS outsourcing literature. Oft-mentioned contract considerations include flexibility and dealing with uncertainty (Kern et al., 2002; Lee, Huynh, Kwok, & Pi, 2003), performance measures (DiRomualdo & Gurbaxani, 1998), service level (Ferguson, 2004), length of contract (Willcocks & Lacity, 1999a), and structure of rewards and penalties (DiRomualdo & Gurbaxani, 1998). Some authors (Quittner, 2004; Willcocks & Lacity, 1999a) indicate that clients should assume that the original contract will need to be renegotiated as the project progresses and prepare for the process of renegotiation in the early stages of the relationship with the vendor.
At the completion of contract negotiations and commencement of the project, clients enter the project management and monitoring phase of the outsourcing process. During this phase, the nature of the relationship between client and vendor takes center stage. Several researchers have studied the determinants
and results of this relationship (including Allen, Juillet, Paquet & Roy, 2001;
Ferguson, 2004; Lee, Huynh, Kwok, & Pi, 2003; Natovich, 2003; Quittner, 2004), but all agree the manner in which the relationship between client and vendor is managed plays a central role in the outcome of the outsourcing project.
Additional IS outsourcing project management issues include conflict resolution (Natovich, 2003), retained skills and capabilities (Willcocks & Lacity, 1999a), and level of commitment to the project for both client and vendor (Natovich, 2003). These additional issues are, to varying degrees, related to the nature of
Outsourcing
Stage Issues Relevant Citations
Strategic
Intent • IS improvement
• Business impact
• Commercial exploitation
Anderson et al. (2004), DiRomualdo & Gurbaxani (1998), Quittner (2004) Outsourcing
Level • Total outsourcing
• Selective outsourcing Barthelemy & Geyer (2004), Chain Store Age (2004), Gupta
& Gupta (1992), Natovich (2003), Quittner (2004), Willcocks & Lacity (1999a, 1999b)
Vendor
Selection • Due diligence
• Vendor capabilities &
resources
• Benchmark v. internal costs
• Winner’s curse
Chain Store Age (2004), Ferguson (2004), Hall (2003), Kern et al. (2002), Kim &
Chung (2003), Lankford &
Parsa (1999), Strassman (2004), Willcocks & Lacity (1999a)
Contract
Negotiation • Flexibility & dealing with uncertainty
• Performance measures
• Service level
• Length of contract
• Structure of rewards &
penalties
Allen et al. (2001), DiRomualdo & Gurbaxani (1998), Lee et al. (2003), Quittner (2004), Willcocks &
Lacity (1999a)
Project Management
&
Monitoring
• Nature of relationship between vendor & client
• Conflict resolution
• Retained skills &
capabilities
• Level of commitment – vendor & client
Lee et al. (2003), Natovich (2003), Nonprofit Business Advisor (2004), Willcocks &
Lacity (1999a)
Project Renewal or Termination
• Choice between renewal and termination
• Tone of project termination
Anderson et al. (2004), Natovich (2003)
Table 1. Information systems outsourcing stages, issues and relevant citations
the client-vendor relationship, which is a further indication of its centrality to the entire project.
The final stage of the IS outsourcing process is project renewal or termination.
This stage is largely a function of the contract terms and client-vendor relation-ship. Natovich (2003) and Quittner (2004) discuss project termination when the original contract term is abbreviated. Willcocks and Lacity (1999a) describe ways to mitigate the risks associated with project termination. As with other types of projects, renewal or termination of IS outsourcing projects can be a delicate issue for both client and vendor, particularly when the project is not going well. However, it offers insight into the entire IS outsourcing process that may be informative for future projects.
A summary of the stages of the IS outsourcing process, related issues, and relevant citations is presented in Table 1. Each of these topics is discussed in greater detail in the next section and illustrated with examples of successes and failures of IS outsourcing in business. From these vignettes, a collection of lessons learned is presented in the final section of the chapter and summarized in Table 2.