Managing change in
IT outsourcing arrangements
Towards a dynamic fit model
Managing change in
IT outsourcing arrangements
Towards a dynamic fit model
Proefschrift
Ter verkrijging van de graad van doctor aan de Technische Universiteit Delft,
op gezag van de Rector Magnificus prof. ir. K.C.A.M. Luyben, voorzitter van het College voor Promoties,
in het openbaar te verdedigen op dinsdag 8 maart 2011 om 15:00 uur door
Albert Gerard PLUGGE
Master of Business Telecommunications
Dit proefschrift is goedgekeurd door de promotor: Prof. dr. Y.H. Tan
Copromotor: Dr. W.A.G.A. Bouwman Samenstelling promotiecommissie: Rector Magnificus, voorzitter
Prof. dr. Y.H. Tan, Technische Universiteit Delft, promotor Dr. W.A.G.A. Bouwman, Technische Universiteit Delft, copromotor Prof. mr. dr. ir. S.C. Santema, Technische Universiteit Delft
Prof. dr. E. Beulen, Universiteit van Tilburg Prof. dr. J. van Hillegersberg, Universiteit Twente
Prof. dr. W. Jones, University of Southern Nevada Dr. ir. G.M. Wijers, Technische Universiteit Delft
Prof. dr. C. van Beers, Technische Universiteit Delft, reservelid Dr. ir. G.M. Wijers heeft als begeleider in belangrijke mate aan de totstandkoming van het proefschrift bijgedragen.
Printing: Gildeprint Drukkerijen, Enschede Published and distributed by:
Albert Plugge
Delft University of Technology
Faculty of Technology, Policy and Management, ICT section, Jaffalaan 5, 2626 BX Delft, The Netherlands
Albert G. Plugge,
Managing change in IT outsourcing arrangements: towards a dynamic fit model.
Doctoral Dissertation, Delft University of Technology, The Netherlands, 2011.
Keywords: IT outsourcing, fit, capabilities, organizational structure, performance, provider
ISBN: 978-94-61081-43-8
Cover design: Albert Plugge en Zita Advertising Copyright (©) 2011 by Albert Plugge
All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording, or otherwise, without the written permission of the author.
For Marijke
Now faith is the substance of things hoped for, the evidence of things not seen.
Hebrews 11:1 King James version
Table of contents
Preface... 11
1. Introduction ... 15
1.1 Sourcing background ... 15
1.2 Studying the IT outsourcing domain ... 20
1.3 IT outsourcing provider industry ... 23
1.4 Research background ... 26
1.5 Problem statement ... 27
1.6 Research objective and research questions ... 28
1.7 Demarcation... 30
1.8 Contribution... 32
1.9 Thesis outline ... 33
2. Theoretical framework ... 35
2.1 Direction for developing a dynamic fit ... 35
2.2 Environment and Capabilities ... 37
2.3 Sourcing capabilities and Organizational structure ... 43
2.4 Organizational structure and Performance ... 49
2.5 Conclusion ... 53
3. Research design ... 55
3.1 Research perspective ... 55
3.2 Research design ... 56
3.3 Case study selection ... 60
3.4 Data collection ... 60
3.5 Data analysis ... 63
3.5.1 Qualitative analysis ... 63
3.5.2 Quantitative analysis ... 65
3.6 Preliminary research ... 66
3.7 Summary and conclusion ... 70
4. Case study Domestic provider ... 71
4.1 Context of the case study ... 71
4.2 Critical events ... 73
4.2.2 Critical event 2: Organizational change ... 75
4.2.3 Critical event 3: Demand for close client-provider alignment ... 76
4.2.4 Critical event 4: The provider’s innovation approach... 76
4.3 Analyses ... 77 4.3.1 Client developments ... 77 4.3.2 Sourcing capabilities ... 78 4.3.3 Organizational structure ... 80 4.3.4 Dynamic fit ... 83 4.3.5 Sourcing performance ... 84 4.4 Conclusion ... 85
5. Case study Offshore provider ... 87
5.1 Context of the case study ... 87
5.2 Critical events ... 89
5.2.1 Critical event 1: Online banking ... 89
5.2.2 Critical event 2: Human flexibility ... 90
5.2.3 Critical event 3: IT continuity ... 91
5.2.4 Critical event 4: Service integration ... 92
5.2.5 Critical event 5: Transformation ... 93
5.3 Analyses ... 94 5.3.1 Client developments ... 94 5.3.2 Sourcing capabilities ... 95 5.3.3 Organizational structure ... 97 5.3.4 Dynamic fit ... 99 5.3.5 Sourcing performance ... 100 5.4 Conclusion ... 101
6. Global Provider Case ... 103
6.1 Context of the case study ... 103
6.2 Critical events ... 105
6.2.1 Critical event 1: Delivery struggle ... 106
6.2.2 Critical event 2: Business needs for ‘on-demand’ support ... 106
6.2.3 Critical event 3: Business needs for innovation ... 107
6.2.5 Critical event 5: Client sourcing strategy ... 109 6.3 Analyses ... 110 6.3.1 Client developments ... 110 6.3.2 Sourcing capabilities ... 112 6.3.3 Organizational structure ... 114 6.3.4 Dynamic fit ... 116 6.3.5 Sourcing performance ... 117 6.4 Conclusion ... 118 7. Cross-case analysis ... 121 7.1 Findings ... 121 7.1.1 Client Developments ... 121
7.1.2 Provider’s Sourcing Strategy ... 124
7.1.3 Sourcing competences ... 126 7.1.4 Organizational Structure ... 128 7.1.5 Fit ... 130 7.1.6 Sourcing Performance ... 133 7.2 Overall analysis ... 135 7.3 Conclusion ... 138 8. Quantitative Results ... 141 8.1 Method ... 141
8.1.1 Sample and Data Collection ... 141
8.1.2 Testing differences between sub-samples ... 143
8.2 Scales ... 144
8.2.1 Measure Development ... 145
8.2.2 Measurement Model ... 145
8.3 Results ... 148
8.3.1 The Structural Model ... 148
8.4 Discussion... 150
8.5 Conclusion ... 155
9. Conclusion ... 157
9.1 Research objective and main findings ... 157
9.1.2 Main findings ... 158
9.1.3 Answers to the research questions... 159
9.2 Research contributions ... 163
9.2.1 Contributions to science ... 163
9.2.2 Contributions to practitioners ... 165
9.3 Limitations ... 166
9.4 Recommendations for further research ... 167
Annexes ... 171
References ... 173
Appendix A: Preliminary research: Overview of interviewees ... 183
Appendix B: Preliminary research: Interview questions ... 185
Appendix C: Main research: Overview of interviewees ... 187
Appendix D: Main research: Interview questions ... 189
Appendix E: Main research: Interview extracts ... 191
Appendix F: Survey questions ... 193
Summary ... 201
Samenvatting (Summary in Dutch) ... 207
Curriculum Vitae ... 213
11
Preface
The reason for writing my dissertation can primarily be found in my curiosity, my desire to discover and learn. Since study has been a connecting thread during my life, it has offered me the possibility to obtain new insights in various disciplines. I have been interested in analysis for a long time, so the relationship with science can easily be made. Moreover, a secondary reason to start my research is my fascination with outsourcing. In particular, the multidisciplinary character of outsourcing comprises various aspects such as technology, HR, legislation, organization, behaviour and culture. As all of these aspects are interrelated and subject to much change, a scientific approach is valuable to understand these influences, which helps to achieve a coherent view. The combination of my need to develop and my favourite subject resulted in my ambition to start with a new discipline: science.
At the start, I was warned that conducting a PhD research is not a sinecure. Well, that proved to be true! All the warnings and experiences of former researchers became reality for me. It was a real challenge to combine my research, my professional career at EquaTerra, and time for my family. It really felt like a balancing act! Nevertheless, I have experienced that the past five years has been an extraordinary educational period for me.
When I consider the developments that have taken place in the field of outsourcing, I have to think about the fishing industry. Since I was born in the fishing village Scheveningen I have witnessed several developments in fishery closely. Interestingly, the developments that have taken place with regard to fishery show a remarkable parallel with the developments in the field of IT: a shift from in-house towards partially outsourcing. The sixties of the 20th century can be seen as a turning point in the fisheries that affected Scheveningen as well. As a result of fierce competition the season-oriented fishery changed to full continuous fishery in which the fishing grounds were extended to Africa and Asia (c.f. globalisation). Overfishing in the North Sea and increased legislation influenced the fishing technology, ships, and quota dramatically. At first, scaling up fishery seemed to be a good alternative, however, a lack of capital to invest in building new ships resulted in a reduction of local shipping companies. Consequently, shipping companies decided to contract out their none-core activities such as mending nets and building ships to survive in the market. Due to legislation with regard to hygiene and cost savings prawns were peeled in Morocco (c.f. offshoring). This example shows that outsourcing isn’t a new phenomenon but that it exists in various forms in different industries. Interestingly, at these days Information Technology is widely used in the fishery, for example, in electronic fishing transactions, electronic sales and e-auctions.
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Many people contributed to the realisation of my dissertation, and I am grateful for all the support I have received from them. But first of all, I want to express my gratitude to God for giving me the opportunity to complete my PhD. During the past five years, I experienced His blessings and love as I received strength and good health to accomplish my research. It was only with His mercifulness that I could combine a challenging job and part-time research. I really perceived God as the source of life: Soli Deo Gloria! With regard to my scientific development I want to thank my copromotor Harry Bouwman. Although I have the opinion that every human being is unique, I have experienced that Harry is quite unique! Besides his excellent methodological skills, a bit nerdy I would say, he is an experienced teacher (even during my reviews). Harry, many thanks for your commitment and your valuable comments by which you encouraged my academic growth! I am also grateful for the support of Gerard Wijers who contributed as my second
copromotor. Combining your expert role in the field of (out)sourcing and academic skills you have strengthened my capabilities when it comes to learning and growth. Many thanks for sharing your insights; it meant a lot to me! In addition, I would like to thank Prof. dr. Rene Wagenaar who passed away unexpectedly during my second year. René, I would like to thank you for your confidence and giving me the opportunity to start my PhD. Furthermore, I would like to thank my promotor Prof. dr. Yao-Hua Tan. I highly appreciate your commitment to improve my manuscript by focusing on both the details and the coherence of my thesis. Moreover, I enjoyed our conversations with regard to Supply Chain management! Moreover, I would like to thank my colleagues in the ICT section of our faculty for their support, cooperation and contribution to my research - thanks Marijn, for writing a paper together! - including their support in preparing my public defence. The
conversations and discussions were very valuable to me. Without any doubt I would like to thank Jacques Brook for his inspiring thoughts and suggestions considering the topic R&D outsourcing. Much appreciated! Furthermore, I would like to thank the committee members for accepting my thesis and for their valuable support and comments that helped me to improve my thesis.
In particular, I would like to take the opportunity to thank the executive management and employees of the providers under study. Your ability and
willingness to cooperate gave me the opportunity to conduct my research by which many other interested parties are able to obtain new insights. Thank you so much for your contribution! Furthermore, I want to express my acknowledgements to the organizers and participants of the Global Sourcing Workshop! Their respectable knowledge and experience in the field of (out)sourcing helped me to deepen my scientific understanding. In particular, I want to thank Leslie Willcocks, Ilan Oshri, Julia Kotlarsky and Joe Rottman for their initiative to organize the Workshop and, of course, I hope to meet you more often! A word of special thanks goes out to the scientific experts who were willing to send me a ‘personal quote’ based on their experience in the field of outsourcing. Their quotes give expression to situations that can be recognized by all who are involved in outsourcing arrangements. I want to thank them greatly!
13 Without any doubt I would like to emphasize my thanks to my good friend Piet Mul. Your considerable effort to review and strengthen my research is honorable! It’s absolutely true, your help, commitment and fruitful thoughts helped me to keep my research on track. I am pleased and honored that you are willing to be my
paranymph during my defence. Moreover, I would like to thank Rik Bijmholt. You have helped me to create the conditions to combine my professional work and research. Rik, thanks for your marvellous contribution during the past years and I am pleased that you will support me as a paranymph. Of course, I thank my EquaTerra colleagues for their interest and incessant remarks: haven’t you finished your research yet? Finally I can now say: Yes indeed, guys, I have!
When I look back to the start of my research, I would like to thank Bert Garlich for his contribution. You have created the condition to combine work and research in an excellent way. Many thanks for your continuous interest and support! I am certain, Bert, that your interest in science, as former researcher at KPN, will predominate some day and then you will start with your own PhD. By the way: I will keep sending you postcards from miserable conference locations! Since I have been associated with Delft TopTech for many years now I would like to thank Guus de Mari. Guus, due to your valuable contacts in Delft you have played an important role at the start of my research by creating the necessary conditions. Thanks a lot for your help and of course your interest during my research period. From an executive Master perspective, I think we achieved a novum here!
Last but not least I would say some words with regard my family. In the days of my research I was fortunate to be surrounded by family who encouraged and
supported me to accomplish my project. In particular, my parents and parents-in-law supported me along my research and they always showed their sincere interest. I am grateful that you are able to be present when I conclude my research during my defence. It really means a lot to me! The final words of this preface are reserved for my wife and children. I won’t forget all the remarks of my children, they stimulated me, although some remarks were meant quite differently! Marije,
Barberieke, Albert-Jan and Willemijn: many thanks for your attention and support! I am back again! But most of all I would like to thank my wife Marijke who enabled me to start and complete my research. I owe you much gratitude! During the previous years I have ‘outsourced’ a lot of work to you, which you managed perfectly. A true example that a successful relationship can only be built on love and trust! And yes, I am aware of the fact that I have to restore the balance between work and private life! Thank you so much for your support and love!
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1.
Introduction
‘Suppliers also need to work on their strategies and capabilities if they are to sustain the more collaborative relationships that clients increasingly demand, and deliver meaningfully on an innovation as well as a cost and service agenda’. (Leslie Willcocks)
As this thesis addresses IT outsourcing, this chapter explores different angles to create a better understanding of the developments in this field. First, in section 1.1 we sketch the sourcing background to highlight the relevance of IT outsourcing. Then, in section 1.2 we study the IT outsourcing domain by addressing various type of outsourcing arrangements. To understand the position of providers in the field of IT outsourcing, section 1.3 explores their background to frame recent market developments. Section 1.4 briefly discuss the research on IT outsourcing and the main topics that have been studied. Then, in section 1.5 we present our problem statement followed by the research objectives and research questions in section 1.6. The scope of our research is described in section 1.7 while the contribution of our research is presented in section 1.8. Finally, section 1.9 offers the thesis outline.
1.1
Sourcing background
The provisioning of IT outsourcing services has especially shown a rapid increase in the last two decades. A historic view on outsourcing shows that from the 1980’s large companies started to contract out parts of IT related tasks to third parties. During this period third parties could offer just a few elementary services such as technical consultancy and training. Applying recent taxonomy, this period can be defined as a preliminary phase of outsourcing, as third parties focused their efforts more on outtasking. The first real phase of outsourcing, which approximately comprises 1990’s to 2000, was the result of a technology push. Companies aimed at contracting out parts or even their entire IT function to third parties. During this phase third parties, also called suppliers, focused on providing technological driven solutions. Since companies in these days were primarily aimed at buying a
technical solution, adding value related to their business was not in scope.
Agreements between companies and suppliers were therefore considered as more transactional-oriented. As a consequence, companies tended more to specifically managing the supply side. Kodak’s famous decision in 1989 to outsource their data center to IBM and DEC can be considered as a landmark in the field of IT
outsourcing (Loh and Venkatraman, 1992). Ever since the ‘Kodak effect’ IT outsourcing has been seen from an industry perspective as the supplier market at the early nineties developed significantly. Hence, a new industry arose. The shift
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from hiring personnel to delivering technology solutions has had a great effect on suppliers such as providing integral solutions and building long-term relationships. This outsourcing phase was popularized by the market as Outsourcing 1.0. During the second phase, which encompasses 2000 to 2010, the maturity of suppliers increased significantly as they focused on providing IT services instead of
technology solutions. It is in this period that suppliers were considered as providers by the market. Agreements between companies and providers changed and became more service-oriented. At the same time companies experienced that they needed to align their demand and supply side to ensure the delivery of IT services. This development influenced their organization significantly. Summarizing this second phase the market has popularized this era as Outsourcing 2.0.
Reflecting on the growth in IT outsourcing since the nineties it can be observed that three major forces have changed the vision and strategy of both firms and
providers namely: (1) globalization, (2) deregulation and (3) consolidation (Holway, 1998). For decades many firms considered their IT function to be a core
competence that should be part of in-house capabilities. As a result of globalization forces firms’ focuses on their core business activities in order to remain
competitive. Business activities that are useful and non-critical can be considered as a commodity and therefore can be outsourced. From the perspective of the provider, concepts as nearshoring and offshoring were introduced that are encouraged by the major force of globalization. Moreover, outsourcing firms like Accenture, CSC, and TCS have extended their global reach by establishing strategic arrangements with other providers in order to cater to client’s growing need to provide a wide range of IT services. Deregulation is another driver that changed the field of outsourcing. Domestic or international legislation affected firms in various industries by changing or even cancelling market legislation. For
example, the telecommunications industry in Europe changed dramatically when the European Union decided to liberalize the telecommunication market in 1987. Telecom operators faced fierce competition while they had to make a shift from delivering technical solutions towards services. Consequently, these firms were forced to focus on their core businesses and decided to outsource non-critical business activities. Since the nineties we have seen that many telecom operators decided to outsource parts of their IT function. Also consolidations are considered as a important force that influenced firms and providers significantly. As most firms have to grow to survive in the market, they decided to merge with their competitors or acquire companies that could establish them to achieve a competitive
advantage. In the field of IT we have seen various consolidations as well. Examples include HP, which merged with EDS in 2008, and Wipro that acquired Infocrossing in 2007. When applying a consolidation strategy firms are able to enter new markets and gain access to new clients while offering a wider range of services. Another consolidation rationale for firms is to increase their market share in order to achieve a stronger position in the market. These three forces have generated the growth and demand for IT outsourcing.
17 Since research companies apply various criteria to measure the growth of
outsourcing it is difficult to obtain consistent information. Back in 1989, global Information Technology Outsourcing (ITO) was a $9 to $12 billion market. By the end of 2009, global ITO revenues exceeded US$250 billion (Oshri et al., 2009). The growth of ITO was not only limited to domestic IT spend. Especially the IT spend is growing in low cost countries, such as Poland, India, and the Philippines. The underlying compound annual growth rate (CAGR) of the outsourcing market has been approximately 7% in the 2008 – 2009 period (Gartner, 2009). The economic recession of 2009 has had an impact on growth of the outsourcing market, causing a delay. As illustrated by the analyst companies IDC and Gartner this is only temporary. In the next years the growth of the outsourcing market is expected to continue. The offshore provisioning of IT outsourcing services has also shown a rapid increase in the past decade while it is expected to continue growth. A study of McKinsey and National Association of Software and Service Companies (NASSCOM) estimates that the information technology and enterprise solutions (ITES) market in India is likely to reach $142 billion in 2009. We observe, however, that the enterprise solutions market is considered much wider than only Information Technology as it also contains other components (e.g. printers, payment
equipment). Therefore, it is difficult to compare all market figures. Carmel and Tjia (2005), who studied the Indian market intensively, suggest that India will continue to play a dominant role in the global ITO market. As firms decide to offshore their IT activities, they benefit from reduced cost, improved lead times, process
streamlining, and strategic repositioning (Beulen et al., 2006). In this context firms face new issues like cultural differences (Beulen and Ribbers, 2003, Carmel and Tjia, 2005); language barriers (Rajkumar and Dawley, 1997, Robinson and Kalkola, 2004) and geopolitical risks (Carmel, 1999, Overby, 2006). Due to these barriers regular communication among firms and service providers becomes more important. The key driver for offshoring and nearshoring is primarily cost savings. In terms of sourcing locations, currently most of the offshoring services are provided from India, which is one of the most popular offshoring countries, commonly referred to as BRIC (Brazil, Russia, India, China). In Europe, countries like Hungary, Ireland, Poland and Russia also provide suitable locations for nearshoring.
As the discussion of economic relevance and growth expectations shows, the term outsourcing has been used in the literature in various ways. Some researchers emphasized on the contribution by external vendors related to physical and/or human resources associated with components of the IT infrastructure in the user organization (Loh and Venkatraman, 1992). Others specifically focused on the field of IT outsourcing addressing the commissioning of a third party to manage a client organization´s IT assets, people and-or activities (Fitzgerald and Willcocks, 1994). IT outsourcing as defined by Kern (1997) is 'a decision taken by an organization to contract out or sell the organization's IT assets, people, and/or activities to a third party provider, who in exchange provides and manages assets and services for monetary return over an agreed time period’. To prevent the use of the inaccurate
18
terms “outsourcing” and “offshoring” we use the following definitions as stated by (Oshri et al., 2009).
´Outsourcing is defined as contracting with a service provider for the management
and completion of a certain amount of work, for a specified length of time, cost, and level of service’.
‘Offshoring refers to the relocation of organizational activities (e.g. IT, finance and
accounting, back office, human resources) to a wholly owned subsidiary or an independent service provider in another country’.
Since these definitions are applicable to the field of Information Technology, highlighting the role and position of the service provider, we will use these definitions during our research.
IT outsourcing in the early nineties started from contracting out parts of the IT function that were more supporting in nature. As the value that IT offers cannot easily be attributed within a firm IT costs were regarded as mere overhead. IT was essential but nevertheless considered from a cost perspective. However, due to increased competition firms shifted their business strategy as they reduced risks and concentrated on their core competencies. As a result, firms developed a focus strategy by adding value to their businesses to create a competitive advantage in the market. Nowadays many firms consider outsourcing as a strategic option for several reasons: access to external capabilities, benefit from providers’ economy of scale, increased flexibility and an increased time-to-market. Willcocks et al. (2002) developed a strategic decision-making matrix on outsourcing (figure 1.1), which also can be applied to the field of IT. The authors described the relation between the competitive position of a firm and the contribution of activities to business operations. While a firm considers parts of their IT function as a commodity, however useful it may be, outsourcing is recommended. After all, retaining these IT activities in-house result in less added value for the firm. On the other hand, business activities that enable a firm to differ from their competitors and are considered as critical need to stay in-house. When a firm consider their IT function as a commodity but nevertheless critical to their business operations the authors nominate this option as a ‘qualifier’. Practice shows that firms divide their IT function in multiple plots in which parts are qualified to contract out to third parties. The fourth option concerns an IT function that is considered as a differentiator and only useful to the business. Discussing the latter option firms have to assess if the IT function, or parts of the function, can be transformed to add value to their businesses. In doing so, firms need to keep this function in-house. Contrary, when an IT function cannot be migrated to a critical contribution firms have to discontinue this activity and outsource the function.
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Figure 1.1: Decision-making matrix on outsourcing (Kern and Willcocks, 2001)
Today, IT outsourcing is considered to be a multidisciplinary environment both by researchers and practitioners. Outsourcing of IT within a firm involves various disciplines, including organizational structures, governance, finance, HR, legal and of course Information Technology. Moreover, many of these disciplines are
intertwined. For example, the transfer of a firm’s IT staff to a service provider is related to Human Resource (HR) as agreements need to be made about employment conditions and fringe benefits like pension plans. Also, the
outsourcing of a firm’s IT function affects the boundaries of a firm and thus their organizational structure. Therefore, firms have to pay attention to manage the coherence of an outsourcing arrangement instead of strictly managing individual disciplines. Due to the importance of these disciplines, contracting out an IT function will result in a major organizational change process. Examples of related risks comprise business interruptions, an increased time-to-market and a growth of resource inflexibility. As market research illustrates, the average outsourcing contract length is stabilizing at three to five years (Gartner, 2008). Hence, switching providers during the contract period result in high switching cost that often could form an unbridgeable barrier (Whitten and Wakefield, 2006). Considering these various disciplines firms are facing both internal and external developments that lead to a number of more general challenges (Oshri et al., 2009, Willcocks and Lacity, 2009) affecting their organization. To illustrate some general challenges we included some examples.
• The rise of Business Process Outsourcing. The trend toward the
outsourcing of business processes to external provider’s leads to a more output-oriented service. At the same time firms have to decide to bundle their business processes and IT function towards one single provider (total outsourcing) or divide their services to separate providers (selective outsourcing).
• The complexity of outsourcing deals. Because of the rise of selective
outsourcing, firms apply new governance models to manage multiple providers. As a result of implementing a selective sourcing strategy, firms’
Commodity Dif ferentiator Usef ul Critical “Necessary evils” outsource “Qualifiers” best source “Order winners” In-house/buy-in “Distractions” migrate or eliminate Contribution to business operations Contribution to competitive positioning
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complexity with regard to IT governance will increase as topics such as tasks and responsibilities needs to be determined.
• Aligning a firm’s demand and supply side. Firms that outsource IT activities
need to develop and retain certain capabilities to manage the execution of the IT outsourcing strategy successfully. For example, firms that have outsourced their application maintenance to a service provider should be able to absorb this application maintenance, which requires knowledge and experience. This relates to structural issues of managing the demand and supply of application maintenance as part of a firm’s capabilities. Practice shows that firms are struggling how to manage their demand and supply side effectively.
• Compliancy demands. Companies remain responsible to comply with
legislation even when specific activities or processes have been outsourced to third parties. With regard to IT infrastructure large companies have to comply with legislation to for instance data storage, recording personal identity files or recording financial transactions.
• The combination of internal shared service centres and external service
providers. Combining two types of delivery organizations, an internal
shared service centre and an external IT outsourcing provider, a firm becomes responsible for managing both delivery organizations. The coordinating department, the sourcing management organization, needs to be organized separately. The rationale behind this choice is that the sourcing management organization is responsible for aligning both business needs and delivery solutions, regardless if the service delivery is supported internally or externally.
As a result of the developments that arise from the multidisciplinary nature of outsourcing, firms’ developed strategies to shape arrangements with their service providers. The next section will highlight the main flavours of current outsourcing arrangements.
1.2
Studying the IT outsourcing domain
So in order to create a better understanding on outsourcing arrangements we describe the main outsourcing strategies that are applied in the market. Research (Lacity and Hirschheim, 1993, Currie and Willcocks, 1998) has taken three major types of strategies into consideration: total outsourcing, selective or multiple-provider outsourcing and strategic alliances.
Total outsourcing
This strategy, which was popular in the nineties, can be defined as the strategy to outsource more than 70% of an organization's IT functions, most commonly to a single large provider (Currie and Willcocks, 1998). The motivation for companies to opt for a total outsourcing arrangement, see figure 1.2, is predominantly based on strategic reasons such as concentration on core business activities in order to
21 create market advantage. This type of decision involves the transfer of a significant number of IT staff from a firm to a third party. The firm receives a large payment for the transferred assets while the provider receives a long-term guarantee to deliver IT services. However, Kern and Willcocks (2001) found out that this can be
achieved by outsourcing contracts that are focusing primarily on cost reduction, but often at the expense of IT operational services and business strategic inflexibilities. Although there has been a reduction in total outsourcing arrangements, companies still choose for this type of decision. In 2005 Volkswagen, for instance, announced to outsource their complete IT department, worth $3 billion on a seven-year contract, to T-Systems in order to enhance sales growth and profitability.
Figure 1.2: Total outsourcing Selective outsourcing
Although the large multi-million/billion, long-term contracts sound impressive, research (Lacity and Willcocks, 2000a, Kern and Willcocks, 2001, Oshri et al., 2009) has unveiled that selective outsourcing is the more common practice. When applying a selective outsourcing strategy, firms divide their IT function into various logical oriented domains that can easily be transferred to the market. For each domain a firm can select an appropriate provider that fits in with the required type of service (see figure 1.3). The rationale behind this approach is that providers are having difficulties to excel in all IT domains such as application development, workplace automation and data communication networks. There are several differences between total outsourcing and selective outsourcing. Bringing in multiple providers will reduce the dependency on a single provider to support all IT domains and, therefore, mitigates the risks (Currie, 1998). Moreover, firms can switch from providers per domain without changing their complete landscape. Practice shows that firms who divide their landscape into different domains, are able to focus more easily on innovation initiatives in order to improve a certain domain. This approach encourages competition between the providers at the same time. The downside of this strategy is that the sourcing management organization
Application maintenance Data connectivity IT in fr a s tr u ct u re A p p li ca tio n s u p p o rt W o rk p la ce a n d o ff ic e a u to m a ti o n Application development Single provider
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of a firm has to spend more time on coordinating the multiple providers. In 2005 the Dutch grocer Royal Ahold has adopted this strategy and outsourced their IT
function, worth $500 million based on a five-year arrangement to multiple providers. Ahold developed a framework with its providers outlining how the providers have to work together, while one of the providers (e.g. EDS) has an additional coordinating role as service integrator.
Figure 1.3: Selective outsourcing
Strategic alliance
Originally the rationale to initiate a strategic alliance covers aspects such as
developing new products/services, entering new markets and mitigating risks (Child et al., 2006). When establishing a strategic alliance, firms and providers bring in staff and assets to accomplish a new company delivering IT services. The key advantage of a strategic alliance when compared to a total outsourcing strategy is to reduce the risks of a single provider or multiple providers because the client is able to influence and control the strategy of the provider. At the same time risks and rewards can be shared between both firm and provider. Another reason is that a firm also gains access to specialist skills of the provider. Establishing a strategic alliance enable firms to create a competitive advantage in the market. Literature reveals (Lacity and Willcocks, 2001) examples of strategic alliances such as Xerox-EDS, Mutual life Insurance and CSC and the Canadian Imperial Bank of
Commerce (CIBC) and Hewlett Packard (HP). Practice shows that in these cases arrangements typically endure for a period of 7 up to 10 years. Literature reveals that various terms are used to describe this arrangement varying from ‘partnership’, ‘strategic partnership’ and ‘strategic alliance’ (Willcocks and Lacity, 2009).
Application maintenance A p p li ca tio n s u p p o rt D o m a in B P ro v id e r B Data connectivity IT in fr a s tr u ct u re W o rk p la ce a n d o ff ic e a u to m a ti o n Domain C Provider C D o m a in A P ro v id e r A Application development
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1.3
IT outsourcing provider industry
To understand the position and the approach of service providers within the distinguished strategic arrangements it is necessary to study their background. From the perspective of service providers, IT outsourcing has undergone many changes, starting with a service bureau model in the 1960's via ASP’s to Software as a Service in the 21st century. The way in which providers offer IT outsourcing services depends on both the context and their background. With regard to the context, new entrants have created a fierce competition in which providers have to distinguish themselves from their competitors by offering value added services. Many providers who are active in the outsourcing industry at present initially did not set out with outsourcing as a target market and, as such, their heritage is an important factor in understanding both their interest in and aptitude for outsourcing. The IT value chain encompasses various layers from data connectivity to
consulting services (see figure 1.4). Each provider offered IT services that relate to specific layers in the IT value chain. The growth of the IT outsourcing market encouraged providers to expand their service portfolio as they developed and introduced new IT services. Dependent of their original position, providers positioned there self higher or lower in the IT value chain. This resulted in fierce competition between providers as they experienced competition on their own core competences. On the other hand, to some extent providers were opportunistic and copied their competitors in developing new IT services. This is a clear example of the 'bandwagon' effect (Lacity and Hirschheim, 1993) and provider strategies of keeping their options open. The market for outsourcing providers, which has been studied previously (Michell and Fitzgerald, 1997), can be categorized into five different types: pure play service companies, software vendors, ex-IT departments, hardware suppliers, and Telecom incumbents. These categories are illustrated in figure 1.4.
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Figure 1.4: IT provider market place adapted from Michell and Fitzgerald, 1997 Providers that belong to the first category, pure play service companies, deliver traditional software development services and often play an important role as a system integrator (e.g. Accenture, CSC, EDS). They can be characterised by a large number of highly trained professionals delivering value added services. Service companies with a consulting background tend to focus more on business relationships and advice on strategic information systems. These companies have a competitive advantage as they have extensive experience with business issues. However, research (Michell and Fitzgerald, 1997) shows that service companies are moving towards more operational services and the actual development of software. This development means a downward integration in order to deliver a full range of IT services with a wide scope ranging strategic to operational.
Software vendors like SAP and Oracle, which belong to the second category, have developed by providing custom systems design, development and implementation. As they often have a more domestic or regional reach, they feel the pressure of pure play service companies from above and traditional hardware providers from below. This 'stuck-in-the-middle' position forces them to expand both upwards and downwards to prevent their role from decreasing over time. Most of the software vendors have created long-term relationships and management responsibility for package software with their clients. By offering application management services they are able to expand their natural business. The development of software vendors to integrate traditional services with more consulting services and
operational services strengthens their position in the IT outsourcings market place. (Boardroom) consultancy
Workplace and office automation
E x -I T d e p a rt m e n ts IT infrastructure Application development System integration Application maintenance Application support S o ft w a re v e n d o rs
Pure play service companies
H a rd w a re s u p p lie rs Data connectivity Data centre Telecom incumbents
25 Former IT departments of large companies offering their services to external clients form the fourth category of providers (e.g. Barclays Computer Operations, Philips Communication). Their main focus is to provide system management services like hardware, software and networks. Traditionally they offer desktop services, applications and maintenance as well as the implementation of new applications. Many companies that originally fit in this target area have evolved by delivering software development and integration services. By a renewed focus on high margin services, this combination forms a starting point for a strong position in the value chain of providing IT outsourcing services. An example of an IT department, shifting to the external market, is Philips Communication, a subsidiary of Royal Philips Electronics. Philips focus on core business activities led to the situation that the operational IT services in 1996 were separated from the company. Through a merger with BSO/Origin in 1996 and later with Atos in 2000, Atos Origin was established by delivering IT services with a focus on the European market. Hardware suppliers (e.g. IBM and HP) went through the biggest challenge to survive in the market place. As a result of the commoditization of the hardware market and the resulting decreased margins, hardware suppliers had to leave their hardware-centred position and move upwards in the value chain, providing
vertically integrated IT services. This radical change from delivering hardware towards delivering outsourcing services has reshaped the industry. Traditional hardware suppliers had good relationships with client IT departments and thus operational activities. However, by moving upwards in the value chain, they had to establish new relationships with business management and improve their
understanding of business processes. The most striking example of a new position in the value chain is IBM. Having set out as a traditional hardware supplier they changed their business strategy based on the vision that both business and IT within companies will converge. By establishing a new corporation, Integrated Systems Solutions Corporation (ISSC), they were focusing on delivering vertically integrated IT outsourcing services from consulting to hardware maintenance. IBM has demonstrated the success of their change in business strategy; at this moment they are the global market leader in IT outsourcing services.
Telecom incumbents such as Deutsche Telecom and British Telecom can be regarded as the fifth category of providers. Originally focusing on delivering hardware and infrastructure services, they felt the pressure as a result of market developments when these products and services became a commodity. Due to decreasing margins a new approach was necessary. The new approach was based on delivering communication solutions instead of infrastructure, for example call centre services, which include IT functionality as well as staff. Some
incumbents moved towards IT integration services like BT and T-Systems, while others focused on delivering ASP services. An example of a telecom incumbent that changed their strategy is the merger between KPN and Getronics in 2007 through which KPN gained entrance to the service industry expanding their service portfolio.
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By moving upwards or downwards through the IT value chain, providers will face important consequences. The first consequence is a change in the provider
capabilities. The proposition of new services, for instance application development, requires new skills, which must be developed or acquired. When a provider pays insufficient attention to the required capabilities, the client satisfaction is at stake. Moreover, there is yet another effect that will influence the capacity of the provider, the increasing dependency on an overall IT service integrator. Due to the rise of selective outsourcing, large companies decide to position an overall IT service integrator between their internal departments and the different subcontractors to coordinate and integrate the IT services. The result of this model is an increase of complexity with regard to the cooperation between customer, overall service integrator and sub-contractors. The relationship of a provider with both client and overall service integrator can be dual, an operational relation towards the overall service integrator and a financial relation towards the client. This means that the provider has to shift from a traditional one-to-one relationship into a one-to-many relationship model.
Due to change in their service portfolio and increased cooperation with
competitors, providers need to adapt to ensure the continuous delivering of high quality services over time. Research revealed that this results in a tension in the relationship between providers and clients.
1.4
Research background
Most research in this area of IT outsourcing focuses on client-related aspects, for instance with regard to relationship models (Kern and Willcocks, 2001), decision making (De Looff, 1997), contract management (Beulen et al., 2006), off-shoring (Carmel, 1999, Carmel and Tjia, 2005, Overby, 2006), success/failure scenarios and hidden costs (Barthélemy, 2001). Since these aspects will have a significant effect on organizations, regular communication among clients and providers becomes more important. At the same time clients have to deal with market dynamism as well. Market developments change over time, influencing client organizations. Therefore, clients need to discuss market developments and
business needs with their service providers regularly. However, academic literature shows that the IT outsourcing provider perspective remains under-researched (Curry and Seltsikas 2001, pp 125). Literature analysis (Gonzalez et al., 2006) regarding information systems outsourcing, shows that in the past 15 years 205 articles were published that related to IS/IT outsourcing. Only 16% of the published articles, which corresponds to 33 articles, focus on the perspective of the provider-side. These articles can be divided into three categories: articles that discuss the role of Application Service Providers (Currie and Seltsikas, 2001), articles that focus on global outsourcing or off-shoring (Rottman and Lacity, 2009) and articles on providers in general (Levina and Ross, 2003). A third of all these articles were
27 theoretical in nature and lack empirical data. Consequently, our understanding about the provider side is fairly limited and, therefore, our research will focus on this perspective.
1.5
Problem statement
Kern and Willcocks (2001) have argued that relationships in IT outsourcing arrangements have received little conceptual and empirical research attention although all researchers emphasize the importance of the relationship between client and provider as being critical. Empirical research (Lacity and Willcocks, 2000a) has pointed out that a number of client organizations encounter severe problems. These problems can be related to areas such as strategy, finance, management and technology that are partly caused by providers due to insufficient skills in business and IT. Prior research (Feeny et al., 2005) found a significant recurring problem related to outsourcing providers, a lack of sustainability in service performance toward clients. Empirical evidence shows that providers are able to achieve agreed cost reductions but at the expense of the service quality. A lack of provider performance will result in failures on the client side. When the quality of service delivery is decreasing the costs to abrogate the lack of provider performance will increase. As a result, the lack of provider performance could also have a negative business impact on the client as the time-to-market of products and services increases. Moreover, the environment of organizations changes over time which means that providers may choose to adapt its behaviour to meet clients needs. Changing client circumstances will also affect outsourcing service providers and the sourcing capabilities they have to deliver. Consequently, providers need to adapt to their client’s organization in order to establish an effective outsourcing arrangement. When neglecting this notion the results of various disputes may affect the client-provider relationship negatively. It is assumed that the lack of a sustainable outsourcing performance has to do with the sourcing capabilities of IT providers and the way in which these sourcing capabilities are organized. The IS outsourcing literature often cites “access to the capabilities and experience” of the provider as one of the main reasons why firms outsource (Gurbaxani, 1996, Poppo and Zenger, 1998, Quinn, 1999, Aubert et al., 2004) and that IT service provider capabilities are probably the most critical factor (McFarlan and Nolan, 1995, DiRomualdo and Gurbaxaini, 1998) affecting firm’s performance. Clients need to gain access to relevant provider capabilities, while at the same time providers are not capable of performing on a sustainable high level.
Besides the influence of sourcing capabilities on performance the way in which sourcing capabilities are organized plays an important role. Depending on the client organization, different perspectives such as the level of complexity of the outsourcing arrangement, the scope of delivery model (e.g. domestic versus global) and applying specific capabilities have to be taken into account when sourcing capabilities are organized. Since there are different organizational
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structures, it is important to find out how they affect the sourcing capabilities of the IT provider. Aspects like the level of complexity of the outsourcing arrangement, the number of parties involved and the level of decision-making will influence the performance of the offered services. So, the ability to adapt to ever-changing client circumstances is an increasingly important requirement for outsourcing providers (e.g. Rothenberg et al., 2008, Oktemgil and Greenley, 1997). Therefore, IT outsourcing providers have to differentiate their services in such a way that they can support their clients most effectively and are expected to monitor their performance with a focus on sustaining high level performance. Previous studies show that, acting in a complex and turbulent market, adaptability is a key
prerequisite to achieve business performance (Oktemgil and Greenley, 1997). Yet little is known about the extent in which service providers involved in outsourcing arrangements are able to adapt to changing client circumstances and subsequently provide a sustainable performance. Although researchers recognise a relationship between competences and firm performance (King and Zeithaml, 2001), the effect of sourcing capabilities and organizational structure on sourcing performance with regard to IT outsourcing providers have not been researched before.
1.6
Research objective and research questions
Research in the field of IT outsourcing at management level is required to fill the gap in studying business improvement, change management, and performance management (Busi and McIvor, 2008). In this thesis we argue that IT outsourcing providers who manage to establish a dynamic fit between sourcing capabilities and their own organizational structure are less susceptible to changes in their clients’
environment. Establishing a dynamic fit is not enough, there is a need for
continuous monitoring of provider’s performance. IT providers who monitor their client’s developments are expected to be able to adapt to changing client circumstances and realize a sustainable performance.
Our research objective is to develop a dynamic fit model that provides insight in the interplay between client developments, sourcing capabilities and organizational structural dimensions and to create a deeper
understanding of their effect on provider’s performance.
In this study we will contribute to the conceptualization of the fit as well as develop measurement tools to help us to analyze the fit between sourcing capabilities and
organizational structure. In order to achieve this research objective there are some
research questions we have to answer. Our main research question is formulated as follows:
Will a dynamic fit between sourcing capabilities and organizational structure result in a sustainable sourcing performance, robust enough to support changing client circumstances.
29 This main research question can be divided into sub-questions. Therefore, a total of five sub-questions have been formulated.
RQ 1. Can a dynamic fit model that encompasses both sourcing capabilities and organizational structure be developed based on existing theories and concepts?
As mentioned in section 1.5, the dynamic fit model comprises sourcing capabilities and organizational structure. As both constructs are interrelated they will influence each other and, therefore, the extent of a fit. Moreover, exogenous client
developments will affect IT outsourcing providers sourcing capabilities and
structure, and in turn, influence the fit. Because of these external developments it is important to gain insight in the type of developments that affect the dynamic fit model. This reasoning leads to the following research question.
RQ 2. Which key developments that arise within and in the environment of client organizations affect the resources and capabilities, the internal organizational structure as well as the performance of an IT outsourcing provider?
The market for IT outsourcing providers, as explained in section 1.3, can be categorized into different types. Based on these categories we assume that
providers will differ in their approach how they adapt to developments and deal with client uncertainty. Besides a generic research question related to providers
adaptability capability, it is interesting to identify distinctions between service providers. Therefore, this research question can be specified in more detailed sub-questions that relate to three different types of providers: a domestic provider, an offshore provider, and a global provider. This brings us to the following research question.
RQ 3. How do IT outsourcing providers adapt to developments that arise within and in the environment of client organizations?
RQ 3a. How does a domestic IT outsourcing provider deal with the aspect of adaptability, taking uncertainties that clients have to deal with into account?
RQ 3b. How does an offshore IT outsourcing provider deal with the aspect of adaptability, taking uncertainties that clients have to deal with into account?
RQ 3c. How does a global IT outsourcing provider deal with the aspect of adaptability, taking uncertainties that clients have to deal with into
account?
Since empirical research on fit is limited, we will conduct an empirical research study that is based on qualitative and quantitative exploratory research. The
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qualitative research, conducting multiple case studies, is needed to explore how the dynamic fit between sourcing capabilities and organizational structure within provider organizations is established. As it is our objective to develop a
parsimonious model we will use hypotheses to test the relationships between the constructs. To establish a measurement model, our quantitative research
comprises a confirmatory factor analysis. Subsequently, the structural model will be tested by applying LISREL. This leads us to the following research question.
RQ 4. Can the model that is the result of the qualitative analysis, i.e. the dynamic fit model, be validated based on quantitative research?
IT providers that focus on establishing a dynamic fit need to measure their sourcing performance to determine if they are able to achieve a sustainable performance. However, measuring the provider’s performance is often difficult as it is
complicated to gather real data, e.g. IT services, finance, that is related to the provider’s performance in outsourcing arrangements. This brings us to the final research question.
RQ 5. How can the concept of provider’ performance in IT outsourcing arrangements be assessed?
To answer the research questions we will conduct an empirical research study based on both exploratory qualitative research and model testing quantitative exploratory research. Our qualitative research, which will be discussed in the chapters 4, 5 and 6, can be used to explain the causal relations between the research constructs. The quantitative research, as discussed in chapter 8, will be used to test the casual relationships.
1.7
Demarcation
Although the client-provider outsourcing relationship is our starting point, the unit of analyses of this research is the provider organization. Figure 1.5 depicts a
framework that refers to two dimensions that are used to define the unit of analysis. The horizontal axis of the framework reflects the type of characteristics, individual or organizational oriented. Since we aim at an organizational research approach, the organizational characteristics are studied. The vertical axis displays the type of organization to be analyzed: the client or provider side of an outsourcing
arrangement. As we have decided to investigate the IT provider side, the unit of analysis describes the organizational characteristics of an IT provider organization.
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Figure 1.5: Unit of analysis
We aim at researching both the sourcing capabilities and organizational structure from an organizational perspective. The interaction of both constructs with respect to sourcing performance is also investigated on an organizational level. Besides the effect of organizational capabilities and organizational structure on sourcing performance, it is important to research the interplay between sourcing capabilities and structure in order to interpret these interactions. Therefore, we will look at the nature of, and interaction between organizational sourcing capabilities and organizational structure in some detail.
With regard to our organizational approach, we make a distinction between various levels of organizational structures as applied by a provider. On a business level we can recognize a generic organizational structure to support the core competences of the firm such as sales, procurement and HR. Besides, on a functional level IT providers apply another organizational structure to facilitate the delivery of IT outsourcing services to their clients such as workplace and office automation services and application development services. This structure can be considered as a specialized form of organizational structure applied within the general organizational structure of an IT provider. In our research, this specialized form of organizational structure is used as a unit of observation. Moreover, the capabilities that are applied by a provider to support this specific organizational structure also differ from their core competences and what Feeny et al. (2005) refers to as sourcing capabilities. Therefore, the unit of observation for studying the dynamic fit model refers to sourcing capabilities that are applied to support outsourcing arrangements to clients and the way in which these capabilities are organized. Both constructs will be studied from a qualitative and quantitative perspective.
Individual characteristics Organizational characteristics Client organization Provider organization Type of sourcing characteristics Type of organization to be analyzed Unit of analysis
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In our research we focus on outsourcing providers, who are supporting their customers domestically or globally. Due to the aspect of researchability, we made the decision to study outsourcing providers with a focus on the Netherlands. To be more precise, we focus on IT outsourcing. The scope of IT includes services such as networks, office automation, infrastructure management, application
maintenance and application development. This scope, which is perceived in the market as mature services, makes it possible to compare the different IT providers with each other according to the organization of their sourcing capabilities. With respect to an outsourcing arrangement from a provider perspective, we can identify two main phases namely the transition phase and the delivery phase (Kern and Willcocks, 2000, Kern and Willcocks, 2001). To obtain a comprehensive view on the performance of an IT outsourcing provider it is worthwhile to research both phases within an IT provider organization. To define the boundaries of our research, other forms or types of outsourcing will not be taken into consideration. The explanation for this demarcation is that, for instance Business Process Outsourcing compared to IT outsourcing, is such a different concept with other accents that the results will be to diffuse and too limited to extract any conclusions.
1.8
Contribution
Our research contributes to IT outsourcing providers in that it increases their awareness of the relevance of establishing a dynamic fit that will improve their sourcing performance significantly. Market analysis (e.g. EquaTerra, International Association of Outsourcing Professionals) based on longitudinal comparisons between providers demonstrated that providers have difficulties to cater to clients’ business need and adapt their IT services. Consequently, providers are still struggling in offering a sustainable performance which may result in disputes with their clients. Providers can gain insights in which determinants will affect their sourcing performance towards clients. In particular, more in-depth knowledge in how sourcing capabilities and organizational dimensions affect each other is valuable to understand performance issues. The way in which providers’
capabilities and their organizational structural dimensions are intertwined provide insight in how providers are able to adapt these main constructs. By strengthen their sourcing capabilities they are able to cater to clients’ business needs. Moreover, developing an organizational structure that reflects the client’s environment contributes to an aligned governance mechanism. In doing so, providers are able to increase their maturity and provide a sustainable
performance. This study also helps providers to create more insight in how client developments can be monitored and assessed. These insights can be applied to start the adaptation process related to capabilities and organizational structures. Furthermore, from a managerial perspective, the providers’ executive management is provided with insights which determinants can be influenced by management in order to establish a sustainable performance.
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1.9
Thesis outline
The aim of chapter 2, which describes the theoretical background of our research, is to identify appropriate theories related to establishing a dynamic fit. In this chapter we answer our first research question. Chapter 3 addresses our research design and the results of a preliminary research on client developments. This chapter answers our second research question. The chapters 4, 5 and 6 discuss our case studies that refer to a domestic provider, an offshore provider, and a global provider respectively. These chapters answer our third research question. Based on the empirical descriptive case studies, in chapter 7 we will conduct a cross-case analysis to identify the implications for our research model. In chapter 8, which addresses our quantitative research, we test the relationships between the constructs as earlier mentioned. In this chapter we answer our fourth and fifth research question. Finally, in chapter 9 we discuss the conclusions, limitations, theoretical relevance, practical implications and directions for further research.
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2.
Theoretical framework
‘Outsourcing arrangements are dynamic in nature and so are the structures, capabilities and value developed and extracted from them over time’. (Ilan Oshri)
Because our research focuses on establishing a dynamic fit between provider sourcing capabilities and organizational structure, while taken the client
environment into account, it is this fit or match that forms the starting point in our attempt to identify appropriate theories. In this chapter we answer our fist research question.
RQ 1. Can a dynamic fit model that encompasses both sourcing capabilities and organizational structure be developed based on existing theories and concepts?
In section 2.1 we focus on firm-specific motivation with regard to establishing a dynamic fit. Previous research (Lee and Kim, 1999) have argued that theories that deal with this subject can be divided into three approaches: social/organizational, strategic and economic. In this chapter we present theories that can be helpful to study our research problem. First, to fathom the developments that arise in the client organization and environment, in section 2.2 we focus on InterOrganizational Relationships. Theories on IOR allies with the social/organizational approach. Secondly, in section 2.3 we consider the Resource-Based View (RBV) as a theoretical approach that addresses the research construct of capabilities. This theory refers to the strategic approach. Moreover, the Transaction Cost Economics (TCE), which is closely aligned to an economic approach, is considered in
discussing the research construct organizational structure. This theory is discussed in section 2.3. Third, in section 2.4 we study the impact of the fit on sourcing performance. Finally, in section 2.5 we discuss our conclusions.
2.1
Direction for developing a dynamic fit
The contribution of sourcing capabilities and organizational structure on sourcing performance is a domain where the notion of fit is particularly relevant. The concept of fit, match or congruence has a long tradition in strategic literature (Porter, 1980, Porter, 1991, Zajac et al., 2000). Initially the view on fit was static, focused on the relation between environmental factors and organizational structure, and common across organizations in similar environments. In more recent views fit is seen as dynamic, focused on multi-variate relations between organizational factors and organizational contingencies in order to explain organizational strategy.
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such as strategy, environment, technology, structure, and culture (Burns and Stalker, 1961). The fundamental view of fit propounded by strategic management researchers and organization theorists is a ‘dynamic search that seeks to align the organization with its environment and to arrange resources internally in support of that alignment’ (Miles and Snow, 1978). In organization theory and strategic management literature the focus is on the relation between environment
opportunities and threats, industry and competitive analyses (Porter, 1980, Porter, 1991), organizational strength (Barney, 1991) and strategy. In this thesis we specifically focus on a dynamic fit between sourcing capabilities and organizational structure.
Venkatraman (1989) proposed a framework that comprises six different perspectives from which fit can be defined and studied: moderation, mediation, matching, covariation, profile deviation, and gestalts. Figure 2.1 depicts a
framework that represents fit based relationships classifying the perspectives along three dimensions: the degree of specificity of the functional form of fit, the number of variables in the equation, and the presence of a criterion variable.
Figure 2.1: Classificatory framework of fit (Venkatraman, 1989)
First, with regard to our research, the degree of specificity of the theoretical relationship indicates a precise functional form of fit. The underlying variables of the fit relationship under study, which are the constructs sourcing capabilities and organizational structure, can be described in a precise form, as two specific
variables are involved in our research. Previous studies of Gupta and Govindarajan Choice of anchoring the specification
of fit-based relationships Criterion-free Criterion-specific D e g re e o f s p e ci fi ci ty o f th e f u n c ti o n al f o rm o f fi t-b a s e d r e la ti o n s h ip s N u m b e r o f v ar ia b le s in t h e f it e q u a tio n High Low Many Few Fit as Prof ile Deviation (V) Fit as Mediation (II) Fit as Moderation (I) Fit as Gestalts (IV) Fit as Covariation (VI) Fit as Matching (III)
37 (1984) and Miller and Friesen (1984) also explored the fit between two variables. As our study indicate two variables, the number in the equation is limited and, based on Venkatraman’s classificatory framework, it can be described as few. This relates to the second dimension. In our study, the construct performance can be seen as a criterion variable. This means that the third dimension is a part of a criterion-specific relationship.
When mapping the six distinct perspectives of Venkatraman’s framework we can determine that fit as moderation is closely aligned to our research. According to the moderation perspective, the impact that the predictor variable has on a criterion variable is dependent on a third variable, the moderator. In our study, the predictor relates to sourcing capabilities while the criterion variable relates to performance. The moderator relates to organizational structure. We argue that based on our theory the impact of the predictor (sourcing capabilities) varies across the different levels of the moderator (organizational structure). In other words, the organizational structure can be viewed categorically taking the various dimensions into account (e.g. locus of decision-making, hierarchy). Moreover, the moderator will affect the strength of the relation between the predictor (sourcing capabilities) and the criterion variable (performance). In our study we clearly specify the type of fit and the number of variables. We theoretically underpin our study and discuss the results with respect to the theory and the selected perspective of fit. This is consistent with previous research of Bergeron et al. (2001).
We focus on the fit between the sourcing capabilities that IT outsourcing providers have to make available, that fit their internal organizati