Global Information Technology Outsourcing: In Search of Business Advantage [Hardcover]

"excellent book ..." -- IT Week, 16th April 2001

"instant classic" -- IT Week, 16th July 2001

Despite the rapid growth in Information Technology (IT) outsourcing - a market predicted to grow to over $150 billion by the year 2005 - most companies are still seeking the elusive 'added-value' they anticipated. Customers expect IT outsourcing to dismantle bureaucratic IT organizations into variable-cost service providers, to meet global IT skill shortages, and even to generate revenue with their IT suppliers. In short, IT outsourcing promises to transform IT functions into lean, dynamic groups that respond quickly to business needs and opportunities. But do customers actually achieve these business advantages? And if so, how? Based on in-depth case studies in organizations and six hundred CIOs surveyed in US, UK, Australia, Europe, and Japan, the authors found that most organizations still achieve modest goals of reducing costs and improving service. Organizations seeking more radical transformation through mega-outsourcing face greater risks and challenges. Findings clearly indicate that gaining a business advantage requires a comprehensive sourcing strategy including both insourcing and outsourcing. IT functions must first develop a set of core IT capabilities that must be insourced. A key success factor is the alignment of expectations among all these stakeholders to ensure that sourcing objectives are met; all too many disappointments with IT outsourcing are based on unrealistic expectations. By applying the frameworks and practices presented here, customers and suppliers can gain business advantage.

Global Information Technology Outsourcing In Search of Business Advantage Mary C. Lacity & Leslie P. Willcocks 'Lacity, and Willcocks have shown us again why they are the world's leading IT outsourcing gurus... the most comprehensive work on IT outsourcing to date.' Sara Cullen, National Partner, Australia Business Process Management, Deloitte Touche, Tohmatsu 'a valuable collection... readers will find here advice that premier consultants would deliver for a very large multiple of the price of this book.' Paul A. Strassmann, former CIO of General Foods, Kraft, Xerox and the US Department of Defense '(a). "must read" for anyone in search of a clear understanding of what information technology outsourcing is all about... absolutely no one should jump into outsourcing prior to taking advantage of the outstanding case studies outlined in this book.' Emmett Paige, President, OAO Corporation 'an excellent guide to successful outsourcing, the best I have read on the topic. It should be mandatory reading for any senior executive.' Gail Burke, Executive Director & CIO, Macquarie Bank, Australia 'crisp and concise. The studies selected for detailed presentation are excellent and the analysis... rings with credibility.' Rob Westcott, Vice President and CIO, General Motors Acceptance Corporation International Operations, UK 'Lacity and Willcocks have... unrivalled access to outsourcing deals across the globe... their new book... is a powerful synthesis of their learning (and) their chapter on risk management is a groundbreaking contribution. A vitally important business guide.' Richard Sykes, Chairman Morgan Chambers plc. - Europe's largest independent consultancy in IT services & business process sourcing 'Lacity and Willcocks tell it like it is and pull no punches... A must read for any organization contemplating outsourcing or trying to fix a broken outsourcing relationship... Planning for outsourcing, negotiating the deal, making the relationship work - it's all here.' Bob Young, Executive Director, South Australian Government Account, EDS (Electronic Data Systems) 'For those of us with a deep knowledge and experience of outsourcing, this book is required reading. For those who are just starting out on the journey, it is essential reading.' Robert White, CEO, Lucidus Management Technologies

Mary Cecelia Lacity is Associate Professor of IS MIS at the University of Missouri, St. Louis and a Research Affiliate at Templeton College, Oxford University. Her research focuses on IT management practices in sourcing, IT privatization, benchmarking, IT metrics, and client/server development. She has conducted case studies in over seventy-five organizations, surveying both US and European IT management practices and given executive seminars world-wide. She was the recipient of the 2000 World Outsourcing Achievement Award sponsored by PricewaterhouseCoopers and Michael Corbett and Associates. Previous publications include: Strategic Sourcing of Information Systems and articles in academic and practitioner publications such as the HBR, Sloan Management Review and MIS Quarterly. She is currently US Editor of the Journal of Information Technology.
Leslie P. Willcocks has an international reputation for his work on information Management, IT evaluation and information Systems Outsourcing. He is Fellow and University Reader at Templeton College, University of Oxford; Visiting Professor at Erasmus Universiteit, Rotterdam; Professorial Associate at the University of Melbourne, and Distinguished Visitor at AGSM. He holds a doctorate in information systems from the University of Cambridge, and is Editor-in-Chief of the Journal of Information Technology. He is co-author of sixteen books, including Strategic Sourcing of Information Systems and Beyond The IT Productivity Paradox with Wiley. He has published over one hundred and thirty papers in journals such as HBR; Sloan Management Review; MISQ; Communications of the ACM, and the Journal of Strategic Information Systems.

Introduction

Despite the rapid growth in Information Technology (IT) outsourcing - a market predicted to grow to over $US120 billion by the year 2002, and even $US150 billion by 2004 - most companies are still seeking the elusive ‘added-value’ they anticipated. While early deals focused on cost reduction, many organizations in their second or third generation of IT outsourcing are seeking significant business advantage. Customers expect IT outsourcing to dismantle bureaucratic IT organizations, to refinance fixed costs into variable costs, to meet global IT skill shortages, to access industry-specific applications, and even to generate revenue with their IT suppliers. In short, IT outsourcing promises to transform IT functions into lean, dynamic groups that respond quickly to business needs and opportunities. But do customers actually achieve these business advantages? And if so, how?

For the past 10 years, we have conducted in-depth case studies in over 75 organizations by interviewing nearly 300 executives and throughout the 1990s (1994, 1998, 1999) regularly surveyed outsourcing participants in the United States, the United Kingdom, Australia, Europe, and Japan. In addition, at Oxford Institute of Information Management we have assembled a database of more than 250 organizations and their outsourcing details and experiences. We found that most organizations still achieve modest goals of reducing costs and improving service for a targeted set of discrete IT activities. Such a selective strategy proves to be low risk, and is generally successful. Organizations seeking more radical transformation through mega-outsourcing face greater risks and challenges, but success stories have been found and documented in this book. We document and discuss strategic uses of IT outsourcing, but als! o the dangers of strategic disadvantage to the business that can result from poorly thought through IT sourcing strategy. Once organizations exhaled safely after their Year 2000 projects proved successful, they have been found experimenting widely with emerging sourcing options available in the e-Economy (see Chapter 9).

While the global economy has changed rapidly with open trade, a more mobile work-force, and most importantly the Internet, certain customer IT goals and objectives have remained astonishingly the same during the past 40 years. Customers want flexible, low-cost, well supported IT products and services to enable business objectives. IT sourcing trends to meet these goals have mirrored underlying shifts in IT cost drivers. During the 1960s, many customers could not afford expensive mainframes and thus sought IT sourcing through time-sharing. During the 1970s and 1980s, the advent of minicomputers and microcomputers drove hardware costs low enough to justify customer ownership and control of IT assets. During the 1990s, the increasing costs of IT software, the global IT skills shortage, and the pressing need for bandwidth, again shifted the economics of IT in favor of packed solutions and outsourced infrastructure.

ERP (enterprise resource planning) software illustrates how shifts in IT cost drivers led to innovations in sourcing. During the early 1990s, companies around the globe were seeking redesigning business processes to radically slash costs and improve service. But this model led to massive and expensive IT projects to enable the redesign. Enter ERP. Rather than redesign business processes first, then build IT to implement the new designs, the ERP model promises that best practices and processes are built into the software-implement the package and change your business processes to fit within ERP's parameters. The latter model promises the benefits of redesign without incurring excessive IT costs.

Most recently, the explosion of the Internet and application service providers (ASP) has again shifted the underlying economics of IT. Why house your own software when an ASP can provide it to you over the Internet for a variable price? We are witnessing the dawn of a new era in the way business-to-business transactions are conducted. Consider procurement. In the past, customers sought strategic sourcing through a set of preferred suppliers, often enabled by fixed network connections for electronic data interchange (EDI) purchasing, invoicing, and payment. With the Internet and ASPS, connections are virtual, allowing customers to bid for nearly every purchase. Besides the revolution in business-to-business transactions, the same drivers are radically changing business-to-customer transactions. Only five years ago we thought consumers would only buy low-cost products and services such as books and clothes over the Internet. Today, consumers are purchasing their most expensive a! ssets online - cars, home mortgages, and insurance.

How can companies use their IT assets - hardware, software, and people - to leverage business performance, of even deliver new business directions, and new business models? And how can the burgeoning external IT services market be leveraged to achieve such business advantage, and harness the opportunities of the rapidly evolving e-Economy? In this book we outline proven, emerging, and innovative practices on IT sourcing. Beginning with the formulation of a strategic sourcing framework, readers are given tools to identify their core IT capabilities, to evaluate emerging market options, to negotiate sound deals to mediate risk, and to ensure that those deals meet expectations through appropriate relationship management.

Readers will learn about the following practices in-depth. We describe proven practices, which are effective practices uncovered by our extensive body of research as differentiating successful sourcing decisions from failures. Proven practices (emerging particularly from Chapters 1, 4, and 8) include:

* the use of a selective sourcing strategy rather than all-or-none out- sourcing strategies * identifying core IT capabilities to keep in-house * identifying non-core IT capabilities for potential outsourcing * conducting a rigorous evaluation of market options and supplier offerings * clearly defining IT outsourcing expectations and mitigating risk in a contract * implementing post-contract management processes and structures to enable supplier success

Such practices serve as a foundation for sound sourcing decisions, despite pleas to abandon them. For example, some experts argue that detailed contracts are obsolete within a year or two and thus should be abandoned for a ‘partnership’ approach. This research has consistently found that detailed contracts are a critical success factor to successful deals. Detailed contracts serve to solidify, document, and disseminate IT outsourcing expectations among stakeholders. Customers and suppliers also learn to resolve conflicts during contract negotiations - activities that are best rehearsed before the deal goes 'live'. Suppliers have repeatedly reported that they can predict how relationships will unfold based on the customer's ability to articulate, negotiate, and resolve issues during contract negotiations - no supplier wants a naive customer.

Emerging practices are practices that are gaining increasing media attention, but for which only preliminary or anecdotal evidence of success and failure currently exists. Emerging practices include business process out-sourcing, value-added deals based on business performance, e-sourcing, and application service providers. In several examples, allegedly new practices are really variations on older business models. We noted, for example, that ASPs have been identified as a major emerging trend for the new millennium. But is it new? ASPs use a business model in which a supplier owns and maintains IS assets and disseminates software over the Internet for a variable fee. This business model is identical to the time-sharing model in the 1960s. The difference is that in the 1960s, hardware was the cost driver; today it is software and skills.

Innovative practices are practices successfully used by a few organizations which may or may not be replicated by others. Chapters 2, 3, and 6 document case studies in which customers and suppliers found new ways of partnering and/or implementing innovations to resolve evolving limitations with their exchange-based contracts. For example, the government of South Australia used outsourcing to stimulate the local economy. South Australia (SA) government’s $AU600 million, nine-year