An evaluation of outsourcing antecedents in information technology

a contractual perspective

Introduction

An extremely important facet of governance is the use of contracts to acquire or provide goods and services in business transactions. How contracts have been used has been the focus of many varied streams of research from neoclassical law like Hennart's (1988) analysis of transaction costs to Crocker and Reynolds’ (1993) study of contract types to the basis of interorganizational relationships and trust. While contracting serves a purpose in establishing organizational relationships, the development of contracts is an imprecise science that typically is dependent on the team charged with forming the contract. Understanding team-based factors, especially with regard to contract development, is fundamental for organizations that use contracts to outsource work.

The primary reasons organizations outsource vary widely from managerial flexibility to anticipated cost savings. When outsourcing has not met organizational goals, however, firms have had to realize that the promises of outsourcing have been overestimated. This is especially true in information technology (IT) environments where tasks often are complex requiring project teams to develop work requirements. Many firms are back-sourcing IT work that was previously outsourced because of this complexity. However, bringing that task back under internal control can prove extremely expensive.

We argue that the communication skills of the writers who write IT work requirements are diverse and complex and limit the effective implementation of the outsourcing and back-sourcing decisions. Our paper evaluates antecedents that lead to these decisions and also integrates new research with regard to how work requirements are developed, especially in team-based designs. We propose that team-based communication affects make outsourcing and backsourcing decisions even more complex.

Contracts as a Bundle of Interests

The “make” or “buy” decision is familiar to many managers especially with regard to information technology. Current research typically focuses on creating value by forming a strategic relationship with an external supplier. The Kodak organization is a good example of an outsource decision where a firm acquired valuable IT expertise from external sources. Dyer's (1993) study of Chrysler's move to long-term contracts with its suppliers indicates that outsourcing relationships should generate benefits for both the buyer and the suppliers. However, several factors limit the realization of these benefits that are inherent in the writing of contractual requirements.

First, individuals cannot adequately craft comprehensive work requirements to cover the full range of future contingencies. From a broader perspective, the contract is not just a legal, rational document that describes work to be performed, the contract also stipulates who is going to do the work, when the work should be done, and how success will be measured.

Contract formulation is an extremely difficult task in an IT infrastructure where teams make decisions in a firm's social context. The IT infrastructure is defined as the complex set of IT resources that provide a technological foundation for firms’ present and future business applications. This infrastructure usually includes platform hardware and software, network and telecommunications technology, core organizational data, and data-processing applications that are fundamental to the organization. An IT outsourcing effort, thus, represents a firm's best guess at what future resource requirements are required to meet future business applications. Team-based designs make writing requirements an extremely difficult task because these designs frequently require integration of discourse community issues and social perspectives while attempting to formulate requirements into a contract format.

Second, many organizations require linear writing practices that exacerbate an already difficult communication process. Jelinek (1979) warns that traditional, incremental development processes leads teams to throwing the product “over the wall” and hoping that IT system managers can implement and fix any errors in the requirements. The general response from the IT community has been to promote “common sensical” approaches like structured methodologies and computer-aided tools that emphasize development, integration, and synthesis of technical requirements. Research on the importance of norms, however, highlights that informal practices and procedures may be more important than structured methodologies in requirement's development. Research also indicates that effective writing practices are more the exception than the rule.

Table 1. Determinants of Information Technology Outsourcing Decisions by Level of Analysis

Environment Organization Team
Less costly, more value added resources
(Duncan, 1995; Williamson, 1983; Loh & Venkratraman, 1992)
Core Competency is not IT
(Hopper, 1990; Richmond & Seidmann, 1993; Hammer & Champy, 1993; Macmillan, 1997)
Political infighting precludes efficient use of IT internal resources (Kelleher, 1990)
Public versus Private Sector
(Slaughter & Ang, 1996)
Operations not closely linked to revenue
(Duncan, 1995)
Inability to communicate technical requirements
(Adler, 2000; Dannels, 2000; Teng, 1994)
Jobs or tasks have volatile demand (Slaughter & Ang, 1996) Flexibility of operations a minor concern
(Currid, 1994; Williamson, 1985)
 
Industry is stable or placid
(Duncan, 1995; Lacity, 1993)
Shorter implementation schedules needed
(Currid, 1994; Lacity, 1993)
 
Interfirm outsourcing success
(Reponen, 1993)
Confidentiality of trade secrets and internal operations not critical
(Currid, 1994)
 
Greater external expertise (Currid, 1994; Lacity, 1993) Desire to share or minimize risk (Outsourcing Institute, 1996)  

Finally, team members have vested interests in how the requirements are written. Kleimann (1993) suggests that written communication processes invokes power sharing between organizational actors and, thus, is indicative of a collaborative culture. Couture and Rhymer (1993) argue that writing is socially constructed when the writer becomes aware of concerns in the organization. Awareness includes a better understanding of team-based needs to write more effective technical requirements, including an elementary understanding of professional jargon, power structures, and nonroutine work.

These three reasons suggest that while the sourcing decision may be made at the organization level, the implementation of the decision through written contracts is grounded in team issues that are much more complex, socially based, and culturally driven. Given that the introduction of new IT frequently causes social change in organizations, we propose that the social perspective be integrated in work sourcing decisions to more accurately reflect fundamental contractual, social, and team-based considerations. Evidence already exists that describes the need for studying general socialization processes in technical writing, and given the complexity and pace of change of IT in the firm, incorporating the social perspective into outsourcing and back-sourcing decisions.

Antecedents of the Outsourcing Decision

Enthusiasm for outsourcing was never more apparent that in Max Hopper's belief, a senior vice president of information systems at American Airlines, that “…the question is not whether to outsource, but how much to outsource, and to whom”(Currid, 1994, p. 133). Loh and Venkatraman, (1992, p. 9) define outsourcing to be, “the significant contribution by external vendors in the physical and/or human resources associated with the entire or specific components of the IT infrastructure in the user organization.” Most firms use contracts to outsource their work. The process of contracting, or hiring a worker with a particular skill, on a temporary basis gives the manager a tremendous amount of flexibility. There seems to be an increasing trend toward reliance on contractors for numerous reasons. The organization may have a deadline that cannot be met internally or a special skill may be required on a one-time basis. Additionally, hiring freezes and other employment regulations may be circumvented using short-term contracts. Contracting is also useful to test a potential full-time employee without making an immediate commitment.

Reasons for outsourcing vary widely. Many firms believe external suppliers will provide needed IT tasks with less cost, more stable demand, better expertise, and successful mimicry of other firms that outsource in their industry. With expected savings ranging from 20% to 40%, the economic incentive to outsource is the primary justification. But for many organizations, cost containment is even more important than a decrease in IT expenses. Other reasons stated in a 1993 survey of business executives by Currid (1994) include expectations of improved performance, reduced IT department management levels, and shorter implementation periods.

Williamson's (1983) transaction cost theory suggests cost reduction is the foremost reason a company would consider outsourcing. Many companies realize a greater positive impact in the firm's ability to focus on current operations and core competencies. Also, increased flexibility and ability to quickly hire expertise are two surprising benefits. Relinquishing control of personnel and equipment was often seen by managers as a negative result of outsourcing. In reality, managers gained considerable flexibility by tailoring all available resources to fit their project needs in a timely manner.

Senior managers tend to evaluate each function solely on the basis of efficiency. Because no concrete measure of actual efficiency exists, the perception of efficiency is often what is used. If managers perceive the IT function as inefficient, outsourcing is seen as an improvement. This reaction to the efficiency imperative is the first of six reasons cited for initiating outsourcing evaluations. The remaining five make up the IT Outsourcing Framework as proposed by Lacity and Hirschheim (1993): (1) the need to acquire resources; (2) reaction to the bandwagon affect; (3) reduction of uncertainty; (4) elimination of a troublesome function; and, (5) enhancing credibility of the IT function. With regard to the last reason, this is especially true where senior managers do not recognize IT department contributions and, thus, outsourcing a portion to an outside agency improves the perceived level of competence and expertise.

Researchers at the Outsourcing Institute conclude that outsourcing can enable an organization to improve growth and success through expanded investment focused on areas providing the greatest competitive advantage. User managers believe increased motivation and technical expertise among IT professionals are the primary reasons to outsource all or part of process. Both user and IT managers were skeptical of the technical knowledge and overall skill level of those within the inhouse IT organization. The decision to outsource infrastructure may also depend on a firm's assumptions about the efficiency of the market for relevant IT resources and its own IT development capabilities.

We have categorized the extant literature into either an environmental, organizational, or team category for building a framework to understand outsourcing antecedents (see Table 1). While we have discussed many environmental and organizational reasons for outsourcing, a key consideration should be how teams affect the outsourcing of tasks within the IT infrastructure. The ability to communicate requirements in team-based designs, especially from a tactical perspective, is just as important a consideration to the work source decision as the reasons discussed previously.

The affects of team-based designs, however, are frequently neglected in work sourcing decisions. Howard Anderson, managing director at Yankee Group, believes organizational politics preclude internal IT departments from achieving economies of scale. The power struggles among profit centers prevent the efficient utilization of information resources. Adler (2000) and Dannels (2000) found similar results in their studies of discourse communities as engineers struggled to develop technical requirements with nontechnical team members. Social and political issues may be a more important factor in the sourcing decision-making process than the rational evaluation of costs and benefits.

We suggest that team-based considerations are fundamental to the implementation of work sourcing decisions, especially where any contractual obligations and relationships are established to replace internal IT infrastructure with external suppliers. Lacity and Hirschheim (1995) present a procedural methodology that addresses both the rational and political aspects of the decision-making process. While this methodology recognizes social and political factors to outsourcing, the role of the requirement's writer and team-based processes are not addressed. In addition, the Lacity and Hirschheim (1995) framework is rational being based on the assumption, albeit a debatable one, that problems, participants, and answers can be known and managed in a team-based setting.

Team-Based Designs and a New Work Sourcing Model

Writing in a Team Context

Diverse team membership creates new problems in collectively developing IT requirements because norms are established that may or may not add value to the technical writing process. Norms are defined as a shared expectation of behavior that connotes what is considered desirable and appropriate. Norms exist to maintain value through the regulation of behavior and processes important to the organization. Regulation of behavior may take the form of routine evaluation of organizational work to invoking disciplinary norms for deviant behavior. Prior research has demonstrated the power of organizational norms, including how norms affect organizational start-up, evolvement, and termination.

While organizations have norms, groups or teams within organizations also have norms. Feldman (1984) defines a group norm as informal rules that groups adopt to regularize group members’ behavior. Norms shared by a particular discipline, or function, or small group of members, or team, exist to get work done in ways that are viewed as appropriate and useful. Unfortunately, organizational, functional, and team discourse norms may not always agree.

Writing technical requirements is a forum where conflicting discourse norms converge because organizational resources are typically at stake. Complicating factors precluding effective technical writing include the constraints placed on managers from other individuals, groups, and organizations who have a vested interest in the uniqueness of the “terms and conditions” in the contract. Rousseau (1990) discusses a similar concept called cultural integration. Cultural integration is the degree to which units, or teams, in an organization share a common culture. Reaching consensus about a common culture is resolved in teams which development requirements. Discourse norms guide team members as they weigh IT requirements most likely affected by terms and conditions of the contract. The socialization of IT specialists in this process takes place over time as they acquire experience and education. Rational approaches to expedite the socialization process, like knowledge information systems and computer-aided (CASE) writing tools, are rudimentary techniques to document lessons learned that enable IT managers to come down the learning curve faster. Tools and standardized approaches taught at universities for problem solving, which focus on the mere retention of facts and details, do not adequately prepare engineers, however, for realistic settings where functional goals compete and conflict. Clearly, as situational experience is gained, technical writing improves.

Figure 1. Importance of Requirements Writing as an Antecedent to the Work Sourcing Decision

Importance of Requirements Writing as an Antecedent to the Work Sourcing Decision

A Revised Sourcing Model

Rethinking how business is done involves radical changes to fundamental processes to achieve dramatic improvements. Key to recognizing what fundamental processes affect successful implementation is the ability of IT managers to adequately communicate requirements in team-based designs (see Figure 1). In fact, we would say that without an ability to recognize social patterns, competing cultural values, and political agendas, the choices made about outsourcing are uninformed and prone to failure. This may mean that IT managers take on more expanded roles. In a recent study, identified why information resource management has rapidly gained importance in the success of the enterprise. Macmillan states how IT now has a fully operational role in contrast to a traditional support arrangement. Demand and cost of IT are growing faster than unit costs are falling. IT also is allowing companies to achieve new strategic competitive advantage. But, with this increased focus comes additional scrutiny. With the option to outsource otherwise ineffective IT operations, the internal operation cost must now be justified when compared to the value added to the bottom line.

IT management has also become more decentralized and integrated into business operations requiring a more complete view of the enterprise. The ramifications to an organization for not training IT managers in professional writing have never been higher, and, likewise, the benefits have never been greater for organizations that can manage teams and craft appropriate contract requirements. IT requirement's development is an important process that either facilitates or weakens cultural integration.

In organizations where IT is strategically mapped to critical business processes and the skills are available in-house, even the mention of outsourcing is quite controversial. Teng, Cheon, and Grover (1994) state, “…recognize that outsourcing is not necessarily a panacea for all IT management problems or an instant cure for incompetent IT groups.” Instead, when it comes to making sourcing decisions, one recommendation stands out. Managers should make systematic internal evaluations of the company's IT function in terms of information quality, support service, and their ability to adequately communicate IT requirements. User Information Satisfaction instruments developed over the years could be a useful application for this type of evaluation.

In utilizing these types of instruments, senior managers attempt to determine if perceived in-house skills and levels of team performance are actually contributing to the organization's goals. Two important assumptions are necessary—organizational goals and competencies are known to decision-makers and perceptions are consistent throughout the organization. Taking these assumptions into consideration, the strategic-theoretic discrepancy model could be a very useful tool in understanding the relationship between desired and actual performance. Once this “fit,” or lack thereof, is identified, the value in maintaining these functions within the organization or looking outside for resources may become apparent. In addition, team-based issues could be elevated so that communication weaknesses could be addressed and hopefully fixed.

Although the concept of outsourcing has produced some exceptional results, many planners are keeping a watchful eye toward the long-range perspective. Some problems have already surfaced, such as contract overruns due to improperly designed initial agreements. Again, this typically falls back on poorly crafted contract requirements that lead to implementation failure. Often, a manager cannot foresee longer-range requirements at the time of the original proposal. Contract firms can also be guilty of underbidding, even though they know additional services will be required. Once under contract, higher prices can be charged to increase the level of performance, sometimes eliminating the cost savings entirely. Besides the cost of increasing service, the cost of terminating a contract can also be significant if not planned for in advance. Discussing and developing terms and conditions to avoid potential supplier opportunism are typically an area where team-based designs can help if requirement's writers have the skills to integrate differing opinions and issues.

Another potential problem, especially in the case of off-site contractors, is the loss of control and oversight. Probably the most often cited concern expressed is the loss of in-house expertise, which makes the backsourcing decision even more suspect. One expertise that is essential in this situation is the ability to write award and penalty requirements for suppliers. Then, when the internal staff is let go, insight into the culture and business philosophy is not lost because the contract contains requirements that are enforceable. Michael Hammer, an industry consultant believes only internal IT employees can determine how a company's information resources should be deployed. We would agree and further add that only internal IT resources should develop, or at least approve, IT requirements before they become outsourced in a legally binding, contract form.

Recommendations for Future Research

Currid (1994) provides seven specific recommendations once the outsourcing option has been decided upon. The primary thrust of each of these suggestions deals with the search for a legitimate contractor and the subsequent steps in dealing with the contract and planning for the inevitable contingencies. Six of the seven recommendations deal with how requirements are stated in the outsourcing contract. These types of issues should ideally precede a work sourcing decision with regard to their viability and realism.

The success of eventually implementing an outsourcing decision is frequently dependent on the writing skills of the IT developer who must work in a team setting. Since implementing IT projects many times institutes, or is a catalyst for organizational change, the ability of the IT writer to understand and integrate social and political pressures, viewpoints, and culture is a valuable skill. Unfortunately, these skills are not being adequately taught in undergraduate curricula. Given the diversity of work sourcing antecedents, IT writers many times face the unenviable task of writing performance requirements without any true basis for the requirement.

We suggest that the capabilities of IT writers be considered from an interpersonal, team-building, and organizational perspective (see Figure 1). IT requirement's writers not only need to communicate on a personal level, but also must be aware of social processes that are active on teams and in organizations. The inability of IT requirement's writers to adequately craft requirements is an important tactical consideration when implementing outsourcing decisions.

An empirical investigation of this framework could also address the nature of organizational, functional, and team discourse norms in relation to a framework of professional norms. Is there a hierarchy of norms? What are the strengths of these norms in relation to each other, especially in the writing of technical requirements? The identification of how discourse norms guide cross-functional team members would aid greatly in our understanding of the effects of social interaction.

Conclusion

Outsourcing appears to be a symptom of the problem of demonstrating the value of IT. For the most part, executives view the IT function as a cost burden that cannot be tied to profitability. Team members may initiate outsourcing for reasons like cost efficiency but have difficulty substantiating these factors in team-based designs. Team-based designs exacerbate these situations by making honest, critical discussion and consensus difficult to attain. If a company decides to outsource, the contract is the only mechanism to ensure that expectations are realized. Many companies view the contractor as a partner in achieving the IT objectives. But, because the evaluation of efficiency is difficult to quantify, or measure, social perspectives arise to fill the void in influencing IT outsourcing decisions. IT requirement's writers do not appear to have the training or capabilities to address these cultural and social perspectives (Adler 2000, Dannels 2000). Thus, the ability to adequately manage social perspectives when developing IT requirements is most likely an antecedent to the outsourcing decision as organizations should not assume that strategic decisions, like future partnering, are tactically feasible.

References

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Proceedings of the Project Management Institute Annual Seminars & Symposium
November 1–10, 2001 • Nashville, Tenn., USA

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