Home > Strategy, Technology > IT outsourcing Frameworks – Part 1

IT outsourcing Frameworks – Part 1

October 16th, 2015
Reading Time: 7 minutes

The following is extracted from a report I put together for my Masters recently. I’d like to say it’s based on an initial draft, however, that would suggest that I managed to revise it before submission. I thought that there were some useful pieces of information in here, so rather that just hide it, I thought I’d upload here for others.

For those that follow me on twitter, you may have seen part of the conversation:

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The report was based on back sourcing of IT services and the reasons for it. Constraints were 3000 words and using the University’s text as the basis for the frameworks – for those that know me, that never flies well, I prefer to stretch it as wide as I can to see what is out there. I wanted to bring in some of Simon’s wisdom and add a multi-dimensional view to the process, something I do in life, however, with the constrains and time restrictions…. This was a single pass, written in 2 days and now chopped up into a 3 part blog for your reading pleasure. All references will be in the final blog.

TL;DR – Information Technology Outsourcing or ITO can take a number of forms. These forms include Fee-for-service models, Strategic Partnerships and Buy-in-Contracts (VELTRI et al., 2008). Due to the complexity of some of these ITO agreements, there is the risk that something will go wrong and the services will need to be backsourced, either partially or in full, in order to regain control over those services (VELTRI et al., 2008) before working out what to do next.

This recommends that a flexible, modular and clear contracting model is used, with a strong governance framework in place to manage and oversee the delivery of services. Some of you reading that last sentence will go “ah, duh!” but in reality I’ve seen so many convoluted contracts and models I want to scream. They work for no one except the consultants that are hired to negotiate it and then later manage it.

 

Introduction

Information Systems (IS) and Information Technology (IT) are now the backbone of the modern business. Today all businesses are reliant on IS/IT to provide a base level of capability in market and not only to achieve a competitive edge (CARR, 2004). Outsourcing IS/IT services to an external party requires giving up a degree of control, thus requiring an organisation to decide how much control they wish to relinquish (BANNISTER, F and Remenyi, D, 2005; CIOINSIGHT, 2012).

There are many reasons for outsourcing include cost reduction, improved quality of service, and access to technological expertise (BAHLIA and Rivard, 2005), however, IT outsourcing (ITO) inherently contains an element of risk, and it sometimes leads to undesirable consequences that are the opposite of the expected benefits (BAHLIA and Rivard, 2005).

This report looks at the reasons for backsourcing IT services; the catalysts for doing so; the risks associated with this; and the frameworks that can be used to ensure that the outsource is not only successful but flexible to support future change.

 

Report:

Part 1 – Drivers for Back-sourcing

There are a number of risk factors involved in outsourcing and management of these risks are crucial to the success of ITO arrangements (ALEXANDROVA, 2015); if not managed appropriately, these lead to the misalignment of expectations and can be the catalyst of backsourcing (VELTRI et al., 2008; LACITY et al., 2009; BAHLIA and Rivard, 2005). These risks can be separated into client outsourcing risks and vendor outsourcing risks.

Client Outsourcing Risks

Client outsourcing risks are those risks associated with an outsourcing arrangement as perceived by the client. Willcocks et al. (1999) in their UK Government LISA case study provide a comprehensive list of client factors (WILLCOCKS et al., 1999, p.290), that if not addressed could cause the breakdown and backsource of IS/IT services.

 

Organisational Maturity, Contracts and Treatments

The following factors can be linked to a lack of maturity and experience of contracting for and managing ‘total’ outsourcing arrangements. Each of these individual issues

  • Treating IT as an undifferentiated commodity to be outsourced – This provides frameworks and contracting mechanisms uniformly across the IS/IT service. Treating IS/IT services in this manner will not allow the business to get the most out of their services (CARR, 2004). This can also lead to unrealistic expectations with multiple objectives for outsourcing.
  • This may be due to difficulties in constructing and adapting deals in the face of rapid business/technical change – This change may be market or organisationally driven and is linked to the risk above. This can create a situation where contracts are incomplete (WILLCOCKS et al., 1999; CARR, 2004).
  • Outsourcing for short-term financial restructuring or cash injection rather than to leverage IT assets for business advantage – This treats IT as a cost centre and not a strategic enabler for strategy, locking in contracts and delivery models that are inflexible and likely to fail in the mid-long term.
  • Poor sourcing and contracting for development and new technologies – restricting the business’ ability to take advantage of new and emerging capabilities in order to meet business as it changes to address market demands (CHOU and Chou, 2009)

 

Governance

Relational governance, in addition to contractual governance is essential for IT outsourcing (ITO) success (LACITY et al., 2009). These are very broad practices associated with managing supplier relationships.

  • Lack of active management of the supplier on contract and relationship dimensions – A strong governance framework is critical in not only establishing the ITO, but requisite for ongoing success. This can be arms-length, integrated or embedded (LACITY et al., 2009);
  • Failure to build and retain requisite in-house capabilities and skills – Outsourcing services requires the retention of some skills associated with services being outsourced. Loosing creates the opportunity for the need for the service and it’s changing business requirements to be lost or not managed (TAPPER et al., 2014; LACITY and Willcocks, 2000);
  • Power asymmetries developing in favour of the vendor – This can lead to abuse of the relationship, and services and capabilities being delivered that are not in-line with the expectations and needs of the business (LACITY and Willcocks, 2000).

 

Vendor Outsourcing Risks

Additionally, vendors engaging in providing outsourcing are faced with another set of risks (ALEXANDROVA, 2015, p.754) including

  • Lack of contract compliance – Clients unable or unwilling to meet their deliverables of the contract, such as providing documentation, can lead to relational and financial strain (LACITY and Willcocks, 2000; MCKEEN, J D and Smith, H A, 2015);
  • Dependence on the client – Inherent need of direction from the client, their domain knowledge or the perceived importance of IS/IT systems within the business (KAISER and Buxmann, 2012) can precipitate the backsourcing of IS/IT;
  • Miscommunication – As described in 3.1.1.2, governance is critical to the successful delivery of ITO services. Communication styles may differ (CROMAR, 2014, pp.124-125, 167) or direction miscommunicated (BARKER, J R, 1993) leading to breakdown in communication (ALEXANDROVA, 2015, p.748); and
  • Globalisation pressures and cost competitiveness – Drives vendors to continuously look for more cost-effective ways to deliver the services. Clients who don’t feel that they are getting value for money backsource to their own offshore centres to bring costs down.

 

Grouping of drivers for backsourcing

These issues stem from a combination of the lack of maturity of the outsourcing client organisation (BAHLIA and Rivard, 2005) and inappropriate sourcing models for services (LACITY and Willcocks, 2000). They can be further identified as contract problems, opportunities from internal changes, and opportunities from external changes (VELTRI et al., 2008).

By now you can start to see that issues stem, not only from conflict, but from lack of situational awareness and how the

In Part 2 I look at considerations for outsourcing